CFA Society Singapore
SINGAPORE (Feb 25): Ezion Holdings was one of the darlings of the offshore and marine boom. During its heyday (2012 to 2014), it took stakes in three small companies — Alpha Energy Holdings, Charisma Energy Services and Aus- Group. Since the start of the year, all three companies have announced new initiatives, which, if they materialise, could sustain cash flow and earnings for several years.
The major obstacle is likely to be the availability of funds to fulfil their vision. As at April 2018, Ezion owned a 41.48% stake in Charisma Energy; and, based on a circular dated Feb 18, it holds a 26.43% stake in Alpha Energy. Following a restructuring,
Ezion holds 12.2% of AusGroup. The relationship between Ezion, Alpha Energy and Charisma Energy is likely to continue. On Feb 4, Charisma Energy announced a suspension of its shares while the company is in discussions with banks and creditors to restructure. Charisma Energy, which owns offshore and marine assets such as rigs, plans to divest these assets. “The group is working on exiting the oil and gas business, and contributions from O&G assets will be minimal going forward. The group will continue to focus on developing and operating renewable energy assets, and building a future in renewable energy,” Charisma Energy states in its 2017 annual report.
A joint-venture 140MW solar photovoltaic (PV) power plant in Rajasthan, India was commissioned in December 2017, and a PV power plant in Hubei was commissioned in January 2018. Both plants have since commenced selling power and are currently generating revenue for the company.
Significant dilution for current Alpha Energy equity holders
Among the assets Charisma Energy plans to sell is its stake in facilities on the Mustang Field in Alaska. The company had an equity investment of US$1 million ($1.35 million) and nontrade amounts of US$7.8 million (equivalent to shareholder loans) due from Mustang Operations Centre 1 as at Dec 31, 2017. Set up in 2014, MOC1 is jointly owned by Alaska Industrial Development and Export Authority (AIDEA) and Charisma Energy, and its purpose is to process oil from the Mustang Field.
Charisma Energy announced it would divest its stake in MOC1 to Alpha Energy for US$4.5 million, to be satisfied by the issuance of 49.572 million new ordinary Alpha Energy shares at 12.5 cents each and US$4.5 million (or $6.196 million) 1.35% convertible perpetual capital securities, which are convertible into 14.82 million new ordinary shares in Alpha Energy.
In 2014, Alpha Energy (formerly JK Tech) partnered Thyssen Petroleum and acquired a 46.8% working interest in the Mustang Field for US$52.5 million. Over the past year, Alpha Energy made further announcements on the Mustang Field. It entered into an agreement to acquire a further 29.28% interest in the Mustang Field project, and a 32.56% stake in Brooks Range Petroleum Corp for $38.57 million to be satisfied by the issuance of 308.6 million new shares in Alpha Energy at 12.5 cents apiece.
Last October, Alpha Energy completed the placement of 46 million shares at 11.25 cents each to raise $5.175 million. The monies were used for working capital and to finance the operations at the Mustang project. As at June 30, 2018, Alpha Energy had no revenue and has had to capitalise its capital expenditure.
An extraordinary general meeting will be held on March 5 by Alpha Energy. Its shareholders will be voting on eight resolutions, which involve the acquisition of the Mustang project and the issue of shares, convertible perpetual capital securities and options to finance it. If all the resolutions are passed, by end-March, Alpha Energy will own 90.1% of the Mustang Field; 97.5% of Brooks Range Petroleum; the road and gravel pad that support the present and future development of the Mustang Field; the oil processing facility for the Mustang Field that is currently under construction; and 3.75% working interest in the Badami Unit, an oilfield in the Alaska North Slope.
The ownership interest of ordinary shareholders will inevitably be diluted further based on the EGM circular. Initially, if all approvals are met, after the completion of the Mustang project transactions, Alpha Energy’s enlarged share capital will comprise 759.17 million shares, up from 400.99 million before the dilution (see Table 1).
After the conversion of the convertible perpetual capital securities and exercise of options, Ezion’s stake will fall to 17.8%, Thyssen Petroleumn and Augustus Trust will each hold 13.17%, Charisma Energy will own 5.62% and AIDEA will have 3.55%. Alpha Energy’s shareholding will balloon to 1,145.87 million.
Hopes pinned on Mustang
“The point of all that [dilution] is that all these shareholders will own one entity owning 90% of all assets on the North Slope of Alaska,” says Bart Armfield, president and CEO of Brooks Petroleum, referring to the Mustang project. “The [Mustang Field] has 38 million barrels of recoverable resource on a full field development stage.” That means the Mustang Field, 90%-owned by Alpha Energy, is worth US$2 billion at a crude oil price of US$50 a barrel.
According to valuers DeGolyer and Mac- Naughton, the Mustang Field has proven, or 1P, reserves of 22.5 million barrels, and 3P — proved-plus-probable-plus-possible — of 38.4 million barrels.
“We have the gravel infrastructure in place and we’re 320m away from the Alpine Pipeline. We’re going to drill a hole in the pipeline, and then we install our pipeline and, by March 31, we will have our first oil production,” Armfield says. “We drill the well, the rig moves away, there is sufficient sub-surface pressure that most wells just flow.”
Once the oil comes up, it goes into a separation facility. Armfield continues: “When you produce oil, you get associated gas and residual water, because water drives the oil. You have to separate these three components. You separate the oil to sell it, the gas for power generation and water is predisposed back into the ground. The oil will go into the pipeline and eventually follow the Trans-Alaska Pipeline to Port Valdez for sale.” Water is pumped back into the oil well to replace the oil that is taken out.
Armfield estimates that the Mustang Field has a life of 25 years, so investors are unlikely to get the US$2 billion in oil revenue all at once. When it is stabilised, the field is likely to produce about 1,300 barrels of oil a day. “[If] we drill a horizontal section to a well that would generate between 2,500 and 3,000bpd, the facility that we ultimately have will be capable of producing 15,000bpd,” Armfield says. “This field will last 20 to 25 years. You can install a facility for less than US$1 billion.”
Once production has stabilised, breakeven levels for Mustang will work out to around US$37 a barrel. The breakeven price includes all costs, including tariffs and interest expense such as the US$5.40 a barrel to use the Trans-Alaska Pipeline and the debt at the project level. As the field is depleted, it may not be economical to continue to extract oil. Often, however, an additional oilfield can be found next to the depleted one. “We’re a very rich oil province. Mustang is connected to the second- largest oilfield in America, with three billion barrels of reserves. We’re sandwiched between some super giant oil companies, such as ConocoPhillips, Eni, BP and Repsol,” Armfield says. “We have a term sheet with a very close neighbour to buy the crude as it enters the pipeline.”
Under the current plan of development, peak production should occur in four years, after which production stabilises, Armfield says. “It peaks very quickly, stabilises, falls off, then runs for a long time.”
Alpha Energy continues to make losses
According to the EGM circular, Alpha Energy will continue to make losses, and loss per share will rise from 0.08 US cent to 1.43 US cents (see Table 3) immediately after the Mustang transaction.
In a sensitivity analysis, valuers DeGolyer and MacNaughton have indicated that, on a proven reserves basis, gross revenue is likely to be US$1.08 billion, with future net revenue of US$288.38 million on a constant price case of US$66.95 a barrel. Based on discounted cash flow, DeGolyer and Mac- Naughton say the present worth at 10% of the proven reserves is US$129.13 million. Depending on the average price of crude oil, future net revenue could be as high as US$392.58 million. At the higher price, the present net worth at 10% of the proven reserves is US$188.2 million.
How profitable the Mustang Field is likely to be depends on cost management. “The Rockefellers made an empire at US$3 a barrel. In 1989, when we made our first lease, oil was at US$9 a barrel,” says Armfield, who has been in the oil business for the past 29 years.
Asked whether it is a sunset industry, Armfield asserts: “For oil, I don’t think the sun will set this year, five years from now or 10 years from now.” That is largely because oil majors such as ConocoPhillips, [Papua New Guinea’s] Oil Search and Repsol have announced spending programmes of US$20 billion in aggregate over the next five years for new development in Alaska.
Ezion issues profit warning
For the embattled Ezion, first oil at the Mustang Field would be a welcome relief. On Feb 4, Ezion issued a profit warning. Delays in loan agreements following its restructuring last year, where bondholders are in the process of taking up equity for debt, affected the deployment of vessels, the company said. In addition, two liftboats were rejected by a national oil company over concerns of shortage of funds, and one liftboat and one jack-up rig have been delayed by a lack of funding to commence modifications required by an oil major. In the meantime, one liftboat encountered mechanical issues and requires funding for repairs, and the builder (under administration) of another liftboat is contesting ownership.
For 3QFY2018, Ezion announced a net loss of US$20.94 million. AusGroup announced on Feb 19 that it had acquired the accommodation village and ancillary facilities at Port Melville near Darwin from Charisma Energy for A$11.8 million ($11.4 million), to be paid in monthly instalments until October 2020.
Neither Ezion, Alpha Energy nor Charisma Energy is out of the woods. If Alpha Energy ever gets the requisite resolutions passed at its EGM and oil starts to flow, that could go some way to relieving the stresses in this group of companies.
This story appears in The Edge Singapore (Issue 870, week of Feb 25) which is on sale now. Subscribe here