Malcy’s Blog – Oil price, CEG, GKP, San Leon, Southern, Lamprell & finally

WTI $104.27 -$1.92, Brent $110.05 -$1.69, Diff -$5.76 +23c.

Author @mgrahamwood

USNG $6.24 -62c, UKNG 196.9p -11.9p, TTF €6.133.00 -13c

Oil price

Oil fell again after Jerome Powell of the Fed admitted that they may have misjudged inflation leading to a possible recession in the US. What a surprise and those clowns at the ECB and the Bank of England are no better.

However it might be fortunate that the woes of the economy come when oil supply is tight, had they been growing fast there isnt enough oil to go around. Opec+ next Thursday when they will roll over the new quotas I suspect.

Challenger Energy Group- Scoop in Uruguay…

I have been keeping an eye on some licence awards by ANCAP, the state hydrocarbon administration in Uruguay, the details of which can be found on their website which is ancap.com.uy 

Hot off the press, last night ANCAP announced it has just awarded three blocks ‘for oil and gas exploration in the Uruguayan sea which includes the drilling of a fourth exploratory well’. Shell bid for blocks OFF-2 and OFF-7 and Apache (APA) bid for blocks OFF-2 and OFF-6. After a submission round Shell were awarded both the blocks they wanted and Apache got OFF-7. 

Shell are obliged on their two blocks to an exploration program that comprises the evaluation of the oil geology and prospective resources, investment in 3D, gravimetric and magnetometric modelling and information licensing whilst Apache went all out to secure their entry into Uruguay by undertaking to drill an deep-water exploratory well in the initial period of four years, as well as the evaluation of the geology of oil and prospective resources, and the licensing of information.

So where do Challenger come into this? Well, whilst OFF-2, OFF-6 and OFF-7 have now just been awarded to majors, the OFF-1 licence was awarded to Challenger in May of 2020, at a time when no-one was paying attention due to the Covid-19 pandemic. Since that time there has been an extended period on non-activity, largely as a result of the pandemic, during which formal signature of the licence was pending. But following final approvals being granted by decree of the President of Uruguay, the AREA OFF-1 licence was formally signed with Challenger on 25 May 2022. Consequently, the first 4-year exploration period under Challenger’s licence has just commenced, so will run largely in parallel to Shell and Apache’s.

But, whereas Shell and Apache have committed big dollars to secure their licences (ANCAP stated in their press release the value of work bid by these two multinationals is north of US$200 million), Challenger’s minimum work obligation during this initial period is relatively modest, low-cost reprocessing and reinterpretation of selected historical 2D seismic data. Challenger has no drilling or 3D obligation in the initial phase. The Company’s work program and budget for the balance of 2022 and into 2023 includes sufficient allocation of funds to progress the agree minimum work obligation on OFF-1, and the Company has previously advised that the total minimum work program cost for them across 4 years is less than $1 million.

Why the huge uplift in value between what Challenger agreed to in May 2020, and what Shell and Apache have signed up to now? Simple: Namibia. Recent discoveries made by Total (the Venus well) and Shell (the Graff well) in Namibia in January and February of this year have been huge, and both companies are already drilling or planning follow up wells, while others such as GALP are also lining up for Namibian wells in the near future. And Uruguay is the direct conjugate margin of Namibia, so the success in Namibia has sparked huge interest in what is on offer across the Atlantic in Uruguay.

In the case of Challenger in particular, experts tell me that the OFF-1 play system is directly analogous to the recent prolific, conjugate margin discoveries made offshore Namibia by Total and Shell, where reported multi-billion-barrel Cretaceous turbidite reservoirs have been encountered. 

Now for the interesting part, OFF-1 contains a management estimated resource potential exceeding 1 billion barrels of oil equivalent recoverable (BBOE), based on current mapping from multiple exploration plays and leads in relatively shallow waters, and with significant upside running room. This estimate is corroborated by formal resource estimates provided by ANCAP of 1.36 BBOE as a P50 expected ultimate recoverable resource.

Challenger has received multiple indications of interest in relation to potential partnerships for the AREA OFF-1 licence. The Company intends to explore such possibilities, with a view to potentially expediting a 3D seismic acquisition into the first licence exploration period. Further updates will be provided as and when appropriate.

So, it is like Challenger has wound up owning a prime block of land in the best street in the post code and the neighbours are committed to spending bundles on renovations. My advice to Challenger is to sit and wait, the price of this real estate looks to be going only one way and they have the best seats in the house…

Gulf Keystone Petroleum

Ahead of today’s 2022 Annual General Meeting, Gulf Keystone, a leading independent operator and producer in the Kurdistan Region of Iraq, provides an operational and corporate update.

Operational

·      Continued strong focus on safety, with no Lost Time Incident recorded for over 240 days

·      Gross average production in 2022 year to date of c.44,900 bopd; gross average production in June of c.45,900 bopd, as at 22 June 2022

·      Year to date gross average production impacted by:

 SH-12 reperforated and brought back online in June at a reduced rate after being shut-in at the beginning of the year

 SH-14 production remains constrained following acid stimulation earlier in the year

 SH-15 brought online in April after being drilled in record time and is currently producing towards the lower end of the anticipated range

·      While the industry is currently experiencing equipment lead time pressures in a supply constrained market, we are continuing to review options to accelerate installation of water handling facilities that would enable further production ramp up from existing wells

·      Progressing well workover and intervention programme to optimise near-term production 

Financial

·      Significant cash flow generation in 2022 year to date, with $348.8 million ($273.1 million net to GKP) received from the Kurdistan Regional Government (“KRG”) for crude oil sales and revenue arrears. The outstanding arrears balance has been fully recovered

·      $190 million of dividends declared in 2022, a sector-leading dividend yield of 26% based on GKP’s closing price on 22 June 2022

 $115 million paid to shareholders to date; additional $75 million, including the previously declared ordinary and special dividends, to be paid in July following approval at AGM

·      Robust balance sheet, with a cash balance of $247.0 million at 23 June 2022

Outlook

·      Tightened 2022 gross average production guidance to 44,000 – 47,000 bopd

·      Gross Opex guidance of $2.9-$3.3/bbl remains unchanged

·      Net capital expenditure guidance of $85-$95 million remains unchanged

·      While timing of FDP approval remains uncertain, we continue to progress towards sanction with the MNR. The Company is preparing to resume drilling to ramp-up production from the Jurassic reservoir and will update capital expenditure guidance in due course

·      We continue to monitor the long running dispute between the Federal Iraqi Government and the KRG on the management of oil and gas assets in Kurdistan. Our operations currently remain unaffected and we continue to work closely with the KRG, our advisers and other stakeholders to protect the Company’s interests

·      Remain focused on balancing investment in growth with shareholder returns, while preserving adequate liquidity:

 Intention to call $100 million bond after the step down in July 2022 of the call premium from 4% to 2% of principal

 Assuming timely payment of invoices and strong oil prices, we expect continuing robust cash flow generation in 2022 providing flexibility to consider further shareholder distributions and an increase in capital expenditure to resume drilling

Jon Harris, Gulf Keystone’s Chief Executive Officer, said:

“Following a year of strong operational and financial performance in 2021, our leverage to the oil price, low-cost production base and focus on capital discipline have continued to drive significant cash flow generation from the Shaikan Field in 2022. We have declared sector-leading dividends of $190 million year to date, $75 million of which is subject to shareholder vote at today’s AGM, while continuing to invest in the high growth potential of the Shaikan Field. We also remain focused on maintaining a robust balance sheet and today we are pleased to announce our intention to call the $100 million outstanding bond, leaving the Company debt free.

Year to date production has averaged c.44,900 bopd. We are prudently managing our wells to avoid traces of water and, as a result, we are tightening 2022 gross production guidance to 44,000 – 47,000 bopd. The installation of water handling facilities will unlock upside production potential and we continue to explore acceleration options in a supply constrained market. In the near-term, we continue to progress our well workover and intervention programme to optimise production. While timing of approval remains uncertain, we also continue to make positive progress on the FDP as we prepare to resume drilling and ramp up production.

Ahead of our AGM later today, I would like to thank our shareholders, employees and other stakeholders in Kurdistan for their continued commitment and support. Together, we are focused on safely delivering the significant value of the Shaikan Field.”

The numbers speak for themselves, despite some minor operational problems at SH-12, SH-14 and SH-15 for various reasons GKP is in a strong cash generating position even though 2022 guidance has been brought down a touch to 44-47/- b/d after 44,900 b/d in the year to date. 

That strong cash generation has seen $273.1m received from the KRG which has led to a cash balance of $247m as at 23rd of June, an imminent cancellation of the $100m bond and declarations of $190m of dividends this year of which $75m is subject to approval by today’s AGM. 

GKP is in a very strong position, like the last time some idea of production increases and when will be appreciated but in the meantime the cash generation and distribution speaks for itself. 

San Leon Energy

San Leon, the independent oil and gas production, development and exploration company focused on Nigeria, provides the following update in relation to the Potential Transaction, as described in the announcement made by the Company on 29 April 2022.

Considerable progress has been made by the Company in progressing the Potential Transaction and the Company is now expecting to publish an AIM admission document  in respect of the Potential Transaction by 8 July 2022, following which point the Company intends to seek the restoration of trading of its ordinary shares on AIM.

However, certain components of the Potential Transaction are required to be completed in the coming weeks and certain key elements, upon which the Potential Transaction is predicated upon, remain outside of the direct control of the Company also need to be progressed. The Board of San Leon (the “Board”) considers that the key items still to be finalised include: (i) documentation of the Proposed Eroton Debt Facilities in relation to the Proposed Eroton Transaction; (ii) the progression and documentation of the Proposed New San Leon Loan Facility; and (iii) the preparation of historical financial information for the year ended 31 December 2021 in respect of ELI, MLPL and the Company. Further details of these matters can be found below.

Following the publication of an Admission Document, the Potential Transaction would still be subject to a number of conditions and other actions, details of which are set out below.

Proposed Eroton Transaction

San Leon has been provided with an update on the progress of the funding for the Proposed Eroton Transaction and has been advised that significant progress has been made with the financing syndicate in relation to the Proposed Eroton Debt Facilities that are required for the Proposed Eroton Transaction to proceed. It is expected by the Board that the drafting of the banking documentation will commence shortly and will move towards agreed form in the coming couple of weeks with execution occurring at a point thereafter and potentially after the publication of the Admission Document.

The Board are of the view that the Proposed Eroton Transaction is important for several reasons, including:

(i)    it underpins the valuation and rationale of the Potential Transaction by delivering, indirectly, to San Leon a far greater interest in OML 18 than is currently held by Eroton;

(ii)   it resolves a series of disputes that have arisen between Eroton and its OML 18 joint venture partner, OML 18 Energy Resource Limited (formerly known as Sahara Field Production Limited) (“Sahara”). Several of these disputes have developed into legal actions, although none are currently being actively pursued, and all legal actions between Eroton and Sahara will be extinguished as part of the Proposed Eroton Transaction, thereby enabling Eroton to focus on the commercial development of this world class oil & gas field; and

(iii)  the Proposed Eroton Debt Facilities enable Eroton’s existing term loan facility agreement (the “Existing Eroton Debt Facility”) with Guaranty Trust Bank Plc to be refinanced.

Accordingly, the Board believe that the Proposed Eroton Transaction is important to Eroton and to the Company.

Potential Transaction update

As previously announced in relation to the Potential Transaction, progress has been made by the Company and its advisers in preparing the necessary transaction documentation, including work on progressing the Admission Document, given that the Potential Transaction will be classified as a reverse takeover under the AIM Rules.

The Admission Document will include audited historical financial information for the three years to 31 December 2021 in relation to MLPL and ELI and will incorporate, by reference, audited historical financial information for the three years to 31 December 2021 for the Company. Substantial progress has been made in respect of compiling this audited historical financial information and the respective auditors and reporting accountants have advised that they expect to finalise their review of the historical financial information in around a week. It is the Company’s intention to publish its audited accounts for the year ended 31 December 2021 (the “SLE 2021 Accounts”) alongside the publication of the Admission Document in early July 2022.

Separate to the Proposed Eroton Debt Facilities, on 29 April 2022, San Leon announced that it was engaging with prospective lenders in respect of the Proposed New San Leon Loan Facility. San Leon is pleased to announce that the Company has since received an indicative proposal for a loan facility which is required to fund certain of its proposed further debt and equity investments in ELI and working capital requirements.  The Company is now working to convert this into a fully documented and executed loan.

At present the publication of the Admission Document remains subject to a number of factors, including, inter alia, the execution of binding contractual documentation, including progressing and competing the Proposed New San Leon Loan Facility, and the completion of the preparation of the historical financial information.  Among other things, when executed, completion of the Potential Transaction is also expected to be subject to various regulatory consents, the approval of San Leon’s shareholders and, in relation to ELI, reorganisation of Midwestern’s indirect equity and debt interests in ELI.  

There can therefore be no guarantee that the Potential Transaction will occur.

A number of actions that are important to the Potential Transaction and the timescales for the execution and completion of such actions, such as the Proposed Eroton Transaction and the Proposed Eroton Debt Facilities are outside of the control of the Company.

Suspension of trading

As previously announced, as part of the Potential Transaction, San Leon would increase its initial indirect economic interest in Eroton from 39.2% to 98.0% and, taking into account the completion of the Proposed Eroton Transaction, San Leon’s initial indirect economic interest in OML 18 would increase from the current 10.58% to 44.1%.

In accordance with the AIM Rules, the Company’s ordinary shares will remain suspended from trading on AIM until such time as: i) the Admission Document and the SLE 2021 Accounts have been published; or (ii) the admission of the Ordinary Shares to trading on AIM is cancelled; or (iii) the Company announces that the Potential Transaction is no longer proceeding and the SLE 2021 Accounts have been published.

Should the Company not be in a position to publish the Admission Document by 8 July 2022 then it is possible that trading in the Company’s shares on AIM will be cancelled.  If trading in the Company’s shares on AIM is cancelled the Board intends to complete the Potential Transaction and seek to have the enlarged group’s shares admitted to trading on AIM later this year.

Oisin Fanning, CEO of San Leon, commented:

“OML 18 has an excellent production history as well as a vast amount of, to date, unrealised potential.  The above series of proposed transactions that we, Eroton and ELI have been progressing for the past year have the ability to be transformational not only for OML 18 but also for San Leon itself and its shareholders.  The Potential Transaction is expected to deliver to San Leon a far greater interest in this world class asset as well as pave the way for better infrastructure enabling more efficient production from the field.  It would be no understatement to say this has been a very challenging and complex undertaking, but I am delighted to say that we have made considerable progress with the Potential Transaction and we now expect to be in a position to publish our Admission Document alongside our report and accounts by 8 July.”

Very much speaks for itself this announcement and another delay is required to complete the paperwork. I remain convinced that ultimately this will make for a substantial payday for what are very patient shareholders. 

Southern Energy Corp

Southern has announced the successful completion of the Placing, as part of the equity financing announced at 17:20 p.m. on 23 June 2022.  

Offering Highlights:

·    Due to strong demand, the size of the Placing in the UK was increased from US$12.5 million to US$13.5 million, and when combined with the US$17.5 million Prospectus Offering the total size of the Offering has increased to US$31.0 million

·    Offering expected to provide additional liquidity to the Company’s Common Shares on both AIM and the TSXV

·    Net proceeds of the Offering to be primarily used to accelerate the initiation of a continuous organic drilling programme at Gwinville, as well as increasing financial flexibility for potential accretive acquisition opportunities

·    Further drilling at Gwinville expected to begin in Q4 2022  

Ian Atkinson, President and CEO of Southern, commented:

“We are delighted to provide this update on the UK Placing regarding our previously announced equity financing, which will raise over c. US$31.0 million for the Company, providing Southern with a strong balance sheet as we finance the business for further, operationally driven growth. This funding will allow us to pursue significant opportunity for accretive acquisitions in our area of expertise and to continue to act nimbly and opportunistically as we execute our growth strategy.

A highly successful placing for Southern after their outstanding drilling programme has provided a great start to Southern’s time in London. Southern has a primary focus on acquiring and developing conventional natural gas and light oil resources in the southeast Gulf States of Mississippi, Louisiana, and East Texas. 

This management team has impressed me as per my recent comments in the blog and I expect much more progress in due course. Also some way of ensuring that all existing shareholders get a chance to participate in raises by way of rights or Open Offer in future should be considered. 

This company is genuinely looking at a move in the Bucket List which is at its interim stage, what performance it has already registered and I would suspect that there is more to come. 

Lamprell- What a mess…

Current trading

The macroeconomic environment has strengthened with oil and gas prices at multi-year highs and significant global demand for offshore wind infrastructure. This strong market backdrop is expected to lead to considerably higher levels of investment by operators in Oil & Gas both in the UK and Middle East. The Group sees significant opportunities, with noticeably increased bidding in both oil & gas and renewables addressable markets. Since the beginning of the year, the bid pipeline has grown to $9.4 billion, with $5.1 billion attributable to renewables and $4.3 billion attributable to Oil & Gas. Engagement with prospective clients remains encouraging with circa $1.4 billion of potential renewables contracts scheduled for award in 2022.

In February 2022, the Group received a limited notice to proceed for the procurement of steel and fabrication of up to five jack-up lift barges with BGMS, an oil and gas contractor based in Saudi Arabia. In March 2022, Lamprell signed a capacity reservation agreement for the Moray West Offshore Wind Farm.  Subject to final investment decision, the full notice to proceed on this project with a value of more than $200 million is expected early in the second half of 2022. In April 2022, the Group also entered into a Memorandum of Understanding (MoU) with NOV, a leading energy services company, to support its delivery of three 1 gigawatt (GW) offshore floating wind farms for Cerulean Winds. The Group has seen an increased interest in reservation agreements for future yard capacity from its customers in offshore wind, and views this as a positive sign of forward planning and addressing capacity pressure in the renewables supply chain. The investment in the new renewables serial production facilities is an important element in the scale-up of our production facilities and a central component of the full award of contract on the Moray West project.

However, current Group performance continues to be affected by the delivery of legacy, low margin projects and insufficient revenue levels as the Group emerges from a prolonged period of low market activity due to the low energy prices and more latterly, the impact of Covid-19. New awards for Lamprell in all of the Group’s end markets over the past two years were below expectations, impacted by Covid-19 and due in part to client concerns regarding the liquidity constraints the Group faces and balance sheet strength in order to support large scale projects.

As a result of the recent reservation agreement and anticipated contract awards, the Group expects 2022 revenue to be in the range of $400-500 million, with $340 million secured for 2022. The Group intends to continue its recently implemented cost savings.

Revenue recognition will be heavily weighted towards the second half of 2022, in line with progress milestones on major projects. Profitability in 2022 may be impacted by the Group’s ability to achieve the 20% profit recognition threshold on any additional contracts secured in the course of 2022. Going forward, the Group expects to deliver a step up in revenue and financial performance from 2023. This will be delivered through the planned strategic renewables yard investment and a stronger balance sheet (assuming the recapitalisation of the balance sheet is successful), which will assist in converting its high quality growth pipeline into higher margin backlog.

I could have published reams of excuses by the board for the situation this really good company has got itself into. How many times have I written, and indeed recently that Lamps is the most cyclical company I look at and on this occasion management might have paid the price.

With the company having always been bailed out by the family in previous crises it was always too easy for management to say that ‘the money will be there’ because it always has been. This time instead of ponying up to the management again they have just said go sort it out or we will take it private, make no mistake that run the right way Lamprell is a  high quality business but eyes have been very much off the ball lately and too much has been taken for granted. One day this will be a business school course in how not to play a cyclical margin v order book play.

And finally…

The test match continues with New Zealand 325-8 at lunchtime on Day 2.

Racing is ablaze with the news of a rift between Frankie Dettori and John Gosden after the former had a handful of shaky rides at Royal Ascot with the owner also pitching in. I have detected some signs of a rift between them when at Epsom recently so all is not well here.

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


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