Azonto Petroleum: Valuation Uncertain Given Funding Risks
Edison | Jan 25, 2015 03:59AM ET
Repositioning to ensure Gazelle progress
As a result of current market conditions, Azonto Petroleum Ltd (ASX:APY) has announced organisational and cost initiatives, including the departures of Rob Shepherd and Andrew Rose (MD and CFO respectively). Gregory Stoupnitzky will step up, leading a reduced team, which retains notable West African experience. These measures should ensure the “viability of the current portfolio whilst facilitating the continued maturation of other potential opportunities”. Although regrettable, we see this as necessary for the long-term good of the company. We have adjusted our valuation, assuming a delayed start-up for the Gazelle development (late 2016) and reduced G&A, which results in a revised undiluted NAV of 1.46p/share. However, we stress this does not account for dilution required to fund Azonto through development; in current circumstances, this may be significant.
Gazelle project still progressing
Gazelle is still progressing, illustrated by the award of the Exclusive Exploitation Area (EEA) in December 2014. The difficulties in progressing two projects (Gazelle and the onshore gas IPP) has meant unfortunate delays. However, the company states that “momentum is clearly building as Vioco moves towards project sanction mid-year.” We also note that the project should benefit from falling service costs, reducing the overall capital requirement, though the exact levels remain unclear for the moment. Gas pricing should ensure that the project achieves a minimum return.
Cost base reduced to ensure continued progress
The recent market turmoil exacerbated the already poor market sentiment towards E&Ps. Given this situation, we regard the departure of Rob Shepherd and Andrew Rose as the right decision to save costs. Over the last 18 months they have contributed significantly by progressing the Gazelle project towards FID despite the situation they inherited, and they will continue to work for the company during their notice periods on important matters such negotiating debt for the Gazelle project. Current BD Director Gregory Stoupnitzky will take over as MD immediately, aided by Jay Smulders (technical director) and Jeff Durkin (general counsel).
Valuation: NAV uncertain given funding risks
We have reassessed the valuation following the delays in reaching FID, reduced G&A and a roll-over to 2015 in valuation. The outlook on funding means that while our NAV rises from 1.3p/share (from our initiation in June 2014) to 1.46p/share, the value for investors is likely to be notably less. Development of Gazelle will require debt and equity funding, both of which are uncertain in the current environment and may lead to significant equity dilution of shareholders’ interests over time.
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