Malcy’s Blog – Oil price, DGO, Wentworth, President, GKP & Zephyr Energy

WTI $41.51 -$1.25, Brent $44.43 -$1.15, Diff -$2.92 +10c, NG $2.49 -4c

By Malcolm Graham-Wood

Oil price- Tell Laura I loved her…

The pure joy of seeing the Street’s finest not knowing how to react to a set of inventory figures after Hurricane Laura is a magnificent sight, made better as it was indeed forecast, at least here. The stats will be shoddy for a  week or two and those  who think they know what’s going on are currently being pursued by those in white coats.

Firstly there is still 20% of GoM production shut-in which doesn’t help, add to that the fact that around 8m of the 9.4m barrels of stock draw was in the PADD 3 zone, Gulf Coast and you have chaos. Sure gasoline drew 4.3m b’s against a higher production of 9.5m b/d but then as you would expect, having seen the pictures from Texas and Louisiana at the weekend.

In other news, the EIA also produced stats on jet fuel consumption where they said that demand in the US has recovered ‘faster than many other major aviation markets’. Also today’s jobs data was better than expected adding to the modestly better economic data.

Diversified Gas & Oil

DGO has announced that it is to join both the FTSE 250 and the FTSE All Share indices after the close of business on 18th September, effective the 21st September. This is well deserved for DGO who have done nothing wrong since they arrived in London.

Commenting on the Company’s entry into the FTSE 250, CEO, Rusty Hutson, Jr., said:

“I am very pleased to announce that following our move to the Main Market in May 2020, DGO will be joining two important indices: the FTSE 250 and the FTSE All-Share, which we expect will further increase DGO’s market exposure and will broaden our investor base.

“Since listing in London just over three years ago, DGO has consistently delivered accretive growth, becoming the largest independent producer by volume listed on the LSE. DGO’s differentiated business model, focused on low-risk cash flow to underpin reliable quarterly dividends, continues to deliver sustainable growth and value creation. I look forward to welcoming new investors through this index inclusion and to continuing our positive momentum.”

Wentworth Resources

Interims from Wentworth this morning where revenues were $8.3m driven by the long term contracts with the Government of Tanzania. The company has $16.7m of cash and no debt and this performance led to a 20% rise in the dividend making three divvis in the past 12 months and in that period WRL has paid $4.2m back to shareholders. That leaves Wentworth on a highly commendable 8% which should inspire investors.

The company has trimmed 2020 production guidance, ‘marginally’ adjusting down to 60-70 MMscf/d gross due to a slight extension of the rainy season and the Covid-19 restrictions being extended. Having said that the cororally is that the second half should benefit from those effects in reverse.

The underlying production at Mnazi Bay is solid, economic growth for Tanzania is forecast at 5.2% and we should never underestimate the commitment by the Government to deliver ‘universal energy access’ by 2030 which will require significant additional gas resources. The Government has invested substantially in pipeline and power generation infrastructure and a complex grid and transmission system.

The energy mix in country is split 50% gas, 35% hydro and 15% oil and the latter two are firstly unpredictable and secondly sometimes inefficient. Wentworth are a ‘significant partner’ to the Government and it is this which goes a long way to be so positive on the shares. They are on an undemanding rating, they are the ultimate defensive play with their long term Government contract not linked to the oil price and they yield 8%, what on earth is not to like?

President Energy

First news already from the President drilling campaign as they announce preliminary results of the workover of the EV-x1 well which has completed on time and 10% below budget. The preliminary results as to flow and pressure are excellent and ‘materially above’ the company’s P10 scenario at 6.3 MMscft/d of gas, equivalent to 1,050 boepd and downhole pressure robust at 1,300 psi on a 12 mm choke with no water.

Right now it’s a five day test including that of pressure build up and with the well being close to infrastructure production will be ‘at a nominal cost’ and could be onstream by the end of September. This is further good news from PPC which deserves the 9% rise in the share price and much more.

Peter Levine, Chairman, commented

“This is an encouraging preliminary start at a reasonable cost and subject to satisfactory testing underpins what we have been saying for a long time as to the gas potential in Estancia Vieja.

“It is important however to bear in mind that we have the two well drilling programme to come as well as progressing the workover programme, as announced, with drilling on track to commence by the end of this month.

“So, we thus progress, well by well”.

Gulf Keystone Petroleum

With year to date production of 36,272 bopd and 2020 guidance of 35-36,000 bopd the company’s Shaikan field is even now producing at some 25% more than H1 2019. With the 2020 troubles and the rise to production of 55,000 bopd on hold the company have a plan to increase production by 5,000 bopd at the minimal cost of $3m gross.

Whilst the company could go back to its previous higher production relatively quickly it does warn that it would need a combination of improved macro conditions, monthly payments from the KRG back to normal and with backlog settled so we probably shan’t stand on one leg waiting for it to happen. Having said that it does show what the valuation could be if and when it happens.

Costs remain under control, opex per barrel in H1 2020 was $2.6/bbl, below guidance of $2.7 – $3.1/bbl. Operating costs and general and administrative expenses savings of 12% contributed to expense reductions compared to H1 2019, and further savings are expected in H2 2020 with the significant reduction in activity and continuing focus on cost control. Indeed the savage cuts in costs such as drilling teams including ex-pats, does worry me somewhat in terms of how flexible the company could be in terms of returning swiftly. Cash is at  $140 million in a strong balance sheet as at 2 September 2020 and no debt repayment is due until mid-2023.

Zephyr Energy

ZPHR (formerly Rose) updates on the Paradox Basin, Utah where the company have been working with a project team from Utah’s Energy and Geoscience Institute and other parties to assess and perform optimisation analyses for more focused, efficient and less environmentally-impactful  oil production strategies in the Northern Paradox Basin.

This is particularly in the Pennsylvanian Paradox Formation’s Cane Creek shale and adjacent clastic zones and the project is sponsored by the U.S. Department of Energy and its National Energy Technology Laboratory.

Zephyr has announced that, subject to negotiation of final funding terms and permitting, the EGI and UGS have selected Zephyr-leased acreage on which to drill the well.  The Zephyr location was selected for a number of reasons, including the quality of Zephyr’s underlying 3D seismic data which (can be tied into the well results to build a stronger integrated predictive model) as well as a favourable surface location which will be sited on a pre-existing pad. In addition, it is proposed that the test well will be spudded before the end of this year and be funded by the existing DOE grant to EGI.

‘The spudding of this test well would provide multiple benefits to Zephyr – not only will the Company be able to utilise valuable data acquired from the test well, but Zephyr believes that data gained from the well would be highly beneficial to the Company’s continuing farm-in and institutional funding discussions regarding its Paradox acreage’.

Colin Harrington, Zephyr’s Chief Executive Officer, said “I’m delighted by this development which should see the first well spudded on the Company’s Paradox acreage before the end of this calendar year. “The spudding of this test well will be a significant milestone for Zephyr, and the data gained will be of fundamental importance as we move forward with farm-in discussions for our Paradox project.

I would like to thank the DOE, EGI, and UGS for all their efforts to date – we are excited to be partnering and working alongside such respected organisations on this project.

In addition to progressing our Paradox Basin asset, our team continues to evaluate production and development opportunities in the DJ Basin, and we look forward to updating the market on both fronts in the near term.”

With apologies for extensive quotations but the nature of this exciting development for Zephyr shareholders deserves the full Monty. It seems to me, and I suspect the management, that they have finally cracked the code re progressing the Paradox position without causing dilution to shareholders or at the asset level, and this is the first of several positive steps coming in Utah alone.  There can be few better effectively option plays in the London market and this management team is of a superb calibre and is worth following on that basis, Zephyr should go into any diverse energy fund and for such a potential is remarkably low risk.

(The opinions expressed here are those of the author, a columnist for Share Talk.)

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 publication.

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