Malcy’s Blog – Oil price, Arrow Exploration, Empyrean Energy, Rockhopper Exploration, Trinity Exploration & Production, United Oil & Gas & finally

WTI $108.21 +$1.26, Brent $113.16 +$1.46, Diff -$4.95 +20c, NG $7.82 +52c, UKNG 164.5 -38.57p

By Malcolm Graham-Wood

Oil price

Last week WTI was up $12.66 and Brent plus $13.22, the main culprit was Libya where in the last few days protesters disrupted production and exports are some 500/- b/d off the 1.2m b/d peak. In China apparently Covid is easing but until they get a grip of vaccinations there will still be ineffective lock-downs. Ironically 1Q GDP came through at 4.8%, higher than the Q4 21 number of 4.0% and even the whisper of 4.4%.

Late on Friday Sleepy Joe slipped out a huge backtrack as all of a sudden the White House resumed selling oil leases on Federal land. One of the key green issues in his manifesto this is some U turn, the environmentalists are not happy.

And it’s retail gasoline day, the price of a gallon of Exxon’s finest across the USA is $4.066 which is down 2.5c w/w, a fall of 17.3c m/m but still up $1.211 y/y. Friday’s rig count showed a rise of 4 units overall to 693 and plus 2 in oil to 548.

Rockhopper Exploration

Rockhopper has announced that, further to the heads of terms notified on 8 December 2021, Rockhopper, Harbour Energy and Navitas Petroleum have signed legally binding definitive documentation in relation to Harbour exiting and Navitas entering the North Falkland Basin.

The Transaction remains subject to completion pending, inter alia, regulatory approvals.

Highlights

·    Navitas will acquire Premier Oil Exploration and Production Limited (“POEPL”), the Company in which Harbour holds all of its Falkland Islands licences

 ·    Rockhopper and Navitas will seek to align working interests across all their North Falkland Basin petroleum licences – Rockhopper 35% / Navitas 65% – subject to all necessary consents

·    Rockhopper and Navitas to jointly develop and agree a technical and financing plan to enable the development of the Sea Lion project to achieve first oil on a lower cost and expedited basis post sanction

·    Navitas to provide loan funding to Rockhopper:

o  The majority of Rockhopper’s share of Sea Lion phase one related costs from Transaction completion up to Final Investment Decision (“FID”) will be funded through a loan from Navitas with interest charged at 8% per annum (the “Pre-FID Loan”).  Certain costs, such as licence costs, are excluded

Subject to a positive FID, Navitas will provide an interest free loan to Rockhopper to fund two-thirds of Rockhopper’s share of Sea Lion phase one development costs (for any costs not met by third party debt financing).  Certain costs, such as licence costs, are excluded

o  Funds drawn under the loans will be repaid from 85% of Rockhopper’s working interest share of free cash flow

·    In the event that material progress towards FID has not occurred within five years of completion of the Transaction, Rockhopper can elect to remove Navitas from the Falkland Islands petroleum licences (should the licences still be in effect at that time) by repaying the Pre-FID Loan.  Should material progress have been made, but FID not achieved, then the five year period can be extended by 12 months and then a further six months if certain project milestones have been achieved

Benefits of the Transaction

·    Greater alignment and simplified commercial arrangements across the joint venture

·    Rockhopper retains a higher working interest in the Sea Lion project than under the previous Premier-Navitas transaction announced in January 2020

·    The Transaction continues to materially satisfy Rockhopper’s proportion of both pre-FID and post-FID costs for Sea Lion

·    Introduction of a new and committed Operator for Sea Lion – Sea Lion becomes Navitas’ largest operated development asset

·    Access to Navitas’ expertise in executing and financing large scale oil field developments

·    Clean exit for Harbour

·    Optionality for Temporary Dock Facility – scope to upgrade for Sea Lion development or future decommissioning

 Forward plan for Sea Lion

·    Transaction completion is subject to receipt of various agreements, consents and approvals by the Falkland Islands Government 

·    Technical work to commence by Rockhopper and Navitas jointly in relation to a lower-cost, alternative development for Sea Lion utilising the existing extensive design and engineering work undertaken for the project in recent years

·    Navitas to become Operator at completion

·    Potential for an additional project partner dependent upon funding requirements – to be defined through ongoing development and financing processes – should an additional partner be required, Rockhopper does not intend to reduce its working interest

·    Navitas committed to strengthen its offshore operating capability with a focus on safe and efficient developments

Licence Ownership post Transaction completion

Other corporate updates

On 28 March 2022, the Company received the following update from the Chairman of the Panel considering the Ombrina Mare arbitration:

“The Tribunal anticipates that the proceedings will be closed in the next few weeks.”

The Company will update the market once it is informed that proceedings are closed. Under the International Centre for Settlement of Investment Disputes rules, the final decision should then be rendered within a four month period, although there is the potential for this to be extended to six months at the arbitrators’ request.

Rockhopper continues to believe it has strong prospects of recovering very significant monetary damages – on the basis of lost profits – as a result of the Republic of Italy’s breaches of the Energy Charter Treaty.

The Company also provides an update on the current cash balance which, as at 31 March 2022, was US$3.9 million (unaudited). The Company will require further funding for working capital and to achieve Sea Lion FID.

Samuel Moody, CEO, commented:

“We are delighted to have signed definitive documentation to bring Navitas into the North Falkland Basin. Subject to regulatory consents, we believe this marks the start of a new exciting chapter for the Falklands, and for the Sea Lion project in particular. Navitas’ US$1 billion Shenandoah financing in 2021 proved their ability to fund challenging offshore oil and gas developments. Given this, coupled with a more positive oil price environment, we are very excited to have them as new partners and look forward to pushing ahead with Sea Lion, a world class resource.”

The market has been waiting a long time for this news that RKH has brought Sea Lion into a nearer term scenario and that this important deal with Navitas has been driven over the line. I have not been able to speak to the company this morning so I will likely add more tomorrow, but I imagine that they are very pleased after all this time. 

Given that the market has always known about the company’s cash position I think it is a touch overly harsh not to mark the shares up any more than they already have done, after all there was always going to be a loan or even two to get up to and through FID and also that short term funding requirements need to be recognised. 

In my view RKH have come out of this very well and with a higher than originally expected working interest and that moving forward have a 35% stake in what I believe will be a substantial pool of value way in excess of the current market value of Rockhopper.

Empyrean Energy

Empyrean has provided the following update on drilling at the Jade prospect at its 100% owned Block 29/11 permit, offshore China:

HIGHLIGHTS

·      LH 17-2-1 well at the Jade prospect drilled 12-1/4″ section to 2150 metres Measured Depth 

o  Elevated methane (C1) ranging from 227ppm to 15440 ppm was recorded while drilling 12-1/4″ section.

o  Higher values of methane (C1) ranging from 4190 ppm to 15440 ppm were recorded in the pre-drill interpreted “gas cloud” zone between 1550 metres to 1800 metres MD.

o  CNOOC has confirmed comparable methane ranges in their oil discovery well LH 23-1-1d that is located 10km Southwest of the Jade prospect which also had a “gas cloud” feature

·      Drilling results have validated the pre-drill interpretation of seismic data including the presence of gas clouds over the Jade as well as Topaz prospects

·      Based on the results thus far, Empyrean has upgraded its internal Geological Chance of Success over the Jade prospect from 41% to 65% and Topaz prospect from 35% to 47%

·      Current operations are the installation of 9-5/8″ casing before drilling 8-1/2″ hole to the Total Depth of 2860 metres MD

Empyrean is the operator of Block 29/11 in China and has 100% working interest during the exploration phase. In the event of a commercial discovery, its partner, China National Offshore Oil Company, may assume a 51% participating interest in the development and production phase.

Empyrean CEO, Tom Kelly, stated:

“The first technical objective of the Jade well has now been drilled. The validation of “gas clouds” through the presence of elevated methane levels in exactly the depth zone we interpreted on the excellent quality seismic data proves that the gas clouds exist and supports the Company’s pre-drill interpretation that the methane is probably coming from light oil in the anticipated reservoir section. This is a major box now ticked, if we are to make a light oil discovery at Jade. The comparisons to nearby CNOOC discovery wells look very compelling. Drilling operations continue to run smoothly and safely, with progress to date right on schedule”.

Whilst I did say that I wasn’t going to report on each and every drilling update I think that this is a positive piece of news and there is much more information in the full statement. The fact that the GCoS has been raised can be seen as being modestly positive and I look forward to continuing updates.

Trinity Exploration & Production

Trinity has provided an update on operations for the three-month period ended 31 March 2022, which delivered good production and operational cash generation, and an update on the development of a more targeted strategy for accelerated growth, initially prioritising the resumption of onshore drilling in H2 which has the potential to significantly enhance production volumes.

Q1 2022 Operational Highlights

·    Refreshed growth strategy focused on prioritising deliverable opportunities with a mitigated risk profile, targeting a meaningful step-change in production volumes

·    Stable underlying business:

–      Q1 2022 Production volumes averaged 3,013 bopd (Q4 2021: 3,103 bopd; Q1 2021: 3,107 bopd)

–      Production sold averaged 2,929 bopd (Q4 2021: 3,039 bopd; Q1 2021: 3,051 bopd)

·    Total of five recompletions (“RCPs”) (Q4 2021: 2) and 24 workovers (Q4 2021: 35) completed, with swabbing continuing across the Onshore and West Coast assets

·    Recently acquired PS-4 asset smoothly transitioned into the Onshore portfolio, with RCPs to enhance production on the asset continuing into Q2, followed by two new wells in H2

·    Installation of the 31 Supervisory, Control and Data Acquisition (“SCADA”) units on our Tier 1 wells in WD-5/6 now complete (covering 50% of land production), with initial indications of lower volatility from these wells through better performance optimisation and quicker response times to well issues

·    Solid operational performance despite impact of COVID-19 on human resource capabilities and resultant equipment uptime

Q1 2022 Financial Highlights

·    Average realisation of US$83.1/bbl (Q1 2021: US$52.3/bbl) 

·    Gross quarterly revenues (unaudited) increased 52% year-on-year to US$21.9m (Q1 2021: US$14.4m)

·    Owing to higher realised prices, Supplemental Petroleum Taxes (“SPT”) of US$2.0m (equivalent to 9% of gross revenues) will be payable in April 2022 with respect to onshore and offshore production during Q1 2022

·    Cash balance of US$17.5m (unaudited) as at 31 March 2022, reflecting strong operating cash generated in Q1 2022 of US$5.5m (Q4 2021: US$3.9m, Q1 2021: US$2.7m) offset by the following material cash outflows:

–      Hedge payments of US$1.8m, as a result of the unexpectedly higher oil price

–      Capital expenditure of c.US$1.7m

–      Tax payments of US$2.5m including Q4 2021 SPT, Q1 2022 Petroleum Profits Taxes and Unemployment Levy 

–      Annual prepayments of US$0.5m (such as insurance) which arise in Q1 of the financial year

·    Average operating break-even for Q1 2022 was c. US$31.1/bbl (unaudited) compared to US$25.8/bbl for Q1 2021. While this was expected, lower sales volumes created upward pressure on the breakeven

·    The Company forecasts an increase on the usual operating breakeven to c.US$31.5/bbl for FY 2022 – as planned, to support medium term growth through increased technical and intellectual capacity

·    Base production for 2022 – before execution of the growth strategy – is expected to be 2,900-3,100 bopd (2021: 3,006 bopd).  However, the Company believes that successful execution of the growth strategy via the planned drilling programme, acquisitions and other initiatives, are likely to significantly enhance production volumes and cash generation in the medium term.

Growth Strategy and Onshore Drilling Programme

Management is focused on refining its growth strategy, geared towards increasing scale and returns as it builds on its existing solid production and cashflow base.  The recently established Technical Committee, comprising two board members and three high-quality independent experts, have helped management refine and prioritise its existing opportunity set to focus on risk-mitigated prospects capable of being delivered with the Company’s existing financial and operational resources to increase scale and optimise returns.  It has set ambitious but deliverable growth targets, and the resumption of onshore drilling is the first part of this scaling up process. The decision not to participate further in the NWD process (detailed further below) reflects management’s focus on profiling opportunities to determine whether they fit into this risk-mitigated framework. The Galeota opportunity continues to provide the potential for a step change in scale, and to cornerstone long-term growth plans. Management will continue to look to enhance scale and returns through acquisitions, participating in new licencing rounds and further developing existing properties.

Jeremy Bridglalsingh, Chief Executive Officer, commented:

“Trinity’s core business remains robust – our reservoirs are performing in line with expectations, and once we are able to deploy human resource with less COVID-related restrictions we anticipate returning to usual production capacity.

“We look forward to the resumption of drilling which will include high angle, horizontal and deeper wells.  While more complex, with higher risk, these wells will have the potential to increase the cumulative number of barrels recovered per dollar of capex invested, and could change the economic paradigm of onshore drilling very positively.

“Furthermore, we remain excited by the prospect of farming down Galeota, allowing this asset to become a more meaningful contributor to production and cash flow in the medium to long term.

“We remain confident that the Government understands the requirement for fiscal reform, despite the near-term outlook for crude oil prices, in order to accelerate the country-wide development of oil and gas resources and to stimulate development of a more robust independent sector in Trinidad. We understand that the Government’s deliberations over tax reform, specifically in relation to SPT, are ongoing, and we look forward to news on this matter in the near term with keen interest.

“We have a resilient, growing business, and are focused on optimising returns from our assets. We are determined to build on the strong foundations in place as we execute against our plans for the next stage of Trinity’s development, and we look forward to updating the market across all activities in due course.”

Trinity is looking to increase production with more complex, higher risk wells in order to change for the better the economics of the onshore drilling. There is little doubt that this is needed, partly due to Covid production has been at best  stable but at least revenues have increased but less impressive is the rise in breakeven costs. 

Accordingly at a time when the oil price has rocketed the shares have traded in a narrow range, at todays 144p it is 41p off the high for the year and only 20p from the years low, going forward those economics need to improve as they look like they are trying to do, management action looks to be doing the right thing. 

United Oil & Gas 

United Oil & Gas has announces a quarterly production update for the first quarter (Q1) of 2022.

·      Q1 2022 production averaged 1,567 boepd (1,267 bopd oil and 300 boepd gas) net to United, in line with H1 2022 guidance of 1,500-1,650 boepd

·      The first well in the 2022 drilling campaign, the ASD-2 development well, started production at the end of March

·      ASV-1X exploration well has commenced drilling; this is the second well of the five-well 2022 drilling campaign

All of United’s production for the period was from United’s 22% non-operating interest in the Abu Sennan licence, Egypt, which is operated by Kuwait Energy Egypt (KEE). This data will vary quarter on quarter as development, appraisal and exploration operations continue.

The ASV-1X exploration well commenced drilling on the 14 April targeting mean recoverable resources estimated by United at c.2.6 mmbbls gross. The primary targets are sandstone Abu Roash “C” (ARC) reservoirs, similar to those currently in production at the Al Jahraa field. The target for this well is in a fault-bounded structure in the east of the licence. This is the largest undrilled ARC structure on the Abu Sennan licence. The ARC is currently in production from a number of fields (Al Jahraa, ASZ, ASX, ASD, El Salmiya) along a proven trend in the north of the licence area. Success in this reservoir at ASV-1X would extend the play to the south and east, potentially de-risking additional prospects in this area for future drilling targets. The well will also penetrate the Kharita reservoir as a stacked secondary target. The well is expected to be drilled and completed in approximately two months.

Not much to add here as the 1Q production was in line with guidance for H1 which itself hasn’t been changed. The ASV-1X exploration well has been spudded targeting c.2.6 mmbbls gross in itself a substantial structure and hopefully de-risking future targets. 

I think that whilst I appreciate that the rationalisation of UOG is creditable and leaves it with a solid canvas, the give away is the comment above that says that ‘All of United’s production for the period was from United’s 22% non-operating interest in the Abu Sennan licence, Egypt’. With Jamaica still I think some way away, UOG shares which have halved so far year on year may need something a bit more exciting than just the Egypt production to make things happen…

Arrow Exploration

Arrow has announced a further update on the Rio Cravo Este-2 well (“RCE-2 well”) on the Tapir Block in the Llanos Basin of Colombia.

The RCE-2 well was spud on 2 April 2022. The well is targeting a large, three-way fault-bounded structure with multiple high-quality reservoir objectives.

As of 14 April, the RCE-2 well was successfully drilled to a total depth of 9,674 feet (True Vertical Depth) and penetrated targeted formations at optimal structural elevations. Cumulative net pay approaches 80 feet over five separate known producing horizons.

The casing of the well was completed on 18 April, and cementing is expected to be completed on 20 April, followed by a thorough production testing program. Testing is expected to take approximately five days per zone.

Marshall Abbott, CEO of Arrow commented:

“From the data we have, several of the pay zones are attractive and like the RCE-1 well, we believe more than one pay zone will be productive.”

This looks like very good news indeed but clearly has still got to be proven after the testing programme which only starts tomorrow. In only a few months on the market Arrow continues to look very impressive indeed and I very much like what I see.

IOG

Just a reminder that tomorrow sees the presentation to private investors by the IOG management. I am excited that I have been invited and very much look forward to catching up with all those in attendance, the invitation details are below.

www.iog.co.uk/investors/private-investor-evening/

And finally…

In the FA Cup semi finals Liverpool beat the Noisy Neighbours and will play Chelsea in the final who beat the Eagles.

Liverpool is back in action in the Prem tonight as they welcome the Red Devils to fortress Anfield. In what used to be a big fixture it is no longer the case and with United bringing a depleted squad it could be a bloodbath. One of those will be Cristiano Ronaldo who with his partner Georgina Rodriguez announced that their baby boy had died at the weekend, his twin sister has survived the birth. RIP

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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