African Petroleum Corporation Limited – Updated Analysis: Moving Forward In Retrospect?

First and foremost, I take note of the chairman’s opening line. He says that the Company has returned to where it belongs – APCL has returned to drilling activities. I don’t think that we should underestimate this statement. It sends a clear message to the shareholders about what the Company’s focus is and underscore that drilling is de facto what the Company is about. Personally, I think that this message is of great importance given last year’s extreme focus on the ongoing disputes, which regrettably has continued throughout 2018. African Petroleum Corporation Limited underscores its focus on drilling activities in several parts of the report, albeit in different ways. I would say that this is the major message of the report. The Company is very clear about and underscore that they had successfully found a (major?) partner ready to step in and drill the prospects in both Senegal and the Gambia and had agreed Heads of Terms with this unnamed company. African Petroleum Corporation Limited also emphasizes that it accomplished this partnership in the context of “severe market conditions for offshore exploration activity since 2014, as well as a change of administration in both countries which resulted in uncertainty and delays.” The message that APCL wants to send is quite clear – the Company makes exploration drilling happen and are able do so even in the most extreme and severe circumstances (my interpretation). As long as the Company remains owners of its licenses, that is.
In addition, the first words under the headline “2017 results overview” are as follows.

“The Company’s focus during 2017 was to fulfil the drilling commitment of the Ayamé-1X well in Côte d’Ivoire with our partner Ophir Energy […]”.

A few more quotes from the report.

“During 2017, the Company returned to offshore drilling […]”.

“After a hiatus of five years without drilling, it was exciting for the Company to return to its essence of exploring high impact exploration targets.”

So, I would say that there is a case for arguing that the multiple mentions of “returned to drilling” is no coincidence.

To me, the reasons behind the focus on drilling are as follows and in no particular order.

  • APCL wants to send a clear message to its shareholders and potential future parners that the Company is all about exploration drilling, highly capable of fulfilling commitments. Potential partners shall have great confidence in APCL’s ability to do so. APCL wants to convey and really underpin that the company has a record of making it all the way to drilling and will continue on this path in the future. The Company makes it clear that it will drill in Sierra Leone. It was about to drill in The Gambia and Senegal and had a major oil company all partnered up when the governments in the two countries suddenly turned things around (Facing several major discoveries in the basins offshore West Africa, the political leadership of Senegal and The Gambia were courted by various oil majors expressing interest in the countries´ highly attractive licenses. Given the complex political history of these two nations, oil and gas in particular, it is not uncontroversial to believe that they likely saw an opportunity to attract large investments in their countries in exchange for (a chance to get in on) the nations’ licenses. We have seen heavy investments in The Gambia from China, to name but one example.)
  • The Gambia has been very clear and excplicit as to why they consider African Petroleum Corportion Limited to no longer be owners of oil block A1 and A4: The Company did not fulfil fulfil its commitment of drilling exploration wells, according to The Gambia.
  • In the report APCL is focusing more than what would normally be the case on the failed project in Côte d’Ivoire. In no less than 17 places, Ayamé is mentioned with the subsequent emphasis that the well was actually drilled. I would say that this is of major symbolic value to the company. It conveys a clear message to potential partners that the Company is making things happen and have the ability to acquire confidence from Goverments and States. That APCL is not about delaying or postponing commitments stipulated in contracts, but to exploration drilling.
  • It could very well also be an elegant yet simple and confident message to the international community, to ICSID and to the Governments of The Gambia and Senegal that “we know what we are doing, we have both history and contracts to prove it and the blame for not drilling is on two governments who has breached valid contracts”.

Moving Forward

Sierra Leone

African Petroleum Corporation Limited’s renewed excitement about the licences in Sierra Leone was reinforced shortly after the Company saw that extensions of its licenses were granted, after an independent assessment of resources verified the high prospectivity of the licences.

The Company is currently engaged in preliminary discussions with potentially interested parties and hopes to progress those discussions towards a commercial outcome in the coming year as it seeks a partner to share the risk and reward of these interesting licences.

Moving Forward in Retrospect

The Gambia & Senegal

The status of African Petroleum Corporation Limited’s licences in the Gambia and Senegal has almost taken a schizophrenic nature. There have been many sudden turnarounds (and from both sides, in all honesty) and what seemed to be a ready-to-drill operation suddenly turned 180 degrees. It is truly impossible to make any certain prognosis on what the outcome will be. The reason is simple: we do not have access to all the facts since most documentation are not public, such as the PSCs. But we can make qualified assessments since there are plenty of clues, non official information and last but not least statements from the Company itself. Since I have published my analysis on the situation in one of my previous articles I recommend you to give it a read before you continue.

In addition to my previous analysis on the outcome of the ongoing dispute I would like to add the following after reading the annual report of 2017.

“Requests for arbitration in respect of the dispute over the A1 and A4 licences in The Gambia were filed during the 4th quarter 2017. In Senegal, at the time of publication of this report, we await clarity regarding the government’s position but remain ready to invoke similar legal rights in respect of our licences. Based upon the legal advice that we continue to receive regarding our position across these licences, we are confident that these steps are wholly appropriate, legally valid and will lead to a successful outcome for the Company.” (Jens Pace, p. 6).

This statement has another nuance to it than previous ones. Legally valid are the key words here. It is simply a confident and very concise message from the Company. From a judicial perspective it probably can not be any clearer. After appointing legal expertise and reviewing the contracts, the Company does not put it mildly or leaves it open for interpretation or speculation: “our cases are legally valid.” Nothing more, nothing less. The following quote from the report underpins this analysis.

“What is certain though beyond a shadow of a doubt, is that we would not be progressing with arbitration proceedings if we did not feel that we had a strong case based on the legal rights of our PSCs. Furthermore, we would not be progressing down this route if we did not feel it was necessary and in the best interest of our Company and its shareholders.” (David King, p. 5).

To summarize – given the statements quoted above there really is not room for any other interpretation (from a judicial perspective) than that the Company has a legally valid and solid case. Based on these statements, the Company is simply saying that the outcome will be in its favour.

Something new?

This paragraph in the report which made me raise my eyebrows.

“While maintaining capital discipline in order to prioritise the above activities, the Company is actively considering new venture exploration opportunities and potential portfolio transactions with third parties. We look forward to reporting on our progress in all these areas in the coming months.”

This paragraph, contrary to the statements previously quoted, leaves plenty of room for speculation. I can only guess and speculate so I won’t comment further on the matter except for saying that I find this exciting. What new venture exploration is the Company referring to? What potential Portfolio transactions with third parties is intended? Is it simply Sierra Leone or something completely new? Is it a stand-by partnership/partnerships for the licenses in A1 and A4 in The Gambia and for ROP and/or SOSP in Senegal ready to kick in when the dispute and negotiations are completed?

Final words on the financial strength of the Company

From the report we can conclude that the Company is certain that it has the financial strength to proceed with the ICSID process as well as the initial exploration activities in Sierra Leone.

“We remain well funded and can comfortably cover our legal costs associated with Senegal and The Gambia, whilst also funding the initial exploration activity in Sierra Leone.”

“We are; however, pragmatic about the complexity, length and uncertain outlook of such processes, but remain steadfast in our belief that our decision to proceed along this path is in the best interest of our shareholders. Importantly, we are well funded to maintain this course until we achieve a satisfactory outcome. We remain open to meet with the respective governments to discuss a way forward that avoids the unnecessary waste inherent in these legal processes.” (p. 6).

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