Malcy’s Blog – Flash blog, PetroTal Corp, Union Jack Oil & IGas Energy

A flash blog today as I am on the move in town, I will add further comments in due course.

PetroTal Corp

PetroTal has announced a fully funded 2022 capital program of $120 million that is expected to generate material free cash flow, allowing for an expected resumption of a dividend to shareholders by Q4 2022.  All amounts are quoted in US dollars.

2022 Key Highlights

·    Invest $75 million in drilling and completing four horizontal development wells in 2022.  Inclusive of well 10H, which commenced production on January 31, 2022, a total of five new wells will commence production in 2022;

·    Target a 2022 average production range between 17,500 bopd and 19,500 barrels of oil per day (“bopd”) with an estimated exit December 2022 production rate of approximately 21,500 bopd;

·    Generate an adjusted EBITDA1 range of $340 to $365 million, assuming a 2022 average Brent price of $88/bbl and a $37 million net derivative true-up payment from oil arriving and being commercialized at Bayovar through the Northern Peruvian Pipeline (“ONP”);

·    Execute a facilities and infrastructure expansion program of approximately $43 million which includes a new diluent tank, additional separators, a power plant expansion, additional injection facilities and key process optimization projects;

·    Generate free cash flow (before debt service)1 of between $220 and $245 million in 2022;

·    Repay $20 million of the 2021 $100 million bond issue in H1 2022;

·    Redeem the balance of the bonds in Q3 2022, should cash and working capital levels permit;

·    Assuming the entire bond is retired, PetroTal intends to reinstate a stable and rewarding return of capital program as early as Q4 2022; and,

·    Allocate approximately $15 million in community social trust payments and direct community investment projects in 2022.

Facilities Budget

In 2022, PetroTal will focus on developing necessary infrastructure needed to support continued growth.  Approximately $25 million is allocated for a new diluent tank, a three-phase separator unit including engineering and mechanical works, central processing facilities (“CPF-3”) planning and construction costs, which will commence in April 2022 and enhance the water injection system with new water injection pumps.  This will enable the Company to manage diluent levels to avoid frequent diluent shipments and allow the field to process nearly 200,000 barrels of fluid when completed, which is expected to be by mid 2023. 

Over 20 key field infrastructure projects have been identified, totalling $18 million, which will be allocated for optimization, process/production improvement, power expansion, maintenance, and security projects.  These projects will be completed in priority of near-term need and are subject to changes given the material and logistical challenges caused by the COVID-19 pandemic.  

Block 107 Budget

A total of $2 million is budgeted in 2022 for Block 107 permits.  PetroTal expects approval of the Constitucion and Kametza (Osheki) permits in 1H 2022 and 1H 2023, respectively.  With these permit approvals, PetroTal will continue to evaluate the Company’s deep portfolio of exploration assets for ways to maximize shareholder value.

Cash Flow Guidance

Assuming an $88/bbl average 2022 Brent price, the current run rate cost structure, and sales agreements for oil exports, PetroTal expects to generate $325 to $350 million of net operating income (“NOI”) and between $340 and $365 million of EBITDA1 inclusive of $37 million of derivative true-up settlements.   The resulting free cash flow (prior to debt service)1 is expected to be between $220 – $245 million, thereby allowing the Company to facilitate full pay-out of the bonds in Q3 2022 and implement shareholder returns2 by Q4 2022, along with maintaining a healthy cash balance.

Quarterly Production and Capital Profile (Mid Case)

Q1

Q2

Q3

Q4

Oil wells completed

1 (10H)

1 (11H)

2 (12H & 13H)

1 (14H)

Production (bopd)

16,300

15,000

20,500

21,000

CAPEX (millions)

$35

$35

$37

$13

PetroTal 2022 Budget Summary ($ millions, unless otherwise stated)

 Budget Range (Low – High Case)

Brent Price $/bbl (Feb 7, 2022 strip forecast)

$88.0

Production bopd

17,500 – 19,500

NOI

$325 – $350

G&A

$22

Derivative settlements (Feb 7, 2022 strip forecast)

$37

EBITDA

$340 – $365

CAPEX

$120

Free cash flow1

$220 – $245

1) See “Non-GAAP Financial Measures”

Reimplementation of a Return of Capital policy

PetroTal anticipates material free cash flow generation in 2022.  Based on $88/bbl Brent, free cash flow1 is expected to range from $220 to $245 million prior to debt service, taxes, lease payments, hedge costs, factoring, and VAT.  In H1 2022, PetroTal intends to repay $20 million of the 2021 $100 million bond issue and $30 million in interest, factoring, lease payments and VAT. 

(1) See “Non-GAAP Financial Measures”

In Q3 2022, the Company expects to be in a position to retire the remaining $80 million in bonds with a 6% call premium of $5 million.  Interest saved for the remainder of the year will materially offset this prepayment charge thereby allowing PetroTal to implement a return of capital policy by Q4 2022.  When the bonds are fully repaid, the Company intends to reinstate a quarterly dividend (as was done in Q4 2019).

The Company notes that the above intention to reinstate a return of capital policy is dependent on a number of interplaying factors materializing as expected.

Hedging Update

During January and February 2022, the Company hedged approximately 1,100,000 barrels using a combination of puts with an $85/bbl strike and collars with a range of $63/bbl to $70/bbl allowing PetroTal to share in any continued commodity price increases.

In total, PetroTal has approximately 2.2 million barrels hedged, representing approximately 33% of the 2022 mid case production guidance, and in line with the Company’s hedging strategy.

2022 EBITDA Sensitivities for Production Ranges ($ millions)

Production (bopd)

Brent Price $/bbl

EBITDA Matrix

17,500

18,500

19,500

2022 derivative settlement

$100

357

376

395

+63

$95

332

350

367

+52

$90

306

323

340

+41

$85

281

297

312

+30

$80

256

270

284

+19

$75

233

246

259

+8

$70

207

218

230

-3

$65

182

193

203

-14

Assuming 2022 average production of 18,250 bopd, PetroTal will be in a position to fully cash fund its 2022 CAPEX program and all debt service, VAT, and lease obligations down to $60/bbl Brent while maintaining a liquidity buffer of approximately $25 million throughout 2022.

Manuel Pablo Zuniga-Pflucker, President and Chief Executive Officer, commented

“We are excited to communicate our 2022 development plans to the market.  2022 will be a year of achievement and rewarding shareholders who continue to believe in our story and management team.  It is vital that we continue drilling wells and executing our 2P development plans by drilling proved-undeveloped locations that should allow future booked location upgrades, prevent base declines, and optimize water handling peaks based on our current infrastructure.  We will continue to deliver investment grade well results and manage our balance sheet prudently, as we have over the past four years our team has been together.”

PetroTal goes from strength to strength and this announcement is further good news as the company grows organically. Even I hadnt expected quite such a large injection of capex which will have a long term positive effect on all the metrics from production to reserves and not forgetting an increased spend on social and community projects. 

The webcast is at 1500 hrs and I will report back anything from that tomorrow.

Union Jack Oil

Union Jack has announced that material landmark net revenues have been achieved from the Wressle hydrocarbon development, located within licences PEDL180 and PEDL182 in North Lincolnshire on the western margin of the Humber Basin. Union Jack holds a 40% economic interest in this development.

Highlights

·    Landmark US$3,000,000 revenues generated to Union Jack since re-commencement of production on 19 August 2021

·   Current daily production figures range from 600 to in-excess of 700 barrels of oil per day from the Ashover Grit reservoir, constrained on a restricted choke

·    Well continues to produce under natural flow

·    Zero water cut

·    Staged site upgrades are progressing well

·    Union Jack continues to be cash flow positive covering all corporate, administrative and project operating costs

·    As at 21 February 2022, cash balances of £6,163,795 and receivables of £2,071,375

·    As a result of increasing revenues and the effect on cash balances, Union Jack intends to make an early settlement to Calmar LP of £2,080,000, on or around 1 March 2022, in respect of previously reported acquisitions of 25% of PEDL180 and PEDL182 containing the Wressle development. This will eliminate all major current trade payables.

·    Oil revenues to 31 December 2021, will be in-excess of £1,890,000 (2020 audited, £158,004)

·    Debt free

Executive Chairman of Union Jack, David Bramhill, commented:

The revenues of in-excess of US$3,000,000 to Union Jack from Wressle, whilst under test production, are highly positive for the Company, which remains in robust financial health as the above figures illustrate.

“We believe that Wressle holds significant further upside which will be demonstrated over the foreseeable future, and we look forward to reporting on progress in respect of site upgrades and achieving optimum production rates in due course.

“In addition to Wressle, the Company has three other cash generating projects and under current oil prices, remains cashflow positive covering corporate, administrative and project operating costs.”

To have achieved a revenue of over $3m since 19th August is simply staggering and whilst the share price in no way reflects such an achievement it does look as if investor sentiment has turned and the market is only slowly putting a more sensible slant on the news. 

Again, I will comment after I have had a chance to speak to but management but this announcement shows that on Wressle alone the shares would have a value of well above the current share price, let alone an exciting portfolio full of growth. 

IGas Energy

IGas has agreed a Heads of Terms with Cornish Lithium, the innovative mineral exploration and development company based in Cornwall, to work together to evaluate suitable sites where geothermal heat can be developed on a commercial basis.

Cornish Lithium has secured extensive land and mineral rights agreements in the South West of England, and has developed 3D models of the sub-surface geology and mineral potential of the region utilising historic records combined with data from modern sources such as satellite imagery, geophysical data and drone mapping.

Cornish Lithium will work with IGas to develop projects in Cornwall that can supply renewable heat to end users and will also evaluate the potential to extract lithium from the geothermal waters.  IGas will bring its experience of well design, drilling and operational management to the projects.

A technical and commercial evaluation of a number of potential project locations is underway, which should result in an initial project location being identified.  IGas and Cornish Lithium will then jointly develop the initial project location as a pilot scheme.

Stephen Bowler, IGas Chief Executive, commented:

“This collaboration with Cornish Lithium is another important step in our drive to diversify and leverage our operational expertise.

This complements the ongoing work on hydrogen production and carbon storage and further augments our geothermal business.”

Jeremy Wrathall, Founder and CEO of Cornish Lithium added:

“We are excited to be working with the team at IGas. The combination of our understanding of Cornwall’s geology and IGas’s understanding of geothermal heat projects will be mutually beneficial to both companies. This represents a significant opportunity to accelerate the development of geothermal heat projects in Cornwall that can decarbonise local businesses.”

IGas are ticking off the boxes nicely as it does another deal that sets up significant synergies that can be exploited from its existing expertise and the transition of the company continues. 

The opinions expressed here are those of the author

Malcolm Graham-Wood

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


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