Solo Oil PLC Jumps 25% After First Gas Production Announced

Shares in Solo Oil (LSE: SOLO) have surged higher by as much as 30% in early trade this morning after the company’s partner in Tanzania, Aminex announced that it had produced first gas from its Kiliwani North gas field in the country.

Initial gas production commenced on 4 April and commissioning of the plant and associated pipeline will proceed over the next 100 days. Production will eventually build up to 25-30 mmcfd, which works out at around 4,000 to 5,000 barrels of oil equivalent per day. So, this is a sizeable production milestone for Solo and its project partners.

Under the terms of its gas sales agreement with the Tanzania Petroleum Development Corporation (TPDC), Solo will receive $3.00 per mmbtu for its share of production from the project. Management expects this agreement to yield net cash of $2m to $2.5m per annum to Solo.

Increasing interest 

Solo currently owns a 6.175% working interest in the Kiliwani North gas field, but this investment is set to increase to 10% over the next few months as certain project milestones are met. Solo’s further interest in the company will be built over three separate investments.

The first instalment, which was to be made after the signing of the special-purpose agreement laying out Solo’s additional interest acquisition timetable, will see Solo’s interest in Aminex increase by 1% to 7.2%. The next two payments, which together will take Solo’s interest in Aminex from 7.2% to 10% will be made 15 days after the first payment for gas from Kiliwani and within 15 days of the commercial operations date being declared, respectively. 

Set price 

As mentioned before, gas from the Kiliwani field will be sold at a set price of $3.00 mmbtu under a sales agreement with the TPDC and isn’t linked to any commodity price. In other words, now that the project has started production Solo’s cash flows are de-risked to a certain extent. As the company’s partners are receiving a set price for the gas produced, they can concentrate on maintaining operations and achieving the best operational performance from the well, a luxury few can afford in today’s oil price environment.

And there’s no doubt that today’s announcement has completely changed the investment case for Solo. This time last week, the company lacked any real income, and all of its value was locked up in the promise of production from its investment portfolio. What’s more, Solo was relying on constant placings to keep the lights on. But as of today, the company has been completely transformed. Solo is now a cash generative, profitable international oil & gas company.

Initially, Solo is planning to reinvest its resulting revenues from the Kiliwani project in growing its reserves base in Tanzania. The company has a 25% stake in the Ruvuma PSC in the country. 

Outside of Tanzania, Solo is participating in other projects with Horse Hill Developments Limited, UK Oil and Gas Investments plc, Pan Minerals Oil and Gas AG, and the company owns a 28.56% interest in 23,500 acres of petroleum leases in southern Ontario. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.