Shares in Solo Oil (LSE: SOLO) and Aminex (LSE: AEX) opened sharply higher this morning, after the two firms announced that Solo would buy up to 13% of the Kiliwani North gas development in Tanzania from Aminex, for $7m.
The deal is structured so that Solo will initially buy a 6.5% interest for $3.5m, with a 45-day option to increase the interest to 13% for a further $3.5m.
The Kiliwani North 1 well is expected to start producing gas at a rate of 20 million cubic feet per day in the first half of 2015. The well is only 2km from a nearby gas processing plant, to which it will be connected by pipeline, so sales are assured.
A win-win deal?
Solo and Aminex are already partners on the much larger Ruvuma gas project, and this deal looks like a smart move for both companies.
For Aminex, the $7m cash injection should help the firm eliminate its $4m net debt and boost cash reserves.
For Solo, the deal will provide some much needed cash flow and to help fund ongoing operations in the UK and Africa.
Solo cash call?
However, depending on expenditure during the third quarter, Solo may need to raise some more cash: my calculations suggest that the firm, which is chaired by David Lenigas, had access to no more than £5m ($8m) cash at the start of October, possibly less.
I suspect this fundraising aspect is why the deal has been structured in two halves — if fundraising conditions are not favourable, Solo should be able to by the first 6.5% tranche from its existing resources, and can withdraw from the second stage of the deal.
Aminex vs Solo Oil
In my view, the acquisition of a (soon to be) producing asset improves the quality of Solo Oil shares, and could make them investable to a wider range of buyers.
Similarly, for Aminex, any reduction in net debt will strengthen the firm’s negotiating position with possible partners for the development of the Ruvuma asset, in which it has a 75% interest.
Shares in both companies have risen sharply this morning, but remain well below their 52-week highs. In my view, both companies remain decent speculative buys: my pick would be Aminex, as I rate the 2.3 tcf Ruvuma asset as more significant, in the medium term, than Horse Hill, but your view may differ. Ultimately, it’s a personal choice.