Orca Energy Group Inc. (“Orca” or the “Company” and includes its subsidiaries and affiliates) announces that it has filed its condensed consolidated interim financial statements and management's discussion and analysis for the three and nine month periods ended September 30, 2024 ("Q3 2024") with the Canadian securities regulatory authorities. All amounts are in United States dollars (“$”) unless otherwise stated.
Highlights
Revenue decreased for Q3 2024 by 9% and by 13% for the nine months ended September 30, 2024 compared to the same prior year periods. Certain volumes were supplied as Protected Gas (as defined below) prior to July 31, 2024. After the termination of Protected Gas after July 31, 2024, those volumes were instead to be supplied as Additional Gas (as defined below). These volumes, which were delivered to Songas Limited (“Songas”) in August 2024 and September 2024 and for which the Company did not receive compensation, do not meet the definition of revenue under International Financial Reporting Standard 15 (“IFRS 15”) and have not been recognized in revenue in Q3 2024. These unrecognized gross revenues include 80.5% of sales to Songas in the amount of $3.6 million. In addition, partial sales to Tanzania Portland Cement PLC (“TPCPLC”) in the amount of $1.0 million have not been recognized in revenue in Q3 2024 as they do not meet the definition of revenue under IFRS 15.
On October 30, 2024, PanAfrican Energy Tanzania Limited (“PAET”), a wholly-owned subsidiary of the Company, was advised by Songas that the Interim Power Purchase Agreement (“PPA”) between Tanzania Electricity Supply Company Limited (“TANESCO”) and Songas, would expire on October 31, 2024, and that it is unknown if a new PPA would be entered into. At midnight on October 31, 2024 Songas shut down the Songas Power Plant. In the event that a new PPA is not entered into, there is a risk that the Songas Power Plant will be shut down indefinitely. This would adversely impact demand for production volumes from the Songo Songo gas field.
2024 production guidance of average Additional Gas sales is now forecast to be in the range of 65-68 MMcfd (100% conventional natural gas). This range incorporates the exclusion of all volumes previously forecast to be supplied to Songas for November 2024 and December 2024, and certain volumes lifted but disputed by TPCPLC as a consequence of the position taken by Petroleum Development Corporation (“TPDC”) and the Government of Tanzania (“GoT”) in relation to the cessation of Protected Gas. Operations at Songo Songo gas field continue to operate as normal.
On April 15, 2024, contrary to the terms of the Gas Agreement (defined below) and PSA (defined below), and in violation of Pan African Energy Corporation (Mauritius) (“PAEM”) and PAET’s expectations, the Permanent Secretary of the Ministry of Energy of Tanzania (“MoE”) wrote to TPDC, copying PAET and Songas, directing TPDC to “ensure that Protected Gas continues to be produced to the end of the Development Licence on 10th October 2026”. Consistent with that instruction, TPDC has taken the position that Protected Gas should continue despite the parties’ contractual agreement that Protected Gas ceased after July 31, 2024.
Gas deliveries decreased by 8% for Q3 2024 and by 19% for the nine months ended September 30, 2024 compared to the same prior year periods. During the first nine months of 2024, Tanzania’s Julius Nyerere Hydropower Project (“JNHPP”) commenced commercial operations, with progressive commissioning of 5 turbines allowing peak output of over 700 MW. Combined with the early onset of the wet season and rainfall well above seasonal averages for the period, hydro power generation has been a primary factor in reduced gas liftings for the power sector.
PAET and TPCPLC have agreed the terms of the Supplementary Gas Agreement (“SGA”) from August 1, 2024 to sell volumes as Additional Gas, which, prior to August 1, 2024, were supplied as Protected Gas. On July 23, 2024 TPDC rejected the entering into of the SGA and as a result the agreement has not been executed. The sole basis for TPDC’s rejection was its assertion that Protected Gas continued after July 31, 2024. On July 25, 2024, PAET escalated the matter to the MoE under article 4.3(b) of the PSA. On August 5, 2024, in a letter received by PAET, the MoE rejected the terms of the SGA, and the MoE demanded that PAET propose suitable wording for an “interim arrangement” to extend the provision of Protected Gas. The letter further stated that if PAET fails to do so, the other parties will seek “alternative means” to operate the Songo Songo gas field.
PAET has continued to ship gas to TPCPLC during August, September and October 2024. PAET has not been able to invoice TPCPLC for the volumes intended to be shipped under the SGA, and has invoiced all volumes lifted as Additional Gas under the existing gas agreement which was established in 2008 and remains in place. Total invoiced amounts for August and September 2024 were $5.4 million. TPCPLC indicated that it will pay $4.2 million, and the ?ompany has recognized corresponding amount as revenue. There is a risk that the balance remaining of the invoice will be disputed and remain unpaid and therefore not recognized as revenue.
Following cessation of Protected Gas after July 31, 2024, despite the absence of an executed contract to do so, Songas continued to lift gas volumes in August and September 2024, at an average rate of 17.8 MMcfd. On September 23, 2024, the Company was notified by Songas that it acknowledges it had lifted this volume, but due to TPDC’s refusal to approve a Gas Sales Agreement for this Additional Gas, they would elect to pay for only 19.5% of such volumes. This accords with the payment arrangements for Complex Additional Gas. Payment was made on this basis by Songas on October 10, 2024, in the amount equivalent to USD $410,000, representing 19.5% of the total invoiced amount of USD $2.1 million.
On April 14, 2023, PAET formally requested TPDC to apply for an extension of the Songo Songo Development License (“License”), which as of the date of this press release TPDC has not done. TPDC is contractually required to make this application promptly upon a request by the Company. There are currently no certainties on the timing, nature and extent of any such extensions. Until such extension has been finalized, a high degree of uncertainty exists with respect to the extent of the Company’s operating activities subsequent to October 2026.
On August 7 2024, PAET and PAEM issued a notice of dispute (“Notice of Dispute”) in respect of an investment treaty claim against the GoT for breach of the Agreement on Promotion and Reciprocal Protection of Investment between the Government of the Republic of Mauritius and the GoT (the “BIT”), and a contractual dispute against the GoT and TPDC, for breaches of the: (i) PSA, and (ii) the Gas Agreement. Initial meetings with both the Advisory and Coordinating Committees were held during the week of October 14, 2024 without any resolution on the key issues in dispute. The matters have now been referred to the relevant entity's chief executive officers in accordance with the dispute resolution process. These meetings have been proposed for December 2024. Further updates on this matter will be made as appropriate.
Net income attributable to shareholders increased by 715% for Q3 2024 and decreased by 43% for the nine months ended September 30, 2024 compared to the same prior year periods. The decrease for the nine months ended September 30, 2024 primarily is a result of the decreased revenue and higher net foreign exchange loss due to the devaluation of the Tanzanian shilling and exchange conversions which was partially offset by a lower depletion expense.
Net cash flows from operating activities decreased by 32% for Q3 2024 and by 46% for the nine months ended September 30, 2024 compared to the same prior year periods mainly as a result of the decreased revenue.
Capital expenditures increased by 219% for Q3 2024 and by 111% for the nine months ended September 30, 2024 compared to the same prior year periods. The capital expenditures in Q1, Q2 and Q3 2024 primarily relate to the costs of the SS-7 well workover program. The capital expenditures in Q1, Q2 and Q3 2023 primarily related to the 3D seismic acquisition program.
The Company completed a production and saturation logging program in three wells: SS-3, SS-10 and SS-5. Initial results indicate that the wells and field are performing in line with expectations, with final interpretation of results continuing in order to update longer term reservoir management plans. The total expected program cost increased to $2.2 million from $1.3 million.
The workover program on SS-7 is continuing. Although critical equipment failures on the part of a major service provider have caused program delays, the objective of the work remains to restore the mechanical integrity of the well to shutoff water production in order to restart production from the southern compartment of the gas field. On conclusion of the intervention, SS-7 is forecast to return to production in November 2024. The total expected project cost has increased to $23.5 million from $16.6 million, primarily as a result of vendor equipment failures, logistical delays and weather delays during both the mobilization from Mombasa to Songo Songo Island and positioning the barges and jack up platform on the offshore well.
The Company exited the period with $67.1 million in working capital1 (December 31, 2023: $67.3 million), cash and cash equivalents of $101.7 million (December 31, 2023: $101.6 million) and long-term debt of $25.1 million (December 31, 2023: $30.0 million). The decrease in long-term debt is related to a repayment of principal of $5.0 million in April 2024, representing the fourth semi-annual repayment of the Company’s long-term debt. Cash held in hard currencies (USD, Euro, GBP, CDN) is $93.2 million (December 31, 2023: $60.4 million).
As at September 30, 2024, the current receivable from TANESCO was $8.1 million (December 31, 2023: $5.9 million). The TANESCO long-term receivable as at September 30, 2024 and as at December 31, 2023 was $22.0 million with a provision of $22.0 million. Subsequent to September 30, 2024, the Company has invoiced TANESCO $4.2 million for October 2024 gas deliveries and TANESCO has paid the Company $4.2 million to date.
In Q4 2023, the Company terminated the contract with the contractor responsible for the 3D seismic acquisition program on the basis that the contractor had failed to meet its obligations under the contract by not fully mobilising to progress the project more than a year after it was scheduled to do so; and that, as a result of mission critical assets being recalled by suppliers, and with no prospect of securing replacement assets, the contractor had suspended its operations without the right to do so and with no realistic plan offered to complete the project. On March 20, 2024 PAET received a summons from the Tanzanian High Court (Commercial Division) to file a written statement of defence against a claim made by the contractor for losses arising from PAET’s termination of the contract on October 25, 2023. The contractor seeks to claim $30.0 million for losses incurred plus legal costs, interest and general damages. The Company in consultation with its legal advisors believes that the claim lacks merits and the Company in Q2 2024 lodged its own counterclaim for specific damages in the amount of $5.5 million and general damages in the amount of $25.8 million. The case commenced in the Tanzanian Commercial Court in August 2024 and is ongoing.
The complete Condensed Consolidated Interim Financial Statements and Notes and Management's Discussion & Analysis for the three and nine months ended September 30, 2024 may be found on the Company’s website at www.orcaenergygroup.com or on the Company's profile on SEDAR+ at www.sedarplus.ca.