Malcy’s Blog: Oil price, Savannah, Diversified Energy, Challenger, Trinidad licences, And finally…

WTI (July) $69.46 -$3.21, Brent (July) $73.54 -$3.53, Diff -$4.08 -32c.

USNG (June) $2.32 +14c, UKNG (July) 58.26p +3.46p, TTF (July) €25.195 +€0.62.

Oil price

The shenanigans with regard to the debt ceiling appear to be sorted, it just got through the rules committee last night and from what I can see should pass through the House tonight yet nothing can be guaranteed. But there are more problems on the horizon not least the jobs data on Friday where a big beat of the whisper will bring back interest rate concerns.

The last Fed meeting seemed to indicate a pause was the current strategy but watching Fed representatives on the TV I think that the favourite bet is now for another rise, probably 25bp’s.

And then its the Opec meeting on Sunday, comments from Russia and the KSA have left things wide open but with yesterday’s fall there may be a token from the hard liners in the way of a cut.

Finally with the driving season underway and gasoline stocks low on a five year average basis, the average price edged up last week, a gallon of Exxon’s finest will now cost $3.571 up nearly 4 cents on the week. The inventory stocks will run a day behind due to Memorial Day.

Savannah Energy

Savannah Energy PLC, the British independent energy company focused around the delivery of Projects that Matter, is pleased to announce that the Company’s 80% indirectly owned subsidiary, Accugas Limited, has entered into a Natural Gas Sales and Purchase Agreement  with Amalgamated Oil Company Nigeria Limited  for gas produced in the OML 156 sole risk petroleum lease area, for onward sale to its customers.

Accugas focuses on the marketing, processing, distribution and sale of gas to the domestic Nigerian market. In 2022, Accugas processed and transported an average of 145 MMscfpd of gas through its pipeline network, with all gas sourced from Savannah’s 80% indirectly owned Uquo gas field¹. Gas is processed at Accugas’ 200 MMscfpd Uquo central processing facility for onward transportation to customers through its c.260km, up to c.600 MMscfpd transportation capacity pipeline network.  The NGSPA with AMOCON represents the first time that Accugas will be supplying gas to its customers that has not been produced from the Uquo gas field. Gas purchased from AMOCON does not require processing by Accugas and therefore does not utilise available capacity at the Uquo CPF.

Under the terms of the NGSPA, Accugas has agreed to purchase up to 20 MMscfpd of gas from AMOCON over the course of the next ten years. The cost of connection to Accugas’ infrastructure has been borne by AMOCON, with the gas being delivered from a new AMOCON-owned 140m pipeline connecting AMOCON’s Early Production Facility (“EPF”) to Accugas’ existing pipeline network. Under the terms of the NGSPA, all capital expenditure required for the AMOCON EPF-to-Accugas pipeline was borne by AMOCON and Accugas has not incurred any additional capital expenditure in relation to this project. The contract is already operational and gas supply to Accugas has stabilised at approximately 20 MMscfpd.

Andrew Knott, CEO Savannah Energy, said:

“Since we announced our intention to acquire our ownership interest in Accugas in 2017, Accugas has recorded six consecutive years of growth in Total Revenues² at a compound annual growth rate of 21%. We are now contracted to supply gas to up to 24% of Nigeria’s thermal power generation capacity (up from 10% at the time of acquisition) as well as key petrochemical and cement factories. We are clearly performing a critical service to the Nigerian economy.

By providing a commercial route to market for otherwise stranded gas resources, the deal with AMOCON represents a new source of growth for Accugas. This deal has the potential to serve as a template for the commercialisation of other stranded gas resources in South East Nigeria which represents a potentially significant opportunity for Accugas.”

This is a very smart deal indeed, buying the gas from AMOCON and selling to Accugas customers through its facilities makes common sense and this is the first time it has happened with any third parties.  Into the bargain AMOCON has paid for the short tie-in to the Accugas pipeline and  as gas purchased from AMOCON does not require processing by Accugas and therefore does not utilise available capacity at the Uquo CPF.

It also, as Andrew Knott says above, solves the problem of stranded gas and is a critical service to the Nigerian economy and goes towards eliminating flaring. And of course it is a handy revenue stream and gives purpose to what is continuing to build as a meaningful business in Nigeria.

Diversified Energy Company

Diversified today announced that on 30 May 2023, Rusty Hutson, Jr, Executive Director, President and Chief Executive Officer, transacted in ordinary shares of 1p each in the Company.

Mr. Hutson acquired through purchases in the open market 176,951 Ordinary Shares at an average price of 83.52 pence per Ordinary Share. Following this purchase, Mr. Hutson is now interested in 24,079,841 Ordinary Shares representing approximately 2.479% of the Company’s issued share capital.

Diversified also announced that on 30 May 2023, David Johnson, Independent Non-Executive Chair of the Company’s Board of Directors transacted in ordinary shares of 1p each in the Company.

Mr. Johnson acquired through purchases in the open market 10,000 Ordinary Shares at an average price of 83.08 pence per Ordinary Share. Following this purchase, Mr. Johnson is now interested in 460,000 Ordinary Shares representing approximately 0.047% of the Company’s issued share capital.

I don’t often, perhaps enough, report on directors share purchases particularly when they are in the open market and for cash. Obviously I am a fan of management having skin of their own in the company they run and in this case boxes are ticked and clearly the Directors feel that their shares are too cheap. 

I also know that at the moment with the oil price taking a breather before China’s recovery is stamped, oil shares are under some pressure but this is ridiculous. DEC is probably one of the most attractively priced in the market on any valuation measure. 

Recent numbers show that DEC have produced record amounts of hydrocarbons with 54% cash margins, 37% FCF and an excellent hedging programme. And as the CEO said recently ‘despite challenging commodity price environment’ the company still reduced per-unit expenses and increased our cash margins as per the above.

The company are taking advantage of the market place by continuing to make substantial acquisitions and raising money in both equity and debt markets where they are blue-chip names. Indeed they are leaders in sustainably linked loans used as reserve based lending in their acquisition policy. 

These share purchases by the board do show their commitment to DEC and as I have often said the shares offer a massive current yield of some 17% and I would also expect a significant capital gain when the oil price rallies. 

Challenger Energy Group

Challenger has provided the following update in relation to the AREA OFF-1 block, offshore Uruguay.

HIGHLIGHTS

•     Volumetric assessment of AREA OFF-1’s three primary prospects (Teru Teru, Anapero, Lenteja) has been completed

•     Assessed estimated recoverable resource (EUR) of approximately 2.0 billion barrels (Pmean, unrisked), and over 4.9 billion barrels in an upside case (P10, unrisked)

•     Ongoing technical work has also identified additional new leads and prospects, once evaluation is complete, expected to add to the overall AREA OFF-1 resource and prospect inventory

•     Formal adviser-led farm-out process has been initiated; strong interest received

Eytan Uliel, Chief Executive Officer of Challenger Energy, said:

“We continue to be encouraged by the opportunity that our AREA OFF-1 licence in Uruguay represents. Our technical work highlights how AREA OFF-1 is clearly world class acreage with massive resource potential, in what has become a global exploration hotspot. To capitalise on this, I can confirm that a farm-out process has now commenced, with very strong initial indications of interest received from multiple major oil companies. Our target is to complete a farm-out transaction by year end, so that we can continue to rapidly progress work on the block, and thereby generate value for shareholders.”

Shareholders in CEG must be pinching themselves right now, it appears that whilst the rest of the world was grappling with Covid their management was identifying a piece of frontier acreage that is now turning out to be one of the most highly prized post codes around.

CEG have done all the hard graft and have reprocessed 2D seismic data which seems to have genuinely found more than they had expected and they now have the three big prospects mapped and with volumetrics they need to fire the starting gun in the farm-out process.

So the data room is open, some visitors such as those in adjacent blocks already have the early technical feed and the neighbours have been chatting already. As I understand it this is a very ‘strong’ data room, high quality, major league players some of whom are throwing grand fromages at the situation. 

I expect CEG to keep a meaningful stake but as with any farm-out cede the operatorship, in return for back payments, a carry on further works and a deal on drilling, but that’s just my guessing. The process is scheduled to finish at the end of September so it is under orders and will be at the finish line before long. 

If I am wrong then fair enough but with an ‘assessed estimated recoverable resource (EUR) of approximately 2.0 billion barrels (Pmean, unrisked), and over 4.9 billion barrels in an upside case (P10, unrisked)’ the risk/return case looks somewhat interesting with the market cap of less than £10m….

DETAILS

On 26 April 2023, the Company advised of the initial results of its geotechnical work program at the Company’s AREA OFF-1 licence, offshore Uruguay. Since that time, the Company has continued with various specific technical and commercial work streams, and is pleased to provide the following update.

A.   Volumetric Assessment

A volumetric assessment of the the three primary prospects identified on the AREA OFF-1 block (Teru Teru, Anapero and Lenteja) has now been completed. This assessment has indicated:

·    a total Oil in Place (OIP) of ~ 6.5 billion barrels of oil equivalent (BBOE) across all three prospects (Pmean, unrisked), and over 16 BBOE in an upside case (P10, unrisked)

·    a total Estimated Ultimate Recoverable resource (EUR) of ~ 2.0 billion BBOE across all three prospects (Pmean, unrisked), and over 4.9 BBOE in an upside case (P10, unrisked).

The Company’s internal estimates are that the economic field size for a discovery in these water and reservoir depths to be in the range of 150 to 200 million barrels. The EUR (P50) for all three primary prospects exceeds or approximates this commercial threshold.

B.   Mapping, Interpretation and AVO work

As previously advised, the Company has continued with various technical workstreams to complete prospect mapping, to finalise the prospect and lead inventory, and to expand amplitude variation vs. offset (AVO) analysis from initially 6 reprocessed 2D seismic lines to 15, driven by the strong results from the initial AVO work conducted.

Whilst this work remains to be completed, AVO analysis shows strong Class II / Class III AVO anomalies have been identified for the Teru Teru and Anapero prospects and are present on multiple seismic lines, which serves to confirm the areal extent of both prospects.

C.   Additional Leads and Resource Potential

Ongoing technical work has also identified further leads and prospects on AREA OFF-1. Interpretation and mapping of these additional leads and prospects is continuing. It is anticipated that once work is complete, these newly identified leads and prospects may add further to the overall AREA OFF-1 resource and prospect inventory. The Company will advise of this additional exploration potential once work is completed.

Farm-out process

As previously advised, the Company has compiled a comprehensive data-room, which includes all new work conducted inclusive of the recently completed volumetric assessment.

A formal adviser-led farm-out process has now commenced, with the Company having received several unsolicited approaches, and strong interest from leading industry participants.

The farm-out process has been structured to meet the Company’s commercial objective, which is to complete a farm-out transaction prior to the end of 2023. Introducing a strategic partner(s) during 2023 will enable the Company to accelerate value realisation from the AREA OFF-1 licence, by fast-tracking 3D seismic acquisition, potentially via a multi-client acquisition in early 2024.

An update Uruguay AREA OFF-1 presentation is now available on the Company’s website at www.cegplc.com.

Trinidad Licensing Round

I have talked about the Trinidad licenses before with regard to a number of the participants. This morning I spotted this article on Reuters which seems to be pretty well researched, as they say…I have spoken to a number of the UK participants without expecting any confirmations, watch this space…

And finally…

The Miami Heat beat the Boston Celtics last night in game seven of the Eastern Conference finals. The Heat went 3-0 up in the series but Boston came back to force a game seven after a chaotic win in Miami on Saturday night. They will face the Denver Nuggets in the NBA finals after they swept the Lakers in the West. It will be a seriously tough challenge for the Heat in the finals but few expected them to get this far as the 8th seed anyway so we could all be wrong and they might pull off another incredible upset.