Orca Energy Group Inc. ("Orca" or "the Company" and includes its subsidiaries and affiliates) announced its audited financial results for the fourth quarter ("Q4 2023") and year ended December 31, 2023. All dollar amounts are in United States dollars unless otherwise stated.
Revenue decreased by 23% for Q4 2023 and by 7% for the year ended December 31, 2023 over the comparable prior year periods. The decrease for Q4 2023 over the comparable prior year period is primarily a result of lower sales to the power sector and a lower current income tax adjustment. The decrease for the year ended December 31, 2023 over the comparable prior year period is primarily a result of higher Tanzanian Petroleum Development Corporation ("TPDC") share of revenue as an outcome of decreased capital expenditures and lower Cost Gas revenue.
Total gross conventional natural gas production, including fuel gas, was in line with revised forecasts and averaged 121.8 MMcfd for Q4 2023, of which 80.8 MMcfd was Additional Gas. Gas deliveries decreased by 15% for Q4 2023 and by 1% for the year ended December 31, 2023 compared to the same prior year periods. The decrease for Q4 2023 was primarily due to declining production from the currently producing wells and reservoir compartments in the Songo Songo field.
We currently forecast average Additional Gas sales for 2024 to be in the range of 80-90 MMcfd for the full year, based on current contracted volumes and the end of the Protected Gas regime on July 31, 2024.
Discussions are ongoing with Songas Limited ("Songas") and Tanzania Portland Cement PLC (“TPCPLC”) to negotiate new gas sales contracts from August 1, 2024 to sell the volumes which are currently supplied as Protected Gas under the Gas Agreement (as defined herein). The obligation to supply Protected Gas ends on July 31, 2024.
Discussions are also ongoing with Tanzania Electric Supply Company Limited ("TANESCO") to extend the Portfolio Gas Supply Agreement ("PGSA") between PanAfrican Energy Tanzania Limited (“PAET”), TPDC and TANESCO, which currently ends on July 31, 2024.
Net income attributable to shareholders decreased by 119% for Q4 2023 and by 75% for the year ended December 31, 2023 compared to the same prior year periods, primarily as a result of the decreased revenue, increased depletion expense, including a one-time accelerated depletion charge in Q4 2023 with respect to costs previously incurred in relation to the 3D seismic acquisition and processing program, and higher net foreign exchange loss.
Net cash flows from operating activities decreased by 36% for Q4 2023 and by 28% for the year ended December 31, 2023 compared to the same prior year periods, primarily a result of decreased revenue and changes in non-cash working capital.
Capital expenditures decreased by 43% for Q4 2023 and by 64% for the year ended December 31, 2023 compared to the same prior year periods. The capital expenditures in 2023 primarily related to the costs of the planned 2023 well workover program and the 3D seismic acquisition program. The capital expenditures in 2022 primarily related to the 2021-2022 well workover program and the initial costs of the 3D seismic acquisition program.
The third party contractor responsible for the 3D seismic acquisition program, which was expected to be completed in 2023, suspended its operations. The Company issued a breach of contract notice to the contractor in Q3 2023. The contractor failed to remedy the breach under its agreement with PAET. The Company therefore terminated the contract on October 25, 2023 but remained in discussions with the contractor who is disputing PAET’s right to terminate. In Q4 2023, accelerated depletion was recognized on costs incurred to date related to the 3D seismic acquisition. On March 20, 2024, PAET received a summons from the Tanzanian High Court (Commercial Division) to file a written statement of defense against a claim made by the seismic contractor for losses arising from PAET’s termination of the contract. 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 there are limited merits to the claim and as such does not consider it necessary to include a further provision in the 2023 financial statements. The initial hearing of the claim has been scheduled on April 18, 2024.
An intervention in the offshore well SS-7 is planned to take place in 2024, subject to the ability to convert Tanzanian shilling balances to US dollars in Tanzania and receipt of the necessary budget approvals. Based on expected supplier mobilization timelines, the earliest start of operations is now in Q2 2024. Following the negotiation of commercial terms with service providers, the total expected project cost has increased to $13.9 million from $8.5 million. The work program is designed to shut off water production which caused the well to die and be shut in from 2019. The cause of the water production is interpreted to be a failed cement bond outside the production liner which created a flow path for water into the well when it was in production. If successful, the SS-7 well is expected to increase field deliverability by 20-25 MMcfd primarily from the currently non-producing southern compartment.
Front-end engineering continues on the new common inlet manifold in order to optimize gas flow between the Songas gas plant and the National Natural Gas Infrastructure plant, both of which are supplied with gas from the Songo Songo gas field. Project construction and installation is expected to occur in Q4 2024, with commissioning in Q1 2025, subject to final investment decision and stakeholder approvals, at an estimated cost of $5-6 million.
The production logging program planned in conjunction with the SS-7 intervention will take place in Q2 2024 at an estimated cost of $1.1 million. This work program will provide detailed reservoir information, in addition to the annual pressure surveys, to improve the accuracy of forecasting future reservoir performance. Key targeted wells under the program include wells SS-3, SS-5, SS-7 and SS-10.
The Company continues to carry out studies to identify opportunities to improve the efficiency of operations at the Songas plant. The Company has installed new positive chokes replacing old units in all wells in Q1 2024 to reduce the pressure drop upstream of the gas processing plant. At a cost of $77,000, this is expected to sustain production during 2024 ahead of the SS-7 intervention.
Funding of capital projects will be from working capital. All capital allocation decisions will be based upon access to US dollars and prudent economic evaluation to achieve the necessary return given the short time remaining on the Production Sharing Agreement ("PSA") between the PAET, TPDC and GoT, which expires in October 2026.
During Q2 2023, the Company formally requested TPDC to initiate the process of extending the development license in accordance with the terms of the PSA. The Government Negotiating Committee held a preliminary meeting with the Company in March 2024 to discuss timing around negotiations. The Company continues to seek dialogue with TPDC and the Ministry of Energy (“MoE”) seeking to expedite license extension discussions and will maintain gas sale contract discipline going forward by operating in line with our gas supply agreements.
The Company exited the period with $67.3 million in working capital (December 31, 2022: $61.6 million), cash and cash equivalents of $101.6 million (December 31, 2022: $96.3 million) and long-term debt of $30.0 million (December 31, 2022: $39.8 million).
As at December 31, 2023 the current receivable from TANESCO was $5.9 million (December 31, 2022: $3.7 million). The TANESCO long-term receivable as at December 31, 2023 and as at December 31, 2022 was $22.0 million with a provision of $22.0 million. Subsequent to December 31, 2023 the Company has invoiced TANESCO $8.9 million for 2024 gas deliveries and TANESCO has paid the Company $10.6 million to date.
On July 21, 2023, the Company repurchased the 7.933% shares in the Company’s subsidiary, PAE PanAfrican Energy Corporation’s (“PAEM”), previously held by Swala (PAEM) Limited ("Swala UK") for $7.5 million and the non-controlling interest was eliminated in Q3 2023.
On December 17, 2023, the Company, PAEM and PAET entered into a settlement agreement with the Fair Competition Commission of the United Republic of Tanzania (“FCC”) to settle allegations under the Provisional Findings issued by the FCC on August 5, 2022. The settlement was made without prejudice to the Company’s objections to the validity of the allegations and without any admission of liability, for an aggregate settlement amount of $0.2 million. The payment was made on December 23, 2023.
Under the terms of the PSA, the Company is required to pay Tanzanian income tax which is fully recovered through the profit-sharing arrangements with TPDC. Income tax has no material impact on the cash flows emanating from the PSA and accordingly there is no significant difference between the net present value of reserves on a before and after tax basis.
Financial and Operating Highlights for the Three Months and Year Ended December 31, 2023
Jay Lyons, Chief Executive Officer, commented:
“2023 was a challenging year for Orca, driven by considerable macroeconomic fluctuations and company specific uncertainties. Despite this, significant time and resources have been dedicated to planning for identified field development opportunities to support future production volumes.
The growing electricity demand in Tanzania has led to an increase in gas supply requirements. In response to this, we formally requested the Tanzania Petroleum Development Corporation to initiate the process of extending our development license in accordance with the terms of the Production Sharing Agreement. Extending the license will allow Orca to continue optimizing existing facilities, boost well and reservoir performance, and ensure a reliable and sustainable supply of natural gas within Tanzania's energy framework. During March 2024, a preliminary planning meeting was held with the Government Negotiating Committee to discuss the timing around negotiations. As we enter this critical period, I would like to emphasize the urgent need for all parties involved to engage in agreeing on a path forward to license extension.
2024 remains a critical year for Orca. We are prepared to commence several near-term operational projects, but there are a number of outstanding commercial matters that need to be addressed, in addition to the relevant parties involved agreeing a path towards a license extension. The Board and Senior Management recognize the importance of reliable and sustainable domestic gas production in Tanzania, so achieving further commercial development in the near term is imperative to progressing our operational work programmes. We will keep all our stakeholders updated as the year continues, updating the market as appropriate.”
The Company's complete Audited Consolidated Financial Statements and Notes and Management's Discussion & Analysis for the year ended December 31, 2023 may be found on the Company’s website www.orcaenergygroup.com or on the Company's profile on SEDAR+ at www.sedarplus.ca.