Malcy’s Blog – Oil price, Challenger Energy, Victoria Oil & Gas, Eco (Atlantic) Oil & Gas, Pharos Energy, Helium One & finally

WTI $83.57 +76c, Brent $83.72 +6c, Diff -$15c, -$1.36, NG $5.43 -35c, UKNG 180.0p -14.64p

By Malcolm Graham-Wood

Oil price

Oil just faltered a bit last week and no great surprise that it is having a breather around these levels, WTI was down 19 cents and Brent $1.81, after the December expiry the differential has narrowed but usually bounces back. Reasons for the weakness don’t change much at the moment, with Putin releasing more gas that price has fallen and there is less switching into oil for power generation.

Also those Covid worries in Russia and China are simmering and have probably been responsible for some money managers taking the top off their crude oil holdings, they will be back. Opec+ meets on Thursday and at the moment one must assume that they will not change policy and thus release the 400/- b/d. Finally the Chinese Government has been selling some products down from the SPR to smooth the market.

Challenger Energy Group

Challenger has announced results to the end of June 2021, a very busy, indeed complicated period of time.

As the company say that as at the date of this report (31 October 2021), the Company’s financial position can be expressed in summary terms as: $3 million of cash resources ($2.4 million if working capital funds in Trinidad are excluded); ongoing monthly overhead in the order of $200,000 per month (with no further one-off expenses to come); Trinidadian operations that are approximately cashflow breakeven, and on course to become cash-flow generative in 2022; and total liabilities (payables, borrowings and other) of approximately $22m million comprising:

(i) approximately $12 million remaining to be paid in respect of the drilling of Perseverance-1, (ii) approximately $2.5 million due to various suppliers in Trinidad and Tobago in respect of both legacy payables and the Saffron-2 well, (iii) approximately $6.5 million representing the full amount of various legacy licencing and other payables in Trinidad and Tobago (albeit partially disputed and of which $4.5 million can be avoided by the forfeiture of certain non-productive assets), and (iv) approximately $0.8 million in respect of outstanding convertible notes not due until the end of 2023.

The counterparties to the majority of the payables referred to in item (i) and (ii) – mainly various suppliers, contractors and financiers – have worked collaboratively with the Company over the past months to agree various rearrangements, payment stand-stills, and interim partial payment plans so as to afford the Company time to pursue its broader business agenda. This process is continuing, with discussions ongoing in relation to a creditor restructuring coupled with a recapitalisation plan.

However, as noted in the recently published 2020 Annual Report, the Company’s ability to meet all of its anticipated obligations over the 12 months from the date of the 2020 Annual Report is dependent on this outcome – that is, successfully completion of a process to definitively address the outstanding payables / liabilities position and secure additional funding for ongoing operations and work-programs in 2022, and in so doing place the Company on a stable, debt-free footing for the future.  It should be noted that if the Company is unsuccessful in achieving its restructuring and recapitalisation plan there is a risk to the Company continuing as a going concern. – further information on going concern is set out in Note 1 to these Interim Accounts.

As noted above, the Company is presently operating with a balance sheet characterised by an unacceptably high level of historic liabilities and payables. The immediate priority during the remainder of 2021 is for this to be addressed.

However, beyond this immediate hurdle, the Company has a clear opportunity to rebuild value, particularly in the context of continued rising oil prices. The current level of (significantly reduced) corporate overhead means that the Company, if unburdened of its current payables overhang should be able to operate on a self-sustaining basis in 2022, relying on just the existing baseline production,.

Beyond this, the Company has clear work programs defined over the coming years on its core producing assets in Trinidad. Executing those work programs will require capital expenditure, but the timing and quantum of that capital expenditure is discretionary, and that capital expenditure is expected to result in increased production. Execution of these work programs and production results in line with expectations could see the addition of 300 – 500 bopd production over the period 2022-2023 which, assuming $65 per barrel realised oil price, could see the Company’s business generating significant operating cash flows for reinvestment into continued production growth.

Beyond this, incremental upside value can be achieved through a successful Saffron development in Trinidad, a successful WNZ development in Suriname, expanded in-fill drilling work program in existing fields, and successful farm-out arrangements in each of The Bahamas and Uruguay.

Eytan Uliel Chief Executive Officer commented:

I very much wish my inaugural reports to shareholders would have been in the context of more positive business outcomes, but unfortunately the Company is labouring from the poor technical results and cost overruns of two successive drilling campaigns, as well as the assumption of debts and unpaid liabilities incurred by the previous management of Columbus. Each of these situations in isolation would, in the ordinary course of events, be manageable, but in combination present a significant burden to overcome, further exacerbated by the circumstances and complications prevailing over the last 18 months – including the legal challenge by environmental groups in The Bahamas, and the persistent adverse impacts of Covid-19. The inability thus far to offset these negative outcomes with positive developments elsewhere in the broader business portfolio means that the Company is now in a position where over the near-term it will need to pursue a creditor restructuring and recapitalisation plan.

The Board expects to be able to complete this plan, which, if successful should result in the Company being well positioned for the future, with a largely debt-free balance sheet and a portfolio of assets in active production, and a rising oil price environment. Definitively dealing with matters in the balance of 2021 will mean that Challenger Energy will then have a clear “runway” in 2022 to focus on the core business of any hydrocarbon company: maintaining and enhancing existing production, finding new sources of oil, and then growing portfolio wide production in a way that is both profitable and cashflow generative. As I commented in the 2020 Annual Report, I hope that once we have completed the task of clearing away the legacy of the past 18 months, 2022 can mark the first steps in restoring value in this Company. We will update shareholders as we progress toward that objective.

It has undoubtedly been a difficult year for your Company, and most definitely not what shareholders had hoped for. In this context, on behalf of the Board and staff of Challenger Energy, I would especially like to thank shareholders for their continued support.

The comments from Eytan Uliel above speak volumes about the 18 months the company has had and where it goes from here. Historically speaking, the fact that the Bahamas well didn’t come in had a more than proportional effect and there is no doubt that the new management did not have the time or the money to dilute its effects. 

Under those circumstances the new team have been working hard to catch up in all these areas and the resume from the CEO assesses that well with a good sprinkling of honesty. There is no doubt that they have the makings of  portfolio and he has a good record of financing companies, on this basis and with the caveats he mentioned in forefront of shareholders minds, I think that if it were me I would give him the benefit of the doubt. 

Victoria Oil & Gas

Interims and an update from VOG today, average daily Logbaba field gross gas sales rate increased by 10% to   5.3 MMscf/d (six months to 30 June 2020: 4.8 MMscf/d), 952 MMscf of gross gas sold from Logbaba (six months to 30 June 2020: 881 MMscf) and two existing industrial customers increased demand during the period

·          Well La-108 tied in and put on production on 15 February 2021. The well produced a cumulative 0.467 Bcf before it was shut-in on 6 June 2021 to perform a pressure build up (“PBU”), and (post-period) additional perforations will be added to the well after which it will be returned to production

Financial Highlights revealed US$7.1 million Revenue (six months to 30 June 2020: US$12.6 million), adjusted EBITDA loss of US$0.4 million (six months to 30 June 2020: EBITDA loss of US$0.8 million), US$0.6 million cash generated from operating activities (six months to 30 June 2020: US$0.3 million utilised) with US$12.1 million Net Debt position (at 31 December 2020: US$12.8 million).

Corporate Highlights included Gaz du Cameroun S.A. signed a settlement agreement with ENEO Cameroon S.A. on 16 April 2021 for approximately US$5 million gross. GDC received payment of US$5.1 million gross from ENEO in full and final settlement in early June 2021, Unsecured loan note of GBP1.25 million entered into with Hadron Master Fund (“Hadron”) on 8 April 2021 and Unsecured loan note instrument of US$7.5 million entered into with Meridian Capital (HK) Limited (“Meridian”) on 18 June 2021.

Since the end of June daily average gross gas sales rate for Q3 2021 of 5.0 MMscf/d (Q2 2021: 5.4 MMscf/d) of natural gas plus gross 3,800 bbls (Q2 21: 4,468 bbls) condensate was produced safely and offloaded to industrial customers.

Q3 sales, traditionally lower than Q2 because of the holiday season, were reduced temporarily by several factors: a number of customers experienced interruptions to their operations, there were a number of maintenance shutdowns, and GDC turned off supply to some long-aged debtors. Constructive discussions continue with these debtors to recover these debts. Q3 2021 gas sales were however 6.5% higher than Q3 2020 following an increase in demand from existing customers.

Cumulative production from the field passed 20 Bcf during the quarter, a significant achievement for GDC, which still remains the only operator onshore Cameroon, providing a vital fuel supply to Douala, the industrial engine of the country.

It is a major achievement to have dismissed the UNCITRAL arbitration hearing – before it commenced – through amicable settlement talks with RSM

The Company has made material progress on the selection and preparation of a drilling site for the Matanda exploration well, and civil engineering works on the site and site access will commence in Q4 2021

Well La-108, brought into production in February from just the lower sands in the well, remains shut in (and has been since June 2021) and we continue to observe the pressure build-up. We have unanimous partner approval to add perforations to the upper sands and this work is now in progress

VOG has also had to pull itself up by its straps but the new management team who have worked their proverbial socks off this year have much to commend them. With a number of corporate deals needed settling and the ‘normal’ operational difficulties in-country made worse by Covid ensuring working from thousands of miles away I think that VOG might be a very interesting thought for next year. 

Eco (Atlantic) Oil & Gas

Firstly the Sapote-1 result, Eco received, on Saturday 30 October, a detailed update from JHI Associates Inc. that ExxonMobil has successfully and safely drilled the Sapote-1 well on the Canje Block, to a depth of 6,759 meters (22,172 ft), in 2,549 meters (8,362 ft) of water.

The well recorded hydrocarbon shows while drilling, and in the logging sequence, in a deeper interval than anticipated, but had no shows in the upper primary objective horizon. With sidewall coring and wireline logging complete, ExxonMobil will now work to define the reservoir properties, including porosity and permeability, and the cored samples will be analysed for hydrocarbons.

On its primary asset in Guyana, the Orinduik Block, the JV partners are currently advancing toward target selection on the Block. The partnership has used state-of-the-art processing technology to merge its seismic data sets and to incorporate regional well results into target selections. The teams are using conservative and proven sciences to define sweet light oil drilling targets, likely within the proven Cretaceous section. The partnership hopes to establish firm targets in the near term and advance towards drilling.  Eco and the JV Partners have already delivered two substantial oil discoveries on the Orinduik Block on the northernmost quadrant of the Block and have worked diligently to define the parameters and identifiers related to this heavy oil field discovery.

Orinduik continues to offer significant upside. The eastern section of the Block is closer to the established Liza oil trend than any other Block. ExxonMobil will next drill in 2021 the Fangtooth-1 well just north and down dip of Orinduik on the Stabroek Block. This well is very close to Orinduik and will test some of the deeper sections. The partnership is focused on the careful selection of locations able to drill a number of stacked or multiple target sections with the opportunity to yield several hundred million barrels. The eastern border of the Orinduik Block is adjacent to and up dip from multiple ExxonMobil discoveries and down dip from the proven light oil discovered in the Kanuku Block, South of Orinduik and towards the continent.

Colin Kinley, Co-Founder and COO of Eco Atlantic, commented: 

“We are very focused on careful selection of the next target to drill on Orinduik. The process has taken longer than we would have liked with prolongation through reprocessing and Covid-19 constraints. However, each additional well drilled in the Basin, both commercially developed or drilled and abandoned, adds to our understanding of the area. We, and our partners, remain committed to good practice in the well location selection. We are fully funded for our share of the next well and are pushing the Operator, towards a committed location, defined drilling date and rig contract.”

Gil Holzman, President and CEO commented: 

“We are very proud of our accomplishments in 2021. We have managed to grow and progress our assets portfolio in both Guyana and Namibia and, importantly, have also managed to maintain and strengthen the Company’s financial position through strict cost controls. The Company has also negotiated a capital investment into treasury from Africa Oil Corp. and Charlestown Energy Partners from New York.

“The Company has remained active as always and we managed to create a flow of catalysts to our shareholders through both drilling campaigns and other corporate activities. With all the activities offshore Guyana and Namibia and with additional corporate initiatives we are busy with, the stream of catalysts is expected to continue throughout the end of 2021 and into 2022 and onwards.

“Eco has also seeded a renewable energy arm that is being managed and driven by a team of industry experts and through strategic partnerships.

“We are very encouraged by the latest well results in Sapote-1. The results, once defined, should warrant additional exploration wells to test the deeper sections where the Sapote oil was present. We remain confident that our past investment in JHI will generate additional value for our shareholders over the longer term in the exciting Canje Block. As a shareholder in JHI and given their strong financial situation, we have no obligation to commit any capital towards future drilling plans at Canje.

“Eco continues to be active in the market from a technical and corporate perspective. While our technical teams look to define targets and push for drilling in Orinduik, and further our exploration in Namibia with our new licenses, we are still very active corporately and look to increase shareholder value through corporate and portfolio additions as well as through the drill bit.

Exasperating as it must have been in the last year or so in Orinduik it looks like it may be turning the corner there and of course there are opportunities in Namibia as well. The former may be made better by the Fangtooth well and the latter by Graf and Venus, all to be spudded this year. Free of Tullow and with a number of really sizeable opportunities the upside is getting closer at long last for Eco and todays mark-down on a well with little direct interest to them is surely a cracking buying opportunity. 

Pharos Energy

Pharos has announced Egyptian Cabinet approval of the Third Amendment of its El Fayum Concession Agreement. The approved terms, already announced on 30 March 2021, include both an increase of the cost recovery petroleum percentage and an extension of the exploration term of three-and-a-half years.

The Prime Ministerial announcement stated that, in its meeting on Thursday 28 October, the Egyptian Cabinet approved amendments to the fiscal terms of five petroleum concession agreements, including El Fayum. These amendments are designed to encourage new investments in existing exploration and development areas, aimed at maintaining and increasing production rates and optimising resources, to the mutual benefit of Egypt and the international companies.

The El Fayum Third Amendment agreement, which includes an increase of the cost recovery petroleum percentage and a three-and-a-half-years extension to the exploration licence term, was approved by the Egyptian General Petroleum Corporation’s (EGPC) Main Board in March 2021. The Cabinet approval obtained on Thursday is a key milestone in the process towards Parliamentary approval, before final Presidential ratification and signature of the Third Amendment by all relevant parties.

The improved fiscal terms are backdated to November 2020, increasing the contractor share of revenue from c.42% to c.50% and lowering the development project break-even while in full cost recovery mode.  

Ratification of the El Fayum Third Amendment is one of the condition precedents to the farm-out of a 55% share of Pharos’ interest in the El Fayum Concession and the North Beni Suef Concession to IPR, as announced on 15 September 2021.

The UK Circular for this farm-out transaction will soon be posted out to shareholders. The Pharos shareholder vote on the IPR transaction is still anticipated prior to year-end.

Ed Story, President and Chief Executive Officer, commented:

“We are delighted that the El Fayum Third Amendment has been approved by the Egyptian Cabinet, which encourages investment into this Concession to increase production rates for the mutual benefits of Egypt and Pharos and our partners.

The enhancements enshrined in the Third Amendment are set to deliver a lower break-even price per barrel and enhanced, earlier cash flow from the producing fields.

Approval of this Amendment will now move forward to its final phase, ratification by the Parliament and signature of the President.”

Pharos worked very hard for this deal and even then it was delayed needing a leap of faith for a shareholder base waiting for completion. Now it is a better deal, on better terms and it should repay the faith with the shares languishing at a miserable 20p. I think that when the deal really kicks in the market will see quite how good it is. 

Helium One Global

Helium One has announced the commencement of the Company’s 2D seismic campaign as part of its Phase 2 exploration programme with mobilisation of survey and line clearing crews to its Rukwa Project (100%) in Tanzania.

Commencement of 200 line kilometre 2D seismic campaign targeting northern extensions of known structural highs that act as a focus for helium charge, mobilisation of survey and line clearing crews commenced. Planned acquisition of data across ‘Deep’ targets with the aim of maturing additional drillable prospects for the planned 2022 conventional drilling campaign.

Continued good co-operation between government departments, local communities and Helium One Management has allowed critical seismic work at Rukwa to be fast tracked by the Company. Strengthened management team with appointment of experienced international operators as COO and CFO and this is the start of exciting Phase 2 exploration work on Helium One’s de-risked Rukwa Basin.

David Minchin, Chief Executive Officer, commented:

“We are delighted to commence the 2D seismic campaign as part of the Phase 2 exploration at Rukwa with the mobilisation of 2D seismic over the northern extensions of the Tai and Itumbula structural trends.  Undertaking this campaign within the Rukwa Basin is not without challenge as we moved to get permitting, people and equipment in place ahead of the wet season.  We are pleased to have AGS return as our providers as we recommence our ground exploration activities.

“Sector confidence in Helium One’s projects is demonstrated by our ability to attract top international talent into our team.  Our new COO and CFO have nearly 55 years’ combined experience in various international operational management roles across Africa and Asia.  The appointment of Colin and Chris bring significant experience to our in-country operational team, their knowledge and leadership will allow us to continue to fast-track the development of Helium One’s exploration portfolio as we move towards Phase 2 drilling in 2022.

“We would like to thank government departments and local communities for their continued support in helping us fast track mobilisation of our 2D seismic campaign. We are excited about our Phase 2 programme as we look to build our geological knowledge within the de-risked Rukwa Basin and continue the process of advancing the Rukwa Project towards discovery.”

A crucial time for Helium One ahead and fully primed with new management they are very confident that 2022 and the Phase 2 programme will be a discovery for the Rukwa project…

And finally…

Spurs sacked manager Nuno this morning and are in discussions with former Chelsea boss Conte. Tonight it’s Wolves hosting the Toffees. At the weekend Chelski and the Hammers were top four winners, Liverpool drew with the Seagulls and the Noisy Neighbours lost at the Emptihad to the Eagles.

In the T20 World Cup at the weekend South Africa beat Sri Lanka and England cruised past Australia while yesterday New Zealand beat India and Afghanistan beat Namibia. Today England were put into bat by Sri Lanka and posted 163-4 after a very slow start and Buttler got a  hundred off his last delivery. As I write Sri Lanka are 66-4 after 10 overs.

And in the baseball the Astros beat the Braves in game 5 and go back to Houston for game 6 tomorrow.

The opinions expressed here are those of the author

Malcolm Graham-Wood

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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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