As of the year-end, the participation interests in production operations in the Mnazi Bay Concession were M&P with 48% who are also the operator, Wentworth with 32% and TPDC with 20%.

Wentworth Resources has now released its final results for the year ended 2015.

Revenues increased by $3.6M when compared to last year but costs also increased. Depletion and depreciation was up $1.2M following the commencement of gas deliveries to the pipeline; production and operating costs increased by $622K; and employee salaries grew by $436K; which were offset by contractor and consultant costs which declined by $371; office and admin costs decreasing by $298K; and travel and accommodation costs which were down $249K to give an underlying operating loss some $2.6M better than last year. In 2014 we also see considerable reversals of impairments, however so that the actual operating loss saw a detrimental movement of $21.3M when compared to last year. As far as finance costs were concerned, an $841K reduction in interest costs was more than offset by a $994K reduction in the accretion on the TPDC receivable and a $1.2M detrimental change in the TPDC receivable estimate. The group did register a $34.3M deferred tax recovery, however, to give a profit for the year of $27M, a growth of $11.8M year on year.

Total assets grew by $54.3M when compared to the end point of last year, driven by a $34.3M increase in deferred tax assets, a $10.2M growth in natural gas properties, a $9.4M increase in exploration & evaluation assets, and a $3.2M growth in receivables from TPDC, partially offset by a $2.7M decline in cash. Total liabilities also increased during the year as a $20M growth in borrowings was partially offset by a $1.1M decline in payables. The end result is a net tangible asset level of $137.3M, a growth of $25.7M year on year.

Before movements in working capital, cash losses improved by $3.4M to $4.9M. There as a modest inflow from working capital to give a cash outflow from operations of $4.8M, an improvement of $4.7M year on year. The group then spent $10.3M on exploration costs with $8.6M relating to drilling of the Kifaru-1 exploration well in Mozambique, $12.9M on production expenditure with $8.1M spent on the MB-4 development well and $3.3M spent on field infrastructure and connection works in Tanzania, and a $1.1M addition to the long-term receivable to give a cash outflow of $29.1M before financing. The group also paid $906K on interest so needed to issue new share capital worth $7.3M and take out new borrowings of $20M which gave a cash outflow for the year of $2.7M and a cash level of $2.7M at the year-end.

The operating loss in Tanzania was $3.3M in 2015 compared to $5.6M last year. Gas deliveries to TPDC via the new pipeline started in August and the company recorded gas sales of 1,172,092MMbtu for revenue of $3.52M with the joint venture being fully paid for gas delivered into the pipeline. Gas sales to Tanesco and the 18MW power plant in Mtwara were 209,206MMbtu during the year while the gas price remained fixed at $5.36 per MMbtu. The higher gas sales during the year compared to last year ($1.12M) resulted from higher demand due to new electricity customers and lower downtime at the plant. At the year-end, sales invoiced for the period from August to December totalling $440K remained unpaid.

Although field operation expenses were relatively flat, the group recognised an expense of $790K relating to the cost of settlement of ongoing Tanzania tax audits for 2008 to 2012 of gas and discontinued transmission and power operations. The group saw admin costs reduce due to downsizing office space, streamlining IT and reducing third party consulting, however.

In August the first gas delivery from the Mnazi Bay concession to the new Mtwara to Dar es Salaam gas pipeline commenced. The government owned pipeline which travels from Mtwara in the south of Tanzania to the commercial capital Dar es Salaam and two gas processing plants. The pipeline has a capacity of 784MMscf per day and is owned and operated by the state owned TPDC.

The government’s electric utility company, TANESCO, plans to add an additional 1,155MW of electricity to the national grid over the next three years by constructing four power stations in addition to the 150MW Kinyerezi-1 power station that was completed during Q4 and is currently being commissioned and brought up to full operating capacity. Two 40Mw turbines are yet to be brought on stream at the plant but are expected to be commissioned by the end of Q1 2016. Additional gas fired power plants at Kinyerezi, Kilwa and Mtwara are planned.

The majority of gas supplied by the company to the new pipeline will be used for power generation whilst a minor portion is expected to be consumed by industrial customers. During Q4, the Mnazi Bay gas field supplied about 46MMscf per day for power generation at the Kinyerezi-1, Symbion and Ubungo II power generation facilities and also to the 18MW power plant in Mtwara. When the final turbines have been commissioned at Kinyerezi-1, the power station is expected to utilise about 30MMscf per day of gas while demand at the Ubungo II and Symbian power plants is expected to be 50MMscf per day once they are operating at full capacity. Future gas demand is expected to come from the planned expansion of the Kinyerezi-1 power station, the construction of three more power stations at Kinyerezi, the Kilwa power station and growth in industrial demand with total estimated demand for natural gas in the country exceeding supply by the end of 2018.

The joint venture partners are contracted to supply up to 80MMscf per day of gas for the first eight months of the gas sales contract from the commercial operations date with an option to increase this supply after eight months to a maximum of 130MMscf per day of natural gas. The supply contract is for the next fifteen years. The commercial operations date is expected to be reached during the first half of 2016 and importantly payments for gas delivered from October to January have been received within the agreed periods.

The gas price is fixed at $3 per MMbtu, escalating annually at the US CPI Industrial Index and the joint venture partners are not responsible for paying a tariff for transporting the gas or any third party processing fees. Initial volumes of 640MMscf and 320MMScf delivered during August and September were purchased by TPDC to fill and pack the pipeline and from October volumes delivered to the pipeline were used by the power plants to generate electricity.

The existing five wells in the Mnazi Bay concession are expected to be able to produce a combined minimum of 80MMscf per day and therefore will be able to meet the initial contracted delivery volumes and during the year the MB-4 well was drilled in Q2, was tested and achieved a constrained flow rate of up to 41MMscf per day. Four wells have been tied in to the connection point of the new pipeline and in Q4 production averaged 44MMscf per day which is limited to the current nomination from TPDC. The fifth well, MB-1, is currently producing about 2MMScf per day which fuels the 18MW power plant in Mtwara.

Subject to deliverability from the existing Mnazi Bay wells and the drilling of additional development wells as deemed necessary, the company anticipates gas sales to the pipeline to increase to 130MMscf per day as market demand grows. Gas deliveries could escalate up to 270MMscf per day should additional exploration success occur in the concession with 210MMscf per day expected to be supplied to the Madimba GPF and 60MMscf per day expected to be supplied directly to a power plant planned for construction in the Mtware region or supplied to industrial customers in the area.

Construction of surface infrastructure included the installation of flow lines and well control infrastructure at the well site locations. Although the Madimba GPF is fully capable of handling wellhead gas, it is necessary to remove water ahead of delivery because the joint venture partners own the liquid content of the gas and also to minimise condensation in the sub-marine pipeline leading into the Madimba GPF. The gas specifications contained in the sales agreement stipulate the acceptable conditions for properties such as temperature, water content and pressure which is the main reason for limited processing of the gas at the Mnazi Bay GPF.
The company is looking to advance an exploration drilling programme in 2017, the costs of which they expect to be fully funded from internally generated cash flow.

The new petroleum act in Tanzania became effective in September. Some of the key changes include the stipulation that TPDC shall hold at least 25% of all interests in oil and gas blocks except where they decide otherwise; and that TPDC are awarded exclusive rights as National gas aggregator to purchase, collect and sell natural gas from producers, excluding gas earmarked for export as part of LNG projects. The company does not expect operations in the country to be materially impacted by the introduction of the act but given TPDC currently only own 20% of the Mnazi Bay concession, surely they could obtain another 5%? This act came in just before the new president was elected in November. This represented the re-election of the ruling party so the group don’t expect the change in personnel to have a material impact on their operations.

The operating loss in Mozambique was $638K this year compared to $561K in 2014. The Tembo-1 exploration well was drilled to a total depth of 4,553 metres and a gas discovery was made in Cretaceous aged sands. Natural gas and some condensate was recovered which confirmed the petrophysical analysis. In July the company provided format notification of its intention to proceed with an appraisal of the discovery.

All of the work programme and commitments of the Romuva onshore block concession agreement have been fulfilled and the third and last exploration phase of the block expired at the end of August. Anadarko, the current operator, M&P and PTTEP have all given notice of the relinquishment of their respective participating interests in the block from the same date.
Wentworth continued discussions with the other remaining party to the Romuva concession, state-owned ENH, to reach an agreement on assigning interests of the relinquishing parties (73%), appointing an operator of the block, determining an appropriate appraisal area and agreeing an appraisal plan. A definitive plan forward is expected during H1 2016.

During the initial year of the appraisal programme the work programme is expected to be limited to reprocessing of existing seismic data with a specific focus on the sands relating to the discovery. Should the results of this reprocessing be encouraging, it is contemplated that the work programme could involve acquiring additional 2D seismic data. Acquisition, processing and interpretation could take up to 18 months depending on the weather conditions and contingent upon identifying a suitable appraisal target, an appraisal well may be proposed.

In Mozambique too, the government passed a new petroleum act which allows the National oil company to compete with other private oil companies, and introduces new terms for exploration licenses and new regulation regarding local content. The group does not expect the changes to have an impact on their activities in the country. At present the oil and gas sector in Mozambique appears stable when compared to the Tanzanian sector which the board describes as a challenging business environment. In addition there is a notable increase in construction industry in the capital Maputo with a number of hotels and apartment blocks under construction and the country appears to be positioning itself to be a leader in the energy sector in East Africa in the years to come.

A deferred tax asset is recognised to the extent that it is probable that taxable profit will be available against which it can be utilised. A deferred tax asset of $34.3M was acknowledged during the year and is attributable to the accumulated tax loss carry forward of the Tanzanian subsidiary which is expected to be offset against future taxable income. Following this, there is now some $22.6M of unrecognised tax losses. During the year the company received a tax assessment relating to a discontinued subsidiary of the company totalling $1.2M for the period 2009 to 2012. Settlement was reached with the TRA and the company paid a liability of $870K which was recoded as a production and operating expense.

There are a number of long-term receivables still to be collected by the group. There are receivables from TANESCO relating to gas sales to an 18MW power plant and at the year end, the concession partners were owed five months of gas sales with $438K owing to Wentworth. It is thought that the completion of the gas pipeline should provide an opportunity for TANESCO to operate with lower input costs which may generate positive cash flow so that it can pay these receivables to the group. This doesn’t sound very positive to me and it almost seems as through the group is supplying TANESCO for free at the moment. There was also $6.5M of receivables due from the government related to the company’s disposal of transmission and distribution assets.

The major receivable is $35.3M due from TPDC, a partner in the Mnazi Bay concession related to historical costs paid by Wentworth to get the concession to the level it is now at. The current portion of this receivable is $18.2M which the group expects to receive over the next year. It is worth noting that last year the current portion was set at $14.5M but only $2.3M was actually received during the year through retained gas revenues and a further $3.3M of TPDC’s Mnazi Bay costs were paid by the group. The group expect the receivable to be fully recovered within two years but this seems doubtful to me. TPDC is also the operator of the new transnational gas pipeline and at the year-end, the group was owed $1.7M related to December gas sales to TPDC, although after the year-end, this amount was paid. This is clearly a potential risk going forward.

The group does have some susceptibility to interest rate changes and an increase of 1% in the LIBOR rate would result in an increase of $260K in annual interest rate expenses. At the end of last year the group entered into two long-term credit facilities; a $20M loan to finance field infrastructure development and a $6M loan to pay off an old loan. At the year-end, the full amount was drawn down on the two facilities. During the year the group closed a private placing issuing 15.4M new shares for a cash consideration of $7.6M.

Total net proved reserves as of the end of the year are estimated at 12.7mboe and the 2P net reserve estimate is 19.1mboe compared to 11.36mboe and 15.91mboe respectively last year. This increase is the result of the Mnazi Bay partners entering into a gas sales agreement with TPDC and commencing sales through the new pipeline.

Within the year, the group has commitments of $6.3M relating to payables, $7.3M in borrowings to pay back (with repayments starting in Q2 2016) and $1.5M of other liabilities. There are currently $3.3M in receivables that are due within the year and no headroom on either of the two loan facilities as they are both fully drawn down. Given the above and the fact there is only $2.7M of cash left, the group are perilously close to needing more funding. The continued payment by TPDC is imperative going forward but the board feel this is sufficient to meet the company’s current and ongoing obligations.

Demand for Mnazi Bay gas is expected to be in the range of 70 to 80MMScf per day for the balance of 2016. Starting at some point during the second half of 2017 additional power plants are planned to become operational thereby increase demand for natural gas. The existing five wells within the concession are performing as well as expected and combined will be able to meet the gas demand until a step up in demand materialises. As such, there is no exploration or development drilling planned for 2016 and giving consideration to the actual well performance during 2016 and a more definitive timetable for additional gas demand, the company expects to establish and active drilling programme in 2017.

Management is engaged in ongoing discussions with the Mozambique government to agree various issues relating to the proposed appraisal of the Tembo-1 gas discovery. Agreement in the issues is expected to be reached in the coming months and involve minimal capital commitments for the remainder of 2016.

Not including the deferred tax asset acknowledgement, the group did not make a profit this year so we can’t really value it on a PE basis. The group is expected to make a profit next year, however, and they are trading on a forward consensus PE of 6.4.

Overall then, this has been a year of change for the group. They are still heavily loss making if we discount the deferred tax asset recognition but the underlying operating loss is improving. The increase in net assets is due to the deferred tax assets which should mean the group don’t have to pay tax for quite some time. The operating cash outflow is improving but the group is still heavily burning cash. Of course the big news during the year was the commencement of gas delivery to the newly constructed pipeline, which after a short delay has been relatively trouble-free with 46MMScf per day being supplied in Q4 which could well increase towards about 80MMScf per day by the end of 2016.

In Mozambique, the partners in the concession seem to have deserted it so it is quite surprising to see the group holding on to their share with the only other partner left being the national oil company. I think perhaps, given the limited need for capex here over the next year they probably want to keep a foothold in the country.

The big issue that continues to hang over the group is the terrible payment record of the various government bodies in Tanzania. The large receivable from TPDC seems little closer to being paid off and it is imperative that they continue paying for the gas being supplied to the pipeline which seems a real risk to me. Also, the money owed by the government itself is no closer to being paid, indeed they seem to be finding lots of tax that the group hasn’t paid so they seem to be paying the government rather than the other way round! Finally, the state owned energy company has stopped paying for gas being supplied to the small local power plant so when that will be received is anyone’s guess. Reading between the lines, operating in Tanzania seems like a nightmare.

This is all very relevant as the company only have cash of $2.7M left and there is no headroom in their borrowing arrangements. Indeed they are obliged to start paying the loans back this year. This all looks very precarious to me and despite there apparently being a forward PE of 6.4 on offer here, the risks seem too high in my view. I will keep the company on my watch list though.