Zenith energy is in a better place today than it has ever been before if you ask me. I have always been a big advocate for a good balance between production and exploration assets for Zenith and it seems as if we will get there soon. I have to give Andrea Cattaneo credit here for not giving up.
We were so close to getting over the line with this production/exploration balance when we acquired the Tunisian production assets and looked like we would also acquire Tilapia, only for both of the agreements to fall apart at the end. But it now looks like we are back following a similar strategy, only this time with the production assets being acquired in the USA and the exploration assets in Kazakhstan.
The importance of having the production/exploration balance right in the company cannot be overstated. The production revenue allows the company the ability to service debt and the debt allows the development of the exploration assets without having to raise money by issuing shares.
I think it was both very interesting and very significant to read in the recent half-yearly accounts that Zenith are preparing to issue €25 million worth of bonds. They do need to find buyers for this debt, but they do have a long track record of issuing and paying bonds on time so this should be possible. If they do manage to issue it then they are well placed for a significant acquisition program in the US and also have all the funding that they would require for the development of Kazakhstan.
If they cannot get these bonds out quick enough then there is a chance that they will need to issue equity but hopefully it will only be for a small amount to tide them over until the bonds come through.
Either way, once they get funding in place, then the company will be incredibly well positioned to have a successful 2024 and a large part of this is to do with Kazakhstan.
Kazakhstan
The Kazakhstan oil field deal is potentially transformational for the company and although there is risk with any oil drill this risk is mitigated by the existence of mega oil and gas fields in licenses immediately surrounding ours.
The acquisition of the license is another great example of Andrea Cattaneo’s incredible deal-making and negotiating ability. $2 million acquisition cost and $3 million on drilling a well is a bargain for 50% of a license that potentially contains over 500 million barrels of p50 resources. It is certainly a much bigger and better deal than Tilapia and poises Zenith Energy for tremendous growth and profitability.in the coming year.
The fact that the company is in a position to utilise its own rig to do the work is obviously a significant advantage to the project. It not only allows Zenith to deliver the work at a much cheaper price than would otherwise have been possible, but it also means that future wells can be drilled quickly and easily. I am sure that this is part of the reason that the deal has been agreed at such a good price.
It is also interesting to see in the RNS that it looks like the terms for the acquisition of the second 50% of the asset will be agreed within 60 days of the remaining $1.8 million being paid for the first 50%. The important part of this is that it is before the drill is completed, so it means that Zenith have the opportunity of acquiring the whole license before the first well is even drilled.
Italy
Obviously, we have the Italian gas to electricity licenses which produce steadily, if not spectacularly, and seem to contribute a revenue of anywhere between €1.5-€3 million per annum dependant on the vagaries of the gas price. In itself these are not particularly significant but Andrea pointed out in his end of year interview that we have run these for 11 years now. So it does show that the company is perfectly capable of carrying out consistent production when external factors do not get in the way of progress. It also proves that they are a perfectly competent operator when left alone to operate.
United States
I like the fact that we are looking into the acquisition of US production assets. After the experience of the company being burnt by the Tunisian government completely breaking the contract that Zenith has agreed with them, then I agree with the strategy that it makes sense to produce in an environment where the legal protections are much stronger.
I think that the idea that they have had, of acquiring a US listed company, Leopard Energy, to operate the US assets through is quite an interesting one. It obviously makes Leopard a pretty much stand-alone entity, which raises the question about how would any revenue from there be repatriated to the Zenith parent in a tax efficient manner. But on the other hand it does give the opportunity for Zenith to raise money for their US operations without increasing the shares in issue for the overall company. It also allows them to raise capital in the US market that will be spent on oil assets in the US and I am sure that this will go down better there than trying to raise money for a drill in Kazakhstan.
Long-term it would not surprise me if they eventually grow this business to a significant enough size that they just sell it off to a larger company, but in the meantime the value of the holdings there will definitely have the benefit of being able to service any US based loans and act as collateral for the same – even if the money is spent on other Zenith operations.
South Sudan
South Sudan is an interesting one. It is unclear as to how much progress has actually been made, but Andrea himself said in his December interview that the two MOUS that have been signed were stepping stones to much larger goals rather than an end in themselves.
He was very clear in his interview that Zenith is continuing his long-stated aim of trying to acquire marginal fields that the super-majors are trying to dispose of. He even went as far as to state that it is fields operated by CMPC and Petronas (who want to leave the region) that he is looking to acquire.
It is an interesting new technique that he is trying in South Sudan. Obviously, with the Yemen deal that fell through last year he had a deal in place to acquire the Yemeni assets from OMV but the deal was vetoed by the Yemeni political establishment. It seems that he has learned from this experience and this time he is going about things the other way round; trying to build bridges with the Sudanese oil and gas deal ministries before attempting to acquire an asset. It makes sense as a strategy and hopefully something will come of it. I particularly like the phrase he sued when he said: “This MOU proves our ability to transact there, to be recognized, to be liked, and in a way that will help us go for much bigger projects”.
Arbitrations vs Tunisia
The three arbitrations against the state of Tunisia and the Tunisian national oil company for breaking the terms of the Tunisian licenses are continuing. The value of these is $140.5 million and it seems like Zenith have an extremely strong case since they were permitted to sell oil until they were not.
This action by the Tunisian government is a clear breach of their legal and contractual obligations. Zenith Energy had a legitimate agreement in place, which allowed them to sell the oil they produced in Tunisia. However, the government's sudden decision to halt this process has cost Zenith a lot of money and it is clear that compensation is warranted. Imagine how different the status of the company would currently be if they were still brining in between $15-20 million in revenue from these assets?
One advantage that Zenith Energy has is that these arbitrations are international in nature. This means that the judgments made in these cases can be enforced on nation states, including the Tunisian government. This is a significant advantage, as it ensures that Zenith Energy has a greater chance of receiving a favourable outcome. This has been reflected in the fact that they have already been granted an award of €120,000 in costs for the ICC in the case against ETAP.
Obviously, the arbitrations are not going to be concluded quickly and I imagine that it will be 2025 before the cases are finally ruled on. However, it does seem as if Zenith have a very good chance of winning and being awarded some or all of the money that they are claiming.
Legal case vs the SMP
Zenith have another legal case going on against the SMP in France. This one is a court case that they acquired when they bought AAOG for £250,000 in 2019 and it is for a total value of $9 million. Andrea described the case in his latest interview as looking “extremely promising” and also stated that he expects to have the final court decision delivered in late spring or early summer so this could mean a significant cash injection into the company as early as H1 2024.
Conclusion
Everything is well set for Zenith to deliver a very successful year for shareholders in 2024. If they can follow the plan that Andrea has stated and complete the Kazak acquisition and drill then they will own 50% of a huge exploration asset that has the potential to be company-transforming. If they can also acquire the American production assets then they have a revenue generator that will allow them to service significant debt on a long-term basis. When you add in the potential $9 million from the SNP then this looks like it could be a very active an profitable first half of 2024 for the company.
The risks involved are simple. They do need to raise money to complete the Kazakhstan deal and also to acquire the US assets, so a lot of the potential success depends on them getting the €25 million bond option in process as soon as possible. This is the first step to success this year. If they can do this then I expect 2024 to be a very profitable year for all of us.
