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Orca Depending on TANESCO Payments for Expansion

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Orca Exploration Group Inc. has announced its results for the quarter and nine months ended 30 September 2014.

Highlights

• Total Songo Songo Field production of Protected Gas plus Additional Gas averaged 92.9 million standard cubic feet per day (MMcfd) down 4% from the prior year period, and up 10% from 84.2 MMcfd in Q2 2014. Additional Gas sales volumes averaged 57.0 MMcfd, a decrease of 13% over the prior year period (Q2 2013: 65.7 MMcfd) and an increase of 14% over Q2 2014 (50.0 MMcfd).
• The continued support of hydro power generation in Tanzania reduced TANESCO nominations for the Company's Songo Songo gas production during the second quarter of 2014 by 20% to 42.8 MMcfd, compared to 53.8 MMcfd in Q3 2013. Compared with Q2 2014, power sales during Q3 increased 12% due to the gradual reduction of hydro generation during the quarter. Increased Industrial sales demand resulted in a 19% increase in Industrial sales volumes to 14.2 MMcfd (Q3 2013: 11.9 MMcfd), and a quarter over quarter increase of 23% (Q2 2014: 11.5 MMcfd). Working capital was US$37.2 million at 30 June 2014, up 95% from 31 March 2014 (US$19.1 million) and up 34% over 31 December 2013 (US$27.8 million), a result of cash received from TANESCO against the long-term portion of the receivable. As at 30 June 2014, TANESCO owed the Company US$63.8 million of which US$53.4 million was in arrears.
• TANESCO substantially honoured its commitment during the quarter and made 10 of 13 weekly payments for a total of US$18.0 million and a further US$6.0 million payment relating to the World Bank US$100 million Second Development Policy Operation (DPO) disbursed in July (Q2 2014: 10 of 13 weekly payments for a total of US$18.2 million). The payment relating to the World Bank Second DPO was substantially less than the Company was led to believe.
• The Company will continue to draw attention to the going concern issue until discernible progress has been made in reducing arrears. In the event that the Company does not collect the balance of the receivables from TANESCO and TANESCO continues to be unable to pay the Company for subsequent gas deliveries, the Company may be unable to undertake the level of capital expenditure required to increase well deliverability to the expansion target of 190 MMcfd.
• Working capital was US$49.6 million at 30 September 2014, up 33% from 30 June 2014 (US$37.2 million) and up 79% over 31 December 2013 (US$27.8 million), a result of cash received from TANESCO against the long-term portion of the receivable. As at 30 September 2014, TANESCO owed the Company US$54.6 million (30 June 2014: US$63.8 million) of which US$50.6 million was in arrears (30 June 2014: US$57.4 million).
• TANESCO currently owes the Company US$56.4 million, of which US$52.8 million is in arrears. During the quarter, TANESCO reiterated its commitment to the Company to maintain the TZS 3 billion (US$1.8 million) weekly payments and endeavor to clear the arrears by year-end with additional lump sum payments should the Government of Tanzania (GoT) obtain additional sources of funding. However, since the end of the quarter TANESCO has only made one payment of US$1.8 million.
• Third quarter 2014 income was US$0.3 million or US$0.01 per share diluted, as opposed to US$1.9 million or US$0.05 per share in Q3 2013 and compared with US$6.7 million or US$0.18 per share in Q2 2014. The reduction in net income over Q2 was primarily the result of a US$4.2 million provision for stock-based compensation during the quarter. Income for the nine months ended 30 September 2014 was US$8.5 million or US$0.24 per share diluted versus a loss of US$1.9 million or US$0.05 per share for the comparative nine-month period in 2013.
• Average gas prices were up 1% in Q3 to US$4.91/mcf over the prior year period (Q3 2013: US$4.88/mcf). Industrial gas prices were up 5% in Q3 to US$8.85/mcf (Q3 2013: US$8.43/mcf) and down 5% from Q2 2014 (US$9.27/mcf). The decrease in Industrial prices from Q2 to Q3 2014 is a result of a change in sales mix and a 2% decrease in HFO prices. Average Power sector gas prices decreased 12% over the prior year period to US$3.60/mcf (Q3 2013: US$4.10/mcf) and down 1% compared to the Q2 2014 price of US$3.65/ mcf. The decreases are the result of reduced sales volumes to the Power sector which in turn reduced the amount sales subject to premium pricing in accordance with the Portfolio Gas Supply Agreement with TANESCO which offset the impact of annual price indexation which is applied in July each year.
• As at 30 September 2014, the Company had US$63.1 million in cash (31 December 2013: US$32.6 million) and no debt, more than double the cash balances of the prior year period. The Company currently has US$63 million in cash and no debt.
• In mid-September, the Mnazi Bay partners announced that they had signed a 17-year gas purchase agreement with TPDC for an initial 80 MMcfd at US$3.07 per mcf. Discussions between TPDC, the Ministry of Energy and Minerals and the Company on commercial terms for future incremental gas sales continue to be at a standstill with no engagement from either party since the end of Q1 2014. Commercial terms remain a key condition to the Company's commitment to Songo Songo development.
• Despite the stalled efforts to reach agreement on commercial terms, the Company continues planning the full development of Songo Songo and advanced engineering on the workovers and development drilling. The Company continues to work with the International Finance Corporation of the World Bank Group to finance the development programme. Completion of the full development programme remains contingent upon (i) satisfactory resolution of TANESCO arrears; (ii) acceptable commercial terms; and (iii) payment guarantees for future gas deliveries to TANESCO.
• The Tanzania National Natural Gas Infrastructure Project (NNGIP) continues to progress towards completion, as reported by project manager TPDC, with the pipeline construction currently 93% complete and gas processing facilities construction 63% complete. Expected onstream date remains mid-2015. There is considerable doubt that the Company will have additional gas at the target onstream date given the lack of progress by TPDC in settling commercial terms.
• In response to speculation regarding a potential sale of the Company or a significant transaction, in mid-July Orca issued a press release advising that the Company was in discussions with a number of third parties which have made unsolicited approaches to the Company relating to the sale of the Company, a significant asset disposal, strategic investment or other transaction involving the Company. As at the date hereof, the Company has nothing to report.