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Iona Energy's ambitious plan to build significant, dividend paying North Sea producer

Published: 09:01 14 Oct 2014 EDT

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North Sea oil producer Iona Energy’s (CVE:INA) new management isn’t hanging around.

Chief executive Tom Reynolds and his executive chairman, Iain McKendrick, have a clear vision for the future direction of the Toronto-listed company.

“The three words we keep using are scale, production and yield,” Reynolds told Proactive Investors.

Put simply, the Iona team wants to ramp up output from a modest 2,759 barrels to around 25,000 barrels a day.

In doing so it hopes to create a significant, dividend-paying company, whose full value is recognised by the market.

By diversifying its production stream, which comes mainly from the Huntingdon Field, off the coast of northern England, the Iona team hopes also to be able to refinance the business.

Securing a reserve-based lending facility might cut the interest rate on the company’s US$275mln of debt to as little as 4.5-5% from the current 9.5%.

Running an efficient balance sheet is also key to gaining a premium rating on the Toronto exchange.

The final piece of the investment jigsaw is the US$331mln pool of accrued tax losses. This will help the company rapidly grow cash flow for re-investment following acquisitions.

Before assessing Iona’s strategy, it is perhaps worth looking at just what assets it has.

Reynolds says there isn’t a great deal wrong with the portfolio – it is simply that expectations have been mismanaged.

It has 15% of the Huntingdon Field, which produces a net 2,562 barrels oil equivalent per day, and a 20% interest in Trent and Tyne (T&T), with output of 197 barrels oil equivalent daily.

Iona has the option to take full control of T&T. However, the proposed buyout is now highly unlikely to go ahead, the company said last week.

Its development assets include West Wick, Kells and Orlando. Orlando is the furthest advanced of the three and has field development approval.

“The economics are good and it would be an attractive use of capital,” Reynolds said of the potential development of Orlando.

“The market is probably not giving any value to for it, but it is a very robust project.

“It looks economically very strong; it is a good use of shareholder capital.”

Last week it secured a deal with CNR International to pump oil from Orlando via the Ninian Central Platform.

This essentially was the final piece in the PIZZLE for this particular project, which is expected to cost around $200mln.

First oil, a net 8,000 barrels a day, is expected to flow in late 2016.

Meanwhile, recent problems with infrastructure used to export gas from Huntingdon and planned maintenance shutdowns that will also affect production underline the pressing need to diversify.

Before joining Iona, the company’s new chairman and chief executive had been working on deals for producing assets and had the financing in place to complete these transactions.

“So, we are coming in the door with a pipeline and sources of cash to make those acquisitions if they happen,” explained Reynolds.

“Having that pipeline, we want to move quickly to make them happen.”

The acquisition finance they have lined up will morph into cheaper reserve based lending within a year to 18 months of the first deal, Reynolds said.

Meanwhile, the cash flow generated from the new and existing producing assets should allow Iona to steadily pay down its debt.

The two bosses will have to juggle a number of balls to make the investment work.

But both have the experience and business successes that say they can achieve the goal of producing a 25,000 barrel a day, financially efficient, dividend-paying North Sea producer.

McKendrick helped turn Ithaca Energy into the thriving North Sea oil firm currently valued at $575mln, while Reynolds built and sold Bridge Energy for $187mln.

They have shown their intent with this latest challenge by ploughing $1.5mln between them into acquiring Iona shares.

“We are very aligned with shareholders’ interests,” Reynolds said.

Whitecap Resources, the Alberta and British Columbia-focused group, reveals what can be achieved given the right management and consistent delivery on dividend payment . And it provides a good benchmark for Iona.

Whitecap has built production to 31,000 barrels a day (i.e. slightly above Iona’s target) and in doing so has created a business worth C$3.9bn, or just under C$100,000 per flowing barrel. Key to this is the distribution of cash to shareholders in the form of a sustainable dividend, as planned by Iona.

Now, Whitecap is an onshore play with the risk spread across hundreds of wells, while a fully formed Iona would be a slightly riskier proposition based around a handful of North Sea gushers.

Even so, you might expect a company of this scale to trade at around $70-75,000 per flowing barrel, giving it a market capitalisation of C$1.5-1.8bn.

“If you can demonstrate you have low cost of capital, a stable and sustainable production profile and a clear dividend promise that you are delivering on, that will help close that net asset value price gap,” said Reynolds.

“We have aspirations of creating a business of a significant scale.”

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