Cash injection is essential for Bula's survival


Considering the traumas that Bula Resources (Holdings) has had to face, it is surprising that it is still alive. Lesser corporates would have given up and died. The group, of course, has been kept in existence by a series of financial transfusions, particularly from two of its major shareholders, Capital International Inc - which now has 252 million shares, or 14.4 per cent - and Morgan Grenfell - which has 217 million shares, or 12.4 per cent. It now needs another £1 million, and quickly.

But it needs more than funds, it also needs a steady flow of income to keep going. That is quite clear from the latest interim figures, presented to last week's extraordinary general meeting.

Although it generated only £70,000 cash from its minuscule oil and gas production operations in the six months to June 30th 1998, it spent £965,000 on capital expenditure and investments, and £379,000 on acquisitions and disposals. That mighty feat was only possible through the placing of new shares (at 1.25p sterling per share), which raised £1.6 million, and through new borrowings of £539,000. The most immediate worry for Bula is that it does not generate sufficient income to cover its basic running costs. This must raise serious questions about its ability to continue, even with a cash injection. So where are the potential sources of income?

Bula is pinning its hopes on two main areas: North Africa and the Middle East. It has signed a farm-in agreement with a subsidiary of Canadian Occidental Petroleum over blocks G & U onshore Libya. This has not resulted in any immediate cash for Bula. However, it could lead to an injection of between £100,000 and £200,000; its costs are to be paid and it will share in benefits from exploration.

It is negotiating a further farm-in over other Libyan blocks: CC, VV, Cyreneica, KK and ZZ. If this is successfully concluded, not only would Bula's costs be covered but it would be paid the £1 million development costs already incurred, bringing in much-needed cash.

All that, however, is only potential. At present, the only producer of income is the group's North American operations. Lower oil prices and lower production levels - due to production problems - led to lower income in the first half. An upgrade of the facilities will lead to a better second half, but this will still be insufficient to cover the group's basic costs.

There are, of course, the two court cases which could lead to a transformation if the group is successful. First, there's the action against Gouldens, the London solicitors which advised the group in respect of the Aki-Otyr, the fated Russian project. It is looking for a recovery of £9.1 million in costs and interest and a substantially larger amount for the lost value of the Aki-Otyr option. However, the London High Court on Thursday ordered the proceedings to be struck out following the failure of Bula to lodge a banker's guarantee for £250,000 sterling, as security for the firm's costs. Bula has already spent £367,000 on these legal costs to date and is appealing the court decision.

Second, there are actions against Mr Jim Stanley, the group's former executive chairman, who was found by a government report to be the sole beneficial owner of Mir Oil. Hotly contested, these, of course, should not figure in any financial assessments. The group's immediate concern is that the proceeds from the last placing have been used up. It is now using bank facilities secured on the US properties. These could be used up by the end of the year. Those assessing the future of Bula will see two conflicting trends.

First, the negative one. The environment for the oil industry is not good. The crisis in Asia has led to excess capacity which has been reflected in falling oil prices for more than 12 months. There is no sign of this changing, so the expectation must be for weak prices over the foreseeable future. And the position will be aggravated when the embargo on exports from Iraq is lifted. Second, the positive one. With excess capacity, oil producers will be looking to close down high-cost facilities and will concentrate on low-cost areas such as Libya (and the Middle East).

Bula does not have too many choices because time is not on its side. It would be best to back into another company. Failing that, the next best option is to have another whip-round among its institutional investors or try to tap the long-suffering ordinary shareholders, though many would resist such a move. If they were to give the thumbs down, it would be Bula's death knell. With the share price below the nominal 1p, Bula would not be able to issue shares at, or around, the market price without shareholder approval.

But to raise £1 million at the nominal value, it would have to issue a further 100 million shares. That would bring the number of shares in issue up to a whopping 1,850,000,000, or 1.85 billion.