Wentworth Resources has now released its Q3 results for the year ending 2016.
Revenues increased by $1.4M when compared to Q3 last year. Production costs increased by $26K and depreciation/depletion grew by $398K, offset by a $414K reduction in admin costs to give an operating loss $1.4M below last time. We then see a $1.3M detrimental change to the estimate of the TPDC receivable which meant that pre-tax losses declined by $354K. There was a $2.7M deferred tax expense, however, following the acceptance of an amended tax assessment by the TRA relating to 2010 to 2012, which gave a loss for the quarter of $3.6M, an increase of $2.3M year on year.
When compared to the end point of last year, total assets declined by $4.5M driven by a $5.6M fall in TPDC receivables, a $3.1M decrease in deferred tax assets and a $1M reduction in the value of natural gas properties, partially offset by a $2.9M growth in receivables and a $1.7M increase in exploration and evaluation assets. Total liabilities saw a modest decline over the past nine months as a $7.6M reduction in long-term loans was offset by a $4.6M growth in payables and a $3.3M increase in the current bank loan. The end result was a net tangible asset level of $131.4M, a decline of $5.9M year on year.
Before movements in working capital there was cash profit of $541K, a positive movement of $1.8M year on year and there was a small cash outflow from working capital but this was lower than last time and the cash flow from operations came in at $433K, an improvement of $3.5M year on year. This did not cover the $835K of interest payments or the $541K spent on exploration in Mozambique but there was a net $1.9M increase in long-term receivables to give a free cash flow of $962K. The group repaid $3.3M of the long-term loan along with $186K of contingent consideration to give a cash outflow of $2.6M in the quarter and a cash level of $3.7M at the period-end.
In Tanzania in Q4, new field infrastructure is expected to be completed, including liquid separation units at the Msimbati gas processing facility. This new field infrastructure is necessary to ensure that the gas meets the specifications of the gas sales agreement signed with TPDC.
During this quarter, gas was used to fuel two power stations located in the city of Dar es Salaam – Kinyerezi-1 and Ubungo-II. The government plans to add an additional 1,155MW of electricity to the national grid over the next three to five years by constructing three new power stations and expanding the recently completed Kinyerezi-1 plant. This expansion project (185MW) has reached financial close and the construction contract was signed in Q2 with the expansion expected to be completed during H1 2018. Construction has started on the Kinyerezi-11 plant (240MW) with start-up and commissioning expected in H2 2018.
In addition to gas fired power stations, growth in industrial demand is expected to increase throughput of natural gas through the pipeline. TPDC has recently signed a MOU with Goodwill Tiles Factory for gas purchases of 7-12MMscf per day. A 1.4km pipeline to connect the factory is being constructed and is expected to be completed by the end of 2016. Gas purchased from Mnazi Bay is expected to be used by the factory. Another near-term initiative undertaken by TPDC is to agree to supply between 30MMScf and 40MMscf per day to meet the power and operational activities of an existing Dangote Cement Factory, the largest in the country. Other industrial users have shown interest in using natural gas and discussions with TPDC are ongoing. The estimated demand for gas is expected to exceed the current production potential by the end of 2018.
During the quarter, the Mnazi Bay field delivered 34.3MMScf per day, a decrease compared to the 51MMscf per day delivered in the previous quarter. The decrease in production is directly attributable to the suspension of Symbion power station’s operations due to a dispute between the owners of the plant and the Tanzanian government. It is uncertain as to how long this power plant will remain idle but as the onset of the hot weather season approaches, power demand is expected to increase and TANESCO is expected to require Symbion to be fully operational in order to fully meet the power demands of the country.
In addition, deliveries were constrained while major overhauls of the three power generation turbines were undertaken at the Ubungo-II power station. The overhauls are expected to be completed by the end of November after which the facilities are expected to operate at full capacity. Finally, commissioning of a new gas processing facility, part of the NNGP project located on Songo Songo island started which diverted about 10-20MMscf per day gas demand to an industry competitor. It is uncertain how long commissioning of this processing facility will take and the lasting impact on gas allocations.
Payments for gas delivered during the period to September have been received in full. The partners have agreed to extend payment terms for the receivable from TPDC for line fill and line pack of the transnational pipeline ($1.3M) during Q3 2015 and expect the full amount to be paid during 2017.
Four wells are already tied into the new pipeline and the fifth, currently producing about 2MMScf per day which fuels the TANESCO power plant in Mtwara, will be tied into the pipeline infrastructure during Q4 2016.
During the quarter, work continued on the expansion of the processing facilities at Msimbati which is expected to be completed in Q4. Primary processing of the gas is required at Msimbati to knock-out free liquids before the gas enters the sub-marine pipeline leading to the Madimba GPF. Gas specifications contained in the GSA stipulate the temperature, pressure and liquids content of the gas at the transfer point so the Msimbati processing facilities are essential in ensuring the gas specifications set out in the GSA are met.
The group will seek to advance their exploration to match the growth in demand. They expect the cost of these exploration activities to be fully funded from internally generated cashflow.
The Tanzanian government published a new finance bill that came into effect in July. The group are in discussions with industry participants and the Tanzania Revenue Agency to better understand how these new changes will impact the sector, be implemented on a go forward basis and be interpreted by the TRA.
In Mozambique in June the government approved an appraisal plan and area for the Tembo gas discovery. The appraisal plan covers a two year period from the date of the approval with the group approved as the operator with a participation interest of 85%. The plan included the pre-processing of existing seismic followed by further acquisition of seismic if warranted with the aim of identifying a suitable drilling location. The re-processing will specifically focus on the sands encountered in the discovery and subject to the results of this work, additional seismic may be acquired in Q3 2017. Drilling of an appraisal well will proceed in 2018. It is expected that the work programme will be funded through internally generated cash flow or the addition of one or more industry partners.
Receivables remain an issue for the group. They are still owed thirteen months of gas sales to TANESCO accounting for $2.1M. Receipts equivalent to just one month’s revenue were received in the quarter but a further two month’s payments were received in October. The group is in discussions with TANESCO to arrange a payment process to quicken the settlement process. Based on internal estimates, the $29M TPDC receivable outstanding is expected to be fully recovered by Q3 2018 which is expected to provide a significant source of cash flow during the next two years. During this quarter, $2M as recovered from TPDC’s share of gas sales.
Principal repayments on the group’s loan started in June with the first of six equal semi-annual payments of $1M on the $6M loan. In July the first of six equal semi-annual principal payments of $3.3M on the $20M loan was made. At the end of the quarter, the total principal balance owing on the debt was $21.7M. The group have $3.7M of cash on hand as of the end of the period.
During the remainder of 2016 the group has no exploration capital commitments in Tanzania. Anticipated development capital spending is limited to the completion of Mnazi Bay infrastructure tying field producing assets to the NNGIP. This development activity is expected to be completed in Q4 and cost about $3M. In Mozambique, spending on appraisal activities is limited to 2D seismic reprocessing and planning for a possible 2D seismic acquisition programme anticipated for the second half of 2017.
Current liabilities include about $10M due to the operator of the assets in Tanzania for field development and operating expenses during the last 15 months. This obligation is expected to be settled within the next two to four months. In addition, currently liabilities include the principal repayment obligations on external credit facilities due within the next year and the anticipated settlement of other liabilities also due within the next year. Due to the lower than expected gas sales during the quarter, in order to enhance short-term liquidity the group has advanced the initiative to expand the debt capacity to up to $50M.
Going forward the group expect demand to increase from the Q3 average of 34.3MMscf per day as they move into the hot season. For the remainder of 2016 and for all of 2017, base gas demand from Mnazi Bay is expected to average between 40MMscf and 50MMscf per day. The addition of the Dangote Cement plant could add another 30MMScf while the resumption of operations at Symbion is worth about 20MMscf per day. In 2018, the expansion of the Kinyerez-1 power plant (40MMScf) and Phase 1 of the Kinyerezi-II power plant (35MMScf) are expected to be commissioned and operational.
It is estimated that future development costs of $24.5M will be required to bring the total proved reserves into production. At the current share price the shares are trading on a historic PE ratio of 2.7 but the group is expected to make a loss for the full year so PE comparisons aren’t really relevant.
On the 18th November the group announced that MD Geoffrey Bury acquired 100,000 shares at a value of £21K which brings his shareholding up to 400,000 shares and 1.9M options. It was also announced that CFO Lance Mierendorf acquired 60,000 shares at a value of £12.6K which gives him an interest in 110,000 shares and 1.3M options. Last of the big spenders!
Overall then this has been a bit of a difficult quarter for the group. The loss has grown but this was due to a deferred tax charge and a change in the TPDC receivable estimate and the underlying loss improved. These issues also affected the net assets which saw a decline in the period. The operating cash outflow has improved but when interest payments are taken into account, the group still isn’t producing any cash from operations.
The gas delivered has fallen quarter on quarter due to the suspension of the Symbion power station following a dispute between the owners and the government, along with a major overhaul at Ubungo-II. The latter is likely to be short term in nature but there seems no end to the Symbion dispute. This is a problem because the group now has to start paying back its loan and has considerable amounts of cash due its Mnazi Bay partners. They are looking to increase borrowings further but I would have thought an equity raise is not out of the question. This looks too risky for me at the moment.