May 01, 2013Rialto Energy Secures Investment From Vitol E&P For...

May 01, 2013
Rialto Energy Secures Investment From Vitol E&P For Cote d'Ivoire And Ghana

Despite all the difficulties of the past year, Rialto Energy, the troubled West African explorer and developer, has signed an agreement with cash-rich Vitol E&P that will accelerate activity over its assets in Ghana and Cote d'Ivoire and ensure the company can fund its part in a near-term high impact wildcat.
What's more, the deal partners the AIM company with an experienced and well-funded regional operator with a proven track record of monetising assets in West Africa, one of the key challenges for Rialto's flagship Block C1-202 in Cote d'Ivoire where development plans for the Gazelle gas field were last year derailed by a run of disappointing drilling results.
Under the deal, Vitol will acquire 65 per cent of the shares of Rialto's subsidiary in Cote d'Ivoire, which has an 85 per cent interest in the block and 74 per cent of the Gazelle field development area, in exchange for providing a US$50 million investment in an agreed work programme on Block C1-202.
The funding is contingent on completing due diligence, agreeing a commercial framework for an integrated development of contingent gas resources and alignment with the Government on the second exploration period work programme by November 9.
Rialto, which is also listed on the ASX, says it has met with the Minister of Energy and the Directorate of Hydrocarbons to discuss the proposed integrated development concept and says these meetings have confirmed the “strong desire” of the Government to see gas developed for local power generation to support the forecast growth of the country's mining sector.
London-listed Afren, operator of the neighbouring block C1-01, is also said to be willing to look at joint development of gas resources. While all parties seem to be on the same page, investors will be aware that such commercial discussions, involving the monetisation of gas resources in a country with a limited existing market, rarely progress smoothly or swiftly and that the clock is ticking on the six months to November 9.
In Ghana, the Swiss group will acquire a 20 per cent interest in Rialto's Ghanaian subsidiary, which holds a 12.5 per cent interest in the Accra Block, in exchange for providing a facility covering Rialto's US$7.7 million obligations for the upcoming Starfish-1 wildcat. As Rialto draws on the facility, then Vitol's economic interest in Rialto Ghana will increase pro-rata to a maximum of 51 per cent. The Ophir-operated well, which is set to spud in June, will target 292 million barrels of gross prospective unrisked mean resources.
This partnership with Vitol is far from generous but, given the urgency of Rialto's funding needs with a rig contracted to start drilling on C1-202 from next month (of which more below), the company didn't have time on its side. The task of finding a partner in this time frame was, admits new MD Rob Shepherd, “very challenging”.
However, the deal does alleviate the funding pressures facing the small cap, enabling it to participate in the high impact Starfish well and progress appraisal and development work on the C1-202 block. Even so, the dual-listed company still has a funding gap for its share of the next exploration commitment well on the C1-202 block, which is not covered by the Vitol agreement.
Its existing cash position will be eroded by negotiations with the owner of the Sapphire Vantage drilling rig, which had been due to start operations on C1-202 next month. It is currently in discussions about a termination payment – the maximum liability is thought to be US$7.5 million. This will eat into its existing cash balance of around US$15 million.
Whilst this is obviously costly, in that the company must now make a payment for a rig it won't be using, it does release it from the higher costs of proceeding with the contract when, given the pending Vitol transaction and the need to agree a work programme with the new partner, it would not be appropriate to drill up the block.
With the rig relinquished, there's been a push back of drillbit-led catalysts on Block C1-202 and reduced visibility of the exploration potential of the 21 prospects and multiple play types already identified on the block, where there could be as much as 897 million barrels and 2.9 TCF of gas. It does, however, give the company more time to analyse the recently delivered Pre-Stack Depth Migration study of last year's 3D seismic dataset before committing to future drill locations.
Shepherd, who joined the company at the end of 2012 with a remit to turnaround the ailing company, said the Vitol deal provided “a solid basis from which we can move forward out of a period of uncertainty” and noted that the relinquishment of the Sapphire rig would “enable us to carry out this further technical work whilst simultaneously progressing plans for a fast track gas development with Vitol and reducing our financial liability”.
Analysts at Investec welcomed the news of the Vitol deal and the relinquishment of the rig as “constructive” because they remove significant uncertainty. “The entry of Vitol into Cote d'Ivoire underlines the economic and geological potential of a development,” said the analysts, who retain a BUY rating on the stock despite lowering the target price to 10 pence, down 3 pence, to reflect the dilution following the Vitol buy-in.
Shares in the company were trading at 3.59 pence recently.