Wentworth Resources has now released their results covering Q3 for the year ending 2017.

Revenues increased by $1.7M when compared to Q3 last year. Production and operating costs were up $139K and depreciation and depletion increased by $411K which meant that the operating profit grew by $1.2M. There was a £585K decline in the accretion on the TPDC receivable but no change in estimate which cost $1.3M last time. After interest expenses grew by $164K and the deferred tax expense fell by $2.2M the profit for the period came in at $704K, an improvement of $4.3M year on year.

When compared to the end point of last year, total assets increased by $201K, driven by a $5.4M growth in receivables, a $2.4M increase in cash, and a $1.5M growth in exploration and evaluation assets, partially offset by a $6.5M decline in receivables from TPDC and a $2.1M fall in the value of natural gas properties. Total liabilities declined during the period as a $1.7M increase in the overdraft was more than offset by a $4.4M reduction in long term loans and a $1.3M decline of payables. The end result was a net tangible asset level of $133.1M, a growth of $2.7M over the past six months.

Before movements in working capital, cash profits increased by $1.5M to $2.1M there was a cash outflow from working capital and the cash from operations came in at $298K, a decline of $135K year on year. This didn’t cover the $511K of exploration costs or the $474K spent on development and production and the $658K that went on interest payments but the $2.1M receipt of long term receivables meant that before financing there was a cash inflow of $769K. Of this the group drew down $1.1M on the overdraft to help repay $2.3M of long term loans to give a cash outflow for the quarter of $471K and a cash level of $3.4M at the period-end.

The average gross daily production increased by 75% to 59.9MMscf per day and the production operating costs declined by 31% to 72c per MMScf. The full year production forecast remains within the previously guided range of 40-50MMscf per day.

During the quarter there was a 78% increase in gas sales to TPDC to 1,256,662MMbtu. During the period the group was supplying two power stations in Dar es Salaam: Kinyerezi-1 and Ubungo-II. Both of these power stations operated at near full capacity during the period with less repairs and problems occurred which resulted in the increase. In addition higher quantities of gas were used for electrical power generation in the period as hydro power generation was significantly reduced following the end of the rainy season and lower quantities of gas were supplied by industry competitors.

During Q2 TPDC started delivery of Mnazi Bay gas to its first industrial customer, a newly constructed ceramic tile factory, Goodwill Ceramics. Gas demand to power the factory is expected to reach 7MMscf per day by the end of 2017 and be sustained at that level thereafter. At the end of Q3, gas deliveries to the company were approximately 5.5MMScf per day.

Additional gas demand from growth in the industrial sector in Tanzania is expected to be realised in the near future. During 2017, TPDC concluded a commercial arrangement to supply gas to a Dangote cement plant and a new gas pipeline is in the process of being installed. The installation of a 35MW power generation unit and associated power supply to the Dangote cement plant is expected to be commissioned during Q1 2018. Dangote also announced a plan to eliminate coal and convert the entire plan to gas, envisaging a permanent combined cycle power plant being built on the premises of the Dangote Cement factory.

Initial gas demand of between 5 and 7MMScf per day for temporary power generation is expected to start towards the end of Q1 2018, The kilns are expected to be fired by natural gas starting in Q2 2018 and will require and additional 8MMscf per day, increasing to between 20 and 25MMScf per day in 2019. The temporary 35MW gas fired plant is planned to be replaced by the combined cycle plant using steam turbines in Q1 2019.

Additional gas fired power generation is expected to materialise in the next three to eighteen months with the completion and commissioning of the Kinyerezi-2 power station and the Kinyerezi-1 extension. The 240MW Kinyerezi-2 station is expected to start the commissioning process in December 2017 with the first six gas power turbines being tested and becoming operational. Completion of this process is expected by Q3 2018. Demand for gas to power this facility is expected to be 5MMScf per day to start up and reach 36MMscf per day by the end of Q3 2018. Commissioning of the 185MW Kinyerezi-1 extension is expected to start during Q4 2018 and once fully operational in 2019 is expected to require an additional 35MMScf per day.

During the quarter there was a 4% growth in gas sales to the TANESCO Mtwara power plant to 51,186MMbtu.

During the period minor works continued the expansion of the processing facilities at Msimbati which, together with the tying-in all five wells completes all the necessary field infrastructure work to enable delivery of gas volumes expected to be in excess of 100MMscf per day to the pipeline to Dar Es Salaam. Commissioning of these facilities is expected in December 2017. With the completion of these capital investments it is expected that there will not be a need for significant additional capex until the average daily demand exceeds 100MMscf per day for an extended period of time.

There seems to be some progress being made on these long term receivables. As of the period-end, the group was owed nine months of invoices for gas sales made to TANESCO, totalling $1.5M. Three months totalling $541K was received after the period-end with the company settling invoices in between seven and twelve months. As of the period-end the group was owed five months of invoices from TPDC totalling $10.4M. After the period-end they paid $1.6M for the February 2017 gas sales invoice and initiated a payment of $2.6M for the October 2017 gas sales invoice.

In July the government of Tanzania enacted three new laws which cover activities within the energy and mining sectors. Two of these are forward looking and contain new regulations stating that all arbitration processes must be heard within Tanzania and place restriction on the ability to move funds out of the country. The third act covers existing agreements and provides the right to the government to renegotiate clauses in existing agreements that are deemed to have unconscionable terms. Based on their current understanding of this new legislation the board do not expect any material impact on their existing operations in the short to medium term but it is unclear whether there will be any material impact in the long term.

In the period, activities in Mozambique mainly involved the reprocessing and analysis of existing seismic data with a view to identifying a well site location, obtaining environmental licenses, planning for the drilling of an appraisal well and completion of tenders for the procurement of a drilling rig and long lead time items such as casing and tubing for the well. The farm-out process is ongoing and the group anticipates securing a partner prior to starting drilling operations in 2018. Funding of the drilling of the Tembo 2 appraisal well will be through internally generated cash flows and sharing the cost with one or more industry partners.

Finalization of the well location and subsequent site visits to further inspect the site for the design of the well pad and site preparation have been delayed due to the deteriorating security situation in and around the Macimboa da Praia region which is next to the group’s concession area. Clashes between police and extremists have increased during October resulting in a heightened risk profile. The group is monitoring the security situation closely.

After the period-end, a further $850K was drawn down on the overdraft which means the facility is fully drawn. Current liabilities include outstanding cash calls issued by the operator of the Mnazi Bay concession for 2016 operating costs of $1.3M of which the company settled the full amount after the period-end. Their share of accrued Mnazi Bay activities for the nine months of 2017 was $4.1M which is expected to be settled through cash receipts from existing gas sales receivables.

Current liabilities also include the principal payment obligations on external credit facilities and the expected settlement of other liabilities also due within the next year. In Q1 the group reached an agreement with its main lender to defer payment of the January payment of $3.3M to Q2/Q3 and deferring later payments for a year. Principal payments of $5.3M are expected to be made in the next year.
The group is working closely with the operator of the Mnazi Bay concession and the external lenders to make settlement of these obligations coinciding with the receipt of cash from gas purchasers for settlement of gas sales invoices. To date the cooperation amongst all parties has allowed the company to effectively manage working capital. Existing gas sales receivables of $12M exceed the immediate obligations to the operator and to the external lenders.

During the rest of 2017 and 2018 the group expects to have no significant capex relating to exploration and development activities in Tanzania and anticipated development capital spending is limited to around $800K for general field development maintenance capital. In Mozambique spending on appraisal activities is expected to be limited to completing the necessary technical work to support drilling of an appraisal well in 2018, costs associated with securing an industry farm-in partner and administrative and support costs for managing the operation under the Rovuma onshore block in Mozambique.

Going forward this quarter was the highest quarterly sales volumes ever and the board expects gas demand to grow in the coming months with the commissioning of the Kinyerezi-2 power station and start of delivery of gas to the Dangote cement plant. The primary challenge continues to be the receipt of regular and timely receipts from TPDC and TANESCO. While the timeliness of cash receipts from TANESCO has improved since the start of the year, settlement of invoices for gas sales made to TPDC remains at between four and five months. While the group expects the situation to improve over the next year, significant effort and patience will be needed to be exercised by all parties.
The group is currently loss making and is expected to make a loss this year but next year the forward PE ratio stands at 90.3 which seems a bit steep.

On the 20th December the group announced that December payments had been received from TPDC totalling $2.5M. They also reported that gas delivery has started to Kinyerezi-2 for commissioning of the first two of six turbines. They continue to maintain 2017 full year production guidance of between 40 and 50MMScf per day.

On the 11th January the group released an operational update. Gas demand continues to grow following the start-up of Kinyerezi-2 with the first two of six turbines now operational which helped push the daily production exit rate for 2017 to 73.4MMscf. The average for Q4 was 62.2MMscf per day with the average production for the full year hitting 49.1MMscf, the upper end of the production guidance range of 40-50MMScf per day.

For 2018 the group expects further growth in gas demand from the Kinyrezi-2 power facility as an additional four gas fired turbines are expected to be commissioned during the year. New gas demand from the industrial sector is also expected from the Dangote Cement factory as well as other new industrial customers. For 2018, based on growing demand and taking into account the seasonal lower demand in Q2, full year production is expected to be in the range of 65 to 75 MMscf per day.

On the 15th January the group announced that Eskil Jersing joined as CEO. He was CEO of Sterling Energy, a UK-based oil and gas exploration company focused on Africa and the Middle East.

Overall then this seems to have been a period of progress for the group. Profits improved, net assets increased and although the operating cash flow declined, this was due to working capital movements and the cash profits increased. The group even managed to produce some free cash flow once the receipts of the long term receivables are taken account of. The question is, is this enough to sustain the growth of the group? The new power station and Dangote cement plant hint that sales should be even higher next year but the problem with actually getting paid for the gas in a timely manner persists. This is a problem as the group is stretched itself with regards to its own payables.

In conclusion, I think the group is moving in the right direction but the shares seem a bit expensive given the issues present.

On the 1st February the group announced that payments had been received during January from TPDC and Tanesco totalling $1.8M for gas sales during 2017. As expected they continue to settle invoices on a regular monthly basis.

On the 1st March the group announced that payments received during February for gas sales generated were $2.5M and gross production volumes during February from the Mnazi Bay field averaged 80MMscf per day, the highest monthly volumes achieved since production started.