Victoria Oil & Gas plc (LON:VOG) finally received the much-delayed arbitration tribunal decision regarding its dispute with RSM Production Corporation (RSM) over the ownership of the Logbaba gas field, which is Victoria’s producing asset (through its subsidiary Rodeo Development Ltd, or RDL).
I won’t go into details here, but the decision, although it went against VOG on a technicality, seems very positive for the firm, in my opinion. As far as I can tell from the published documents, there are now two possible outcomes:
- RSM pays up a total of $89m in fairly short order to reclaim its 40% interest in Logbaba, and its entitlement to a share of future profits.
- RSM defaults on one of the back-payments it will have to make and forfeits ownership of its 40% interest in Logbaba — and this time, I’m sure VOG will make sure the paperwork is done correctly and the forfeiture sticks.
Before looking at the implications of each option, let me explain the $89m, which is simply taken directly from VOG’s RNS this morning:
- RSM must now pay the Second Cash Call in the amount of US$4.1m promptly or else risk a further default.
- In accordance with the Tribunal’s endorsement of RDL’s operation of the cash call procedure, RDL will shortly be issuing a third cash call for RSM’s 40% share of expenditures incurred since the second cash call (June 2011) in the amount of approximately US$20m. RSM is obligated to pay the third cash call within 10 days of receiving the cash call failing which it will once again be in default.
- RSM is required to pay all future cash calls for on account sums and expenditures in accordance with the terms of the agreement.
- RDL remains entitled to recoup approximately $65 million of drilling costs before RSM can claim its share of profits.
- RDL will now be pursuing RSM for payment of US$512,000 representing the unpaid costs awarded to RDL in the first arbitration.
If you add up all the above, you get $89m.
Now, there are three possibilities:
- RSM is willing and able to come up with at least $24.1m in a very short period of time. Having done that, RSM then needs to be willing to pay VOG a further $65m before it can receive its share of any profits (expected by 2016).
- RSM won’t or can’t come up with enough money to pay its back obligations to VOG, in which case it will default and forfeit again.
- RSM plans to pursue further legal action to try and reduce the size of its obligations to VOG.
In my view, option 1, while it dilutes VOG’s interest in Logbaba, is a positive outcome, as VOG will be very securely funded for ongoing operations and should still be able to make a respectable profit from RDL’s operations. In effect, it would be as if VOG had farmed out an interest to a new partner, replicating the situation it would have had with RSM, if RSM had paid up in 2011.
Option 2 seems a bit strange — presumably RSM knew all along they they would be liable to all of these missed payments, so why pursue the legal action if they can’t or won’t pay up?
One explanation is that RSM is willing to pay to get its part of today’s settlement; RSM has been assigned Logbaba wells LA102 and LA104, which were drilled and abandoned in the 1950s, when the Logbaba gas field was originally discovered by French company SEREPCA (later part of Elf). If RSM believes that these wells have similar potential to VOG’s producing wells, LA105 and LA106, then they might be worth $89m.
Finally, option 3. Is this even a possibility? I don’t know, but I can imagine that some combination of option 2 and 3 could cause havoc for VOG, making it difficult for the firm to gain partners and borrow money. At the same time, this might somehow profit RSM. This is a worst-case scenario, in my view, and may not even be possible — but RSM must have had a game plan when they started this arbitration.
VOG shares closed up by 7.4%, so I’m not the only person who views the tribunal’s ruling positively. We’ll now have to wait and see what RSM makes of it — and whether it comes up with any cash.
(For a recent summary of VOG’s business, check out my recent post covering the firm’s latest results.)
Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.