Cluff Natural Resources (CLNR) has been warned it could lose two North Sea licenses if it continues to struggle to find a partner for them.
Financial advisors Allenby Capital have produced a report for the firm, saying the stock is “very much a play on securing large-scale financing” for the work.
The two southern North Sea licenses in question – P2248 and P2252 – are estimated to hold around 2.4trillion cubic feet of gas.
CLNR has struggled to find a partner to help finance a drilling campaign, and the Oil and Gas Authority (OGA) last month waived the firm’s obligation to farm-out.
Allenby said that project financing remains “the greatest risk” to the firm.
A drill or drop decision is expected in September, by which point CLNR could lose the licenses according to Allenby.
If a partner cannot be found, financing would need to take place in order to raise cash for appraisal of CLNR’s ten recently awarded blocks through the OGA’s 30th licensing round, which would “dilute existing shareholders”.
In April CLNR generated £750,000 through share placing ahead of its application to the OGA, and is “fully funded” until the middle of the fourth quarter of 2018.
However Allenby expects the funding requirement to be £2million for both 2018 and 2019.
The advisors say that – in order to pay for the two licenses at £5-7million and £12million each –CLNR would need to give a 50% stake to a partner, citing the model of Hurricane Energy’s deal with investors Kerogen Capital.
Success on that front “could be a prelude to drilling in 2019”.
Allenby estimates that with a farm-in partner found, drilling would take a minimum of six months to get underway, potentially in Q2 or Q3 of next year.
First production may then be in 2023, assuming further appraisal would be needed on the resource.
The 10 full and partial blocks awarded in the OGA licensing round would require “a lengthy period of appraisal” to determine their potential.
Report author Peter Dupont said: “At this stage we believe that by far the greatest risk facing CLNR is project financing.
“Failure to secure financing by end September 2018 could result in the loss of licenses P2248 and P2252 based on the OGA’s drill or drop condition on this date.
“In the event of a loss of the legacy licenses CLNR would then face having to raise finance in late 2018 for appraisal work on the 30th Round licensing against a potentially challenging backdrop.
“Between now and September we see the stock as very much a play on securing large scale financing for its SNS drilling programme.
“Success on this front would be a prelude to drilling in 2019.”
Despite farm out opportunities being “few and far between”, CLNR founder Algy Cluff has previously said the firm will leave “no stone unturned” to find exploration partners.
The Allenby report adds that CLNR has doubled its resource base following the successful licensing round last month.