Business
Tanzania oil firm to raise capital from local investors
Oil and gas explorers usually look outside East Africa’s relatively smaller financial markets to more developed markets like the United States, Canada and Europe, for funding to fuel exploration.
But Tanzania-based hydrocarbon explorer Swala Oil and Gas is going against the tide.
The company has launched a private placement in Tanzania, hoping to raise US$1.2 million. The company will use the money to collect data on the best drilling locations along its acquired blocks.
The private placement opened in August and closes at the end of September, with investors expected to buy a minimum of 80,000 shares at Tsh390 (US$0.25) per share. Tanzania Securities is the issue’s stockbrokerage agent.
“Though oil and gas is a relatively new sector in the region, we feel the market is ripe for this kind of investment, we shall use the funds to collect more data as well as interpret what we have,” said David Ridge, the company’s CEO, in an interview with reporters on the sidelines of the just ended Africa Down Under mining conference in Perth, Australia.
(More: Africa: Private Equity – New Cash for Expanding Businesses)
Mr Ridge said the firm has considered doing a private placement for Swala Oil and Gas Ltd Kenya, but its limited assets in the country make it a hard sell.
“We have only one block in Kenya compared with two in Tanzania. Considering the risk involved in oil and gas exploration, it was more prudent on our part to offer the public a stake in our Tanzanian operations,” said Mr Ridge.
Swala Oil thinks that it has a higher chance of finding oil in Tanzania, given that its blocks share the same geographical features as Kenya’s block 10BB and Uganda’s Lake Albert region, where oil deposits in excess of 1.2 billion barrels have been discovered.
The company has been awarded a 50 percent operated interest in the Pangani Block in Tanzania.
“The Pangani licence is interpreted to lie within the East African Rift System and potentially forms the southeast arm of a triple point junction at the southern end of this major rift system,” notes the information memorandum.
Swala has a 50 percent equity interest in Pangani and the Kilosa-Kilombero hydrocarbon exploration licences in Tanzania; the company has applied for even more blocks, which it hopes to get. In Kenya, it jointly owns the 12BB oil block with Tullow Oil.
The move by the firm to raise capital locally is a departure from the past where regional exploration firms Pancontinental Oil and Ophir locked out potential local investors from contributing to the company’s cash call, or owning a stake in what is quickly becoming a future growth sector.
In April, Pancontinental Oil announced it would source US$50 million through a placement to sophisticated investors and international institutional clients of Hartleys Ltd, the firm’s principal broker in Australia.
Swala Oil Tanzania’s current shareholders are Swala Oil and Gas Australia with a 70 percent stake, Erncon Holdings Ltd which is associated with Tanzanian Ernest Massawe who is a director of the firm, with 20 percent.
The remaining 10 percent is held by Swala Oil and Gas in trust for the local community in areas that the company operates in.
“For us, it’s also a way of trying to get local investors and communities involved in the project from the start, which will ensure they are able to reap maximum benefits from the resources in the area,” said Mr Ridge.
The involvement of local investors and communities has always been a hot political and economic issue with local communities complaining they do not benefit enough from mining operations, an issue the firm says the placement will help address.
“It is the intention of this offer to encourage Tanzanian investment in a Tanzanian oil and gas company, and the company’s parent, Swala Energy Ltd Australia, will therefore not participate in the offer until the Tanzanian and East African applicants have been satisfied,” reads the company’s information memorandum.
“It is the intention of the sponsors to have the shares of the company eventually traded through the Enterprise Growth market of the Dar es Salaam Stock Exchange. However, at this stage shares may be traded through an over-the-counter market,” the memorandum stated.
But even as the company looks to tap funds from regional investors, the issue of liquidity is still a concern, given that the over the counter market remains poorly developed regionally.
This means it would be difficult for investors to realise their investment in the company, compared with listed firms.
Investments in oil and gas are considered risky since there is always a chance of not striking hydrocarbons despite the huge investments.
However, once a discovery is made, the gains are massive.
International oil and gas consulting firm Wise Owl values Swala Tanzania at US$7 million, but in the event that the company discovers oil, it estimates the value would jump 34 times to US$239 million in less than three years.
With the East Africa drawing attention due to its huge gas and oil discoveries, it is estimated that more and more companies are likely to raise capital in either debt or equity, to speed up their exploration works or to launch operations, implying that there could be further opportunities for local investors.
Source: The East African