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Orca Energy

Orca Energy is listed in Canada and its primary asset is a natural gas field in Tanzania, which is governed by a production sharing agreement (PSA) with Tanzania Petroleum Development Corporation (TPDC), the national oil company.

The PSA divides the gas reserves as ‘protected’ and ‘additional’. The company operates the wells and gas processing plant for the protected volumes on a ‘no gain/no loss’ basis - but can earn on volumes in excess of that. The PSA also mandates provisions on further revenue sharing arrangements based on daily volumes, cost recoveries, and taxes payable.

Gross proved plus probable reserves were certified by independent valuers at 229.5 Bcf (billion cubic feet). At 2020 production volumes of 19.4 Bcf, the company roughly has 12 years of reserves left.

The company generates 62% of revenues from the power sector and the balance from the industrial sector.

It generates average revenues of $80m and operating cash flows (net of interest expense) of just under $40m. The balance sheet has gross debt of $54m but the liquid asset position is strong.

The most concerning aspect is the quantum of disputes with government entities – the largest of which are tax disputes with the Tanzania Revenue Agency (TRA) of $65m and disputes on cost recoveries with TPDC amounting to $56m – both dating back several years and not provided for in the accounts. The company has recourse to higher appeals courts for the tax disputes and to international arbitration for the cost recoveries.

The TRA was able, however, to extract $5.3m from the company’s bank account during 2020, which appears concerning. (The above $65m is net of this.)

In addition, management dropped plans to expand elsewhere in Africa and concentrate on this operation.

These factors (along with stock appreciation rights and restricted units amounting to $1.2m payable) may have induced management to initiate a massive stock buyback operation amounting to $40m in FY20, which reduced the outstanding shares by 23%.

The company has two classes of shares (A and B) that rank equally for dividends and liquidation but A has 20 votes to B’s one. However, the B shares sell for under $5, which equates to under $80m on an all-equity basis.

At a price of 2x cash flows with strong buybacks, the conservative investor could get his principal back and earn a satisfactory return (18%+), which incorporates a safety margin for this short-lived field.

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