Malcy’s Blog – Flash Blog, Genel Energy, Diversified Energy Company, Zephyr Energy, Touchstone Exploration & Petrofac

A flash blog today as I’m at meetings in London, anything additional after further company interface will be added tomorrow.

Author @mgrahamwood

Genel Energy

Update on Tawke PSC

Genel notes that DNO ASA, as operator of the Tawke PSC (Genel 25% working interest), has today issued an update on licence activity.

Gross production at the Tawke licence averaged 106,900 bopd during the second quarter, of which Peshkabir contributed 62,300 bopd and Tawke 44,600 bopd, the latter representing the first quarterly production increase since 2015 at this legacy field as new wells are drilled, workovers conducted on existing ones and gas injection continued.

In the second quarter, four new production wells were brought onstream on the Tawke licence with three at Tawke and one at Peshkabir. Together with wells drilled in the first quarter, natural field decline has been arrested and reversed, including at Tawke, raising DNO’s full-year projection to 107,000-109,000 bopd (previously 105,000 bopd).

Genel’s production guidance for 2022 is unchanged, with net portfolio production currently expected to be between 30-31,000 bopd for the full-year.

This is a good operational performance from the Tawke PSC and will serve to back up Genel’s policy of building its core portfolio, building cash and distributing to shareholders. 

Diversified Energy Company

Diversified has announced enhanced alignment of its Revolving Credit Facility led by KeyBank National Association with its stated ESG initiatives through an amendment converting the Facility into a Sustainability-Linked Loan.

Diversified’s integration of the SLL principles emphasises the Company’s commitment to continuous ESG improvement by incorporating the following three sustainability-linked performance targets (“SPTs”):

•     Greenhouse gas emissions (GHG) intensity reduction targets (Scope 1 & 2)

•     Asset Retirement targets above current levels

•     Safety-related performance targeting a decrease in Total Recordable Incident Rate (“TRIR”)

The amendment also extends the SSL’s maturity to August 2026, reaffirms the borrowing base of $300 million and included no other material changes to pricing or terms.

Rusty Hutson, Jr., CEO of the Company, commented:

“We are pleased to incorporate our commitments to emissions reductions, asset retirement and safety into the terms of our syndicated credit facility, making our SLL the Company’s fourth sustainability-linked instrument aligned with our ESG performance targets.  These measurable SPT’s, if achieved, will reduce our cost of capital and increase our potential to attract new bank capital. I would like to once again thank the members of our bank syndicate for partnering with us on this important change and for their continued support of our stewardship strategy.”

This is further important news from DEC who continue to make the credit facilities genuinely moving into green territory. With the SLL incorporating Scope 1&2 emissions, decommissioning and HSS, DEC remains on top of its game in this key area. 

Zephyr Energy

Second Quarter 2022 results from Williston Basin portfolio

Zephyr has provided second quarter 2022 results related to hydrocarbon production and cashflows from its non-operated asset portfolio in the Williston Basin, North Dakota, U.S.

Q2 2022 Williston Basin Highlights

• Quarterly revenues totalled US$14.3 million net to Zephyr, up from US$11.5 million in the first quarter of 2022 (“Q1”) and a 16-fold increase from US$0.9 million reported in Q2 2021.
• Quarterly operating income was US$10.1 million (after taxes, lease operating expenses, hedging impacts, and gathering and marketing fees).
• Q2 sales volumes averaged circa 1,856 barrels of oil equivalent per day (“boepd”), an increase from circa 1,600 boepd in Q1 2022 and from 148 boepd in Q2 2021.
  • Q2 revenue was positively impacted by deferred payments for production on newly completed wells generated in earlier months but received in Q2.
  • Q2 wellhead production averaged circa 1,400 boepd, net to Zephyr, in line with management expectations and marginally impacted by temporary shut-ins due to planned “frac-protect” procedures on existing wells while new nearby wells were completed.
• At the end of Q2, 195 wells in the portfolio were available for production, including 10 wells which came online during the quarter.
  • An estimated 30 additional wells in which Zephyr will have working interests are forecast to be brought on production by the end of 2022, which will help to decrease standard portfolio decline rates.
• Net working interests across the Williston Basin non-operated portfolio now average 7.1%, equivalent to 15 gross wells, all of which utilised horizontal drilling and modern, hydraulically stimulated completions.
• Zephyr reiterates its previously released 2022 production and revenue guidance of an expected US$35-40 million in non-operated revenue, net to Zephyr, for FY 2022 based on a forecast production range of 500,000 to 550,000 barrels of oil equivalent (“boe”) for the year.

Q2 Sales Detail

During the second quarter of 2022, the Company reported net sales of approximately 168,880 boe. Product mix for Q2 was 73% crude oil, 15% natural gas, and 12% natural gas liquids. The table below provides sales volumes, product mix, and average sales prices for the quarter:

Oil: 123,233 barrels (“bbls”) at an average sales price of US$99.84/bbl

Natural Gas: 149,860 thousand cubic feet (“mcf”) at an average sales price of US$6.69 /mcf

Natural Gas Liquids: 20,671 bbls at an average sales price of US$50.40 per bbl

(Note: Second quarter production volumes and average sales prices figures include field estimates in respect of June 2022 natural gas and natural gas liquids sales volumes and are subject to future revision.)

During Q2, a number of Zephyr’s existing production wells were temporarily shut-in due to “frac-protect” procedures while new nearby wells were stimulated and completed.  As new infill wells are drilled, existing offset wells may be temporarily shut in to optimise the nearby completion and mitigate offset well production losses. Offset wells are then re-instated for production when the new infill wells are started up for production.

Q2 sales volumes of 168,880 boe include approximately 41,480 boe produced prior to Q2 but for which payments were received during the quarter.  In the Williston Basin, cashflow from non-operated interests in newly drilled wells may lag actual production by up to five months.  Such payments from the operator accrue on a monthly basis and are paid in full prior to the sixth month of production, which may result in impacts to quarterly sales volumes and revenues during times of significant completion activity.  Zephyr expects additional accrued payments from operators in Q3 2022 given the Company’s interests in 10 newly drilled wells which came online during Q2.

Williston Basin production outlook

30 additional producing wells from Zephyr’s existing portfolio are expected to be brought online during the next six months, which will partially mitigate decline rates typical of Williston Basin production.

The Company has hedged just under half of its forecast non-operated production over the next 21 months.  Using an average hedged production price of US$96.28 for the remainder of the 2022 calendar year and using US$90 flat for the remainder of its anticipated production, the Company reiterates its forecast of an expected US$35-40 million in non-operated revenue, net to Zephyr, for FY 2022 based on forecast production range of 500,000 to 550,000 boe for the year.

Colin Harrington, Chief Executive of Zephyr, said:

“In the 15 months since we announced Zephyr’s first non-operated acquisition in the Williston Basin, I’ve been delighted with the growth and strong cash flows generated from that part of our portfolio.   Having completed six discrete acquisitions, our non-operated asset base is a now diverse mix of 195 low-risk, high margin producing wells operated by some of the strongest companies in the Williston Basin.  With a further 30 wells expected to come online over the next six months, the platform is demonstrating its capacity for future organic growth.

“This highly attractive portfolio is delivering substantial cashflows which will fuel the ongoing development of our flagship Paradox project, and potentially facilitate further opportunistic portfolio acquisitions.

“It’s an exciting time for Zephyr and we look forward to keeping Shareholders regularly updated on progress in the coming weeks. In particular, we look forward to commencing the upcoming drilling programme on the Paradox project.  With internal development potential fully funded from our existing asset portfolio, we plan on significant further growth over the next twelve months.”

Zephyr has been very smart and this very good performance in cash flow generation should be lauded, an interesting move in pretty much just one year since they started adding production to finance the exploration. 

Now our thoughts move to the Paradox Basin project and the autumn drilling programme which is fully funded from this portfolio, exciting times ahead for Zephyr and the shares should be significantly higher than they are now. 

Touchstone Exploration

Touchstone reports its operating and financial results for the three and six months ended June 30, 2022. Selected information is outlined below and should be read in conjunction with our June 30, 2022 unaudited interim condensed consolidated financial statements and related Management’s discussion and analysis, both of which will be available under our profile on SEDAR (www.sedar.com) and on our website (www.touchstoneexploration.com). Unless otherwise stated, all financial amounts herein are rounded to thousands of United States dollars.

Second Quarter 2022 Financial and Operational Highlights

·      Achieved quarterly average crude oil production volumes of 1,420 barrels per day (“bbls/d”), representing a 2 percent increase relative to the preceding quarter and a 1 percent increase from the 1,402 bbls/d produced in the second quarter of 2021.

·      Realized petroleum sales of $12,596,000 from an average crude oil price of $97.48 per barrel compared to petroleum sales of $7,586,000 from an average realized price of $59.06 per barrel in the comparative quarter of 2021.

·      Generated an operating netback of $44.99 per barrel, a 19 percent increase from the first quarter of 2022 and a 71 percent increase from the $26.30 per barrel reported in the second quarter of 2021.

·      Recognized current income tax expenses of $1,547,000 in the quarter compared to $432,000 in the second quarter of 2021, driven by $1,043,000 in supplemental petroleum tax expenses based on our average realized oil price exceeding the $75.00 per barrel threshold in 2022.

·      Our funds flow from operations was $1,133,000 in the quarter, which was net of $540,000 accrued for reclamation costs related to the previously announced oil spill which occurred as a result of vandalism in June 2022.

·      Recognized a net loss of $262,000 in the quarter compared to a net loss of $284,000 reported in the same period of 2021, reflecting the $540,000 provision for oil spill reclamation costs.

·      Capital investments of $3,368,000 primarily focused on facility and pipeline expenditures related to the Coho-1 facility and investments directed to the Cascadura natural gas facility.

·      Exited the quarter with cash of $9,425,000, a working capital surplus of $346,000 and $30,000,000 drawn on our term credit facility, resulting in a net debt position of $23,654,000.

Post Period-End Highlights

·      Daily crude oil sales averaged 1,303 bbls/d in July 2022 with a realized price of $89.52 per barrel.

·      Preparation for Coho gas facility and pipeline pre-commissioning operations is underway, which will be followed by system commissioning operations to introduce natural gas from the Coho-1 well into the facility and pipeline.

·      Received confirmation from the Trinidad and Tobago Environmental Management Authority that determination of our Certificate of Environmental Clearance application for development operations in the Cascadura area will be made by September 15, 2022.

Paul Baay, President and Chief Executive Officer, commented:

“This quarter represents the end of an era for the Company as a pure crude oil producer in Trinidad with the next quarter seeing a transition to a combination of oil and natural gas production from our Coho-1 gas well. Our team has maintained base production while remaining focused on our Coho and Cascadura projects including associated commissioning operations and regulatory approvals, which are both progressing. Our Trinidad team successfully implemented our emergency response plan in response to the vandalism at Fyzabad which had a minimal impact to the environment and residents affected in the area but resulted in reclamation costs which we fully accrued for in the quarter. We will continue to complete the restoration required and work with our insurance provider to identify any costs that may be recoverable under our policy.”

With the recent announcements on Coho and Cascadura the CEO has pinpointed the huge changes that TXP is going through and which will make landmark changes to the company throughout this year. The shares, apart from the recent bounce, have yet to take into account the fact that the company is moving fast in a major transformational phase and my medium term TP of 250p is in no way unreasonable. 

Petrofac

RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2022

First half highlights

• H1 financial performance in line with guidance with good momentum in AS and IES, offset by challenges in E&C’s mature portfolio
• Business performance EBIT of US$2 million(1)(2)
• Reported net loss of US$(14) million(2) inclusive of separately disclosed items
• Group order intake of US$1.1 billion(3) with book-to-bill of 0.9x
• Healthy 18-month Group pipeline of US$57 billion
• High levels of bidding activity in E&C with opportunities expected to be awarded evenly over the second half
• Backlog of US$3.7 billion
• Net debt of US$341 million(6) and liquidity of US$511 million(7)
• Free cash flow in second half expected to be broadly neutral

Sami Iskander, Petrofac’s Group Chief Executive, commented:

“Our performance in the first half continues to reflect the COVID-19 related industry challenges, as we work towards completion on many of the projects in the legacy E&C portfolio. Moving into the second half of 2022, a significant increase in bidding activity has put us firmly on the path to grow backlog over the full year. Supported by a strong commodity price environment and an increasing focus on energy security, the outlook for the industry is robust and the work we have done over the past 18 months means that Petrofac enters this important period in a strong competitive position.

“We made good progress on our new energies strategy having entered into a collaboration with Hitachi Energy, a leading player in HVDC and HVAC technology, to provide joint grid integration and associated infrastructure for the rapidly growing offshore wind market. This collaboration strengthens our market position and the large pipeline of opportunities supports our US$1 billion revenue ambition from new energies in the medium term.

“Our priorities in the second half of the year are clear. First, we will continue to safely deliver the existing backlog for our clients, while maintaining cost discipline. Second, we will focus on closing out the delayed commercial settlements, to unwind working capital and return to positive free cash flow from 2023. Lastly, we will make progress in securing awards in E&C to deliver growth in full year backlog. Our recent US$200 million provisional award in Algeria, while small, is evidence of our competitiveness and marks the beginning of a multi-year upcycle.”

I will add more on PFC in due course, time today forbids much detail and I’ve only just got off the conference call which was extremely optimistic albeit the company being very honest and open about the hurdles that they have faced.

I continue to believe that wise, long term investors should be building or rebuilding holdings in PFC now whilst some remain unconvinced about when and whether the rebound will happen. But I consider that the order book will without doubt power ahead and with what is already in the pipeline could blow the lights out next year. 

The company is itself confident ‘ as attractive as we have seen for many years’ and ‘we are now in a strong competitive position’ with a ‘significantly improved outlook to become a $4-5bn business’. Buy now, while stocks last…

The opinions expressed here are those of the author

Author @mgrahamwood

Disclaimer: Malcy’s Blog is provided for general information about the international oil and gas industry and the companies that operate within it. It does not constitute investment advice and Malcy does not buy or sell shares, warrants or bonds in any company written about within the blog. Information is taken from publicly available sources and any comment is that of the author who does not take any third party comment in the blog