African gem – Tanzanian gas

ORC.B-TSXV | Price C$5.65  | Market Cap C$147.7M

Canaccord Genuity view

Orca Energy is the leading Tanzanian gas production focussed E&P. It has a long and successful production track record of gas delivery from its operated Songo Songo field for electrical power generation and industrial users in the Dar es Salaam area.

We expect these gas markets to grow over the next few years, and the Songo Songo field is ready to meet that anticipated demand expansion. In 2019, Orca delivered over 100 mmcf/d production (c.16.7 kboed gross, 15.3 kboed net) with a peak rate of over 130 mmcf/d and total well production capacity of more than 170 mmcf/d.

The outstanding operational performance is backed by a very strong balance sheet, with YE19 net cash of US$84m (cash & short-term investments US$139m) and we project YE25 net cash of US$247m and no debt. This, combined with predictable cashflow generation – gas prices are largely fixed – has enabled it to return significant capital to shareholders through buybacks and dividends totaling C$66m in 2019/20. We expect the company to maintain dividend distributions in 2020 (currently trailing c.4% DY) and beyond.

We initiate coverage with a BUY rating and a target price of C$8.00.

Tanzanian gas

Only two fields currently supply indigenous gas demand: Orca’s Songo Songo is the larger, while Maurel and Prom’s Mnazi Bay is also significant.

The market is dominated by the power generation and industrial users in the Dar es Salaam area.The power market accounted for 80% of Orca’s sales gas (62% of revenue) in 2019. Bolt-on expansions to current power plants are underway and planned, and those are expected to be the main sales growth drivers.

We expect Orca sales gas demand to increase by c.70% by 2023.

Songo Songo gas field

The field lies on and offshore Songo Songo Island (SSI), some 200 km to the south of Dar es Salaam. Orca is the operator with a 92% commercial interest, and the licence expires in October 2026.

The Songo Songo field has been in production since 2004 and is currently producing from five wells through two processing facilities on SSI. The gas is transported by two pipelines to the offtakers.

Infrastructure limitations are not expected to impede increased delivery to match demand requirements.

Valuation and rating

As a single asset, Tanzanian-focussed, E&P our valuation is based on future DCF at NPV12.5, which results in a risked central valuation, usually the basis for our target price, of C$10.00/sh. It is worth noting that our Songo Songo asset valuation is c.25% below the YE19 independent valuation on a like-for-like NPV10, reflecting a more cautious view of demand growth in Tanzania.

Orca has a dual shareholder structure with A shares (each has 20 voting rights) and B shares (each has 1 voting right). Although B shares account for 93% of the shares outstanding, they have only 41% of the voting rights. Protections are in place in the event of a potential takeover; nevertheless, the lack of control of B shares leads us to further discount its valuation by 20%

That yields a target price of C$8.00/sh for Orca B shares, a 42% premium to the current market value, and we initiate with a BUY rating.

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