AIM reverse takeover: Advance Energy

Advance Energy is focusing on oil and gas projects that can generate cash in the short-to-medium-term or where there is a short-term opportunity to increase their value. The Buffalo oilfield fits the criteria, and the company is acquiring a 50% stake in this field in this reverse takeover.  

Buffalo has produced oil in the past. This could be a highly cash generative investment, but it will require significant capital expenditure before production can commence.

Advance Energy is seeking other acquisitions and farm-in opportunities for discovered oil projects. Some of these could end up as another reverse takeover. At the moment, though, the company is a one asset bet.

The share price has slipped back to 2.4p (2.2p/2.6p). Advance Energy has been a shell in search of a business for many years and has taken many forms. This latest incarnation has promise, but it is best to wait and observe progress for the time being.

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Advance Energy (LON: ADV)

Oil and gas

www.advanceplc.com

Market: AIM

Reversal / placing

Flotation date: 19 April 2021

Issue price: 2.6p (after ten-for-one consolidation)

Amount raised: £21.84m

Expenses: £1.83m

Market capitalisation: £26.7m

Nominated adviser: Strand Hanson               

Brokers: Tennyson / Optiva

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What does it do?

Isle of Man-based Advance Energy has subscribed $20m for a 50% interest in Carnarvon Petroleum Timor, which is a subsidiary of ASX-listed Carnarvon Petroleum – operator of the Buffalo oilfield.  

Carnarvon Petroleum Timor holds a 100% working interest in the Buffalo PSC, offshore Timor-Leste. This is a proven oilfield with 2C oil resources of 34.3MMstb (million US stock tank barrels – each barrel is 42 US gallons at a specific pressure and temperature). An appraisal well due to be drilled this year could increase the potential resources.

Timor-Leste become independent from Indonesia in 2002 and its maritime boundary with Australia was settled in 2018. Buffalo is just inside the country’s maritime boundary and it is in shallow waters. BHP discovered Buffalo in 1996 and it reached production of 45,000 barrels of oil per day before production declined and ended in 2004.

Advance Energy’s investment will fund the appraisal well. If it is successful then production could reach 40,000 barrels of oil per day within three years, although this would require additional investment in the oilfield.

The production sharing contract provides 100% cost recovery with 65% of profit oil going to the contractor. Corporation tax is 30% and royalties are 5%.

The only other assets held by Advance Energy are blocks in the North Sea, but these are likely to be sold for a nominal sum and no more cash will be invested.

Chairman Mark Rollins and chief executive Leslie Peterkin are both highly experienced in the oil and gas exploration and production sector.

Financials

Two-thirds of the cash raised in the placing will pay for the 50% interest in Carnarvon Petroleum Timor and this will go towards funding the appraisal well.

Pro forma net assets are $27.2m, including the $20m investment in the Buffalo oilfield. There is pro forma cash of $7.77m. This will cover the $2.5m provision for potential additional costs of the appraisal well. The rest will be used for working capital.  

If a development plan is approved, then Advance Energy will have to arrange the funding for $125m of capital spending. Third party loans should account for 70% of the spending with the rest being loaned by Advance Energy through a subsidiary. Carnarvon Petroleum Timor will bear interest of up to 10% a year and Advance Energy would have to pay any excess interest. If the funding is not arranged, Advance Energy will default on the agreement.

A default would mean that the interest would have to be sold for three-quarters of fair value.

Directors

Mark Rollins (Non-exec chairman)

Annual fee: $192,000

Leslie Peterkin (Chief executive)

Annual salary: $375,000

Stephen West (Finance director)

Annual salary: £198,000

Ross Warner (Non-exec)

Annual fee: $60,000

Larry Bottomley (Non-exec)

Annual fee: $60,000

Stephen Whyte (Non-exec)

Annual fee: $60,000

Shareholders

New shareholder Tavira Securities owns the largest stake of 5.2%, while Anavio Capital Partners holds 3.48% and Toscafund Asset Management 3.37%. John Story has a 3.48% shareholding. Sebastian Marr’s shareholding has been diluted to 4.09%, even though he added to his stake.

The directors own 6% of Advance with Mark Rollins holding 2.86% and Leslie Peterkin 2.59%. They subscribed for £430,000 of shares in the placing, as well as taking director fees in shares.

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Andrew Hore
Andrew Hore is the publisher of AIM Journal, which is an online monthly publication covering the Alternative Investment Market.