Malcy’s Blog – Oil price, DGOC, JOG, Jadestone, President, Hurricane & finally

WTI $65.01 +$1.15, Brent $68.56 +$1.29, Diff -$3.55 +14c, NG $2.91 -5c, UKNG (June) 59.26p +3.76p

By Malcolm Graham-Wood

Oil price

Another good day for oil as the month comes to a close even if it is a touch lower today. The reason is that economic data from the US continues to pile on and with 1Q GDP of 6.4% and yesterday’s jobless claims falling by 13/- to 553/- markets, certainly over there were very positive.

Diversified Gas & Oil 

DGO has announced the $135 million conditional acquisition of certain Cotton Valley upstream assets and related facilities primarily in the state of Louisiana from Indigo Minerals, and also an operations and trading update for the quarter ended 31 March 2021. The Acquisition represents the first for the Company in its newly identified “Central” Regional Focus Area where it expects to replicate its proven business model on an expanded opportunity set. Expect more deals here as it looks like there is more availability, indeed it could get as big as the Appalachian portfolio. 

The purchase price is $135MM (gross; estimated $115MM net purchase price after customary purchase price adjustments) which gives a  ~2.9x multiple on ~$40MM of Adjusted EBITDA (Hedged) before anticipated synergies. Very importantly the deal is 13% accretive to the Company’s 2020 Adjusted EBITDA which I like and  it delivers a PV10 of ‘~$175MM as of 1 March 2021 effective date and based on 16 April 2021 NYMEX strip price’.

Here’s how the numbers for the deal stack up. Proved-Developed-Producing reserves of ~50 MMBoe (~305 Bcfe) and  current production of ~16 MBoepd (~95 MMcfepd) includes ~780 net operated wells and it benefits from Gulf Coast pricing driving higher realisations.

Unsurprisingly, DGOC are retaining key field employees to streamline integration and Smarter Asset Management and of course it is a strategic entry into the prolific, gas-producing Cotton Valley/Haynesville area. Maybe even more importantly, it is the strategic relevance of a new basin step-out which includes producing areas within Louisiana, Texas, Oklahoma and Arkansas and should provide a robust opportunity set for further acquisitions. In particular it is highly compatible with roll-up strategy leveraging scale and geographic density to drive efficiencies.

This deal has significant scope and enhances ability to optimise capital allocation across multiple regions as dictated by the prevailing M&A environment or other economic or operational factors and thus broadens the appeal of the company dramatically. 

It is worth noting that the deal provides a similar size geographical footprint to Diversified’s existing Appalachia region, similar asset characteristics, industry supportive regulatory environments and the substantial existing infrastructure complements a low-operating cost structure as one might expect from DGOC. 

The deal has been financed by borrowing on the Revolving Credit Facility and gives a pro forma consolidated Net Debt / Adjusted EBITDA unchanged at 2.4xon the transaction effective date of 1 March 2021 with an anticipated closing in late May 2021.

As for the operations and trading update, average net daily production of 102 MBoepd (612 MMcfepd) of which 73% is conventional (75 MBoepd; 448 MMcfepd) and 27% is unconventional (27 MBoepd; 164 MMcfepd) and adjusted average net daily production (“Adjusted Production”) of 105 MBoepd, 3% higher for identifiable, temporary and primarily winter-weather related downtime with  72% conventional (76 MBoepd; 454 MMcfepd) and 28% unconventional (29 MBoepd; 174 MMcfepd).

This all produces a Q1’21 Adjusted EBITDA of ~$78MM  (hedged) contributing to Cash Margin of 52% and a total unit cash expense of $7.86/Boe ($7.66/Boe on Adjusted Production (“Adjusted”)).  Base LOE of $2.63/Boe ($2.57/Boe, Adjusted) gives total operating expenses of $6.13/Boe ($5.98/Boe, Adjusted) and total recurring administrative expense of $1.73/Boe ($1.68/Boe, Adjusted). 

Net Debt / Adjusted EBITDA of ~2.3x and available liquidity of $204MM which means they have the powder to make more deals particularly if they can do a deal involving Oaktree. Having said that yet again they have stepped up to the mark on the pay-out front with a Q1’21 dividend of 4.00¢/share, payable on 24 September 2021 (ex-dividend date of 2 September 2021).

Commenting on these accomplishments, CEO Rusty Hutson, Jr. said:

“Over the past four years as a listed company, I shared my vision for expanding the Diversified mission with its emphasis on cash flow and tangible shareholder returns into other producing regions across the country. Our commitment to acquiring cash-generative assets and retaining the talented men and women who operate those assets establishes a highly transferable business model. Our strategic expansion into a new producing region turns vision to reality and marks a key milestone in our development. The expansion also provides significant runway for us to replicate our success in Appalachia: reducing unit expenses, improving margins and optimising production.

“Our new regional focus area covers a multi-state area in a similar size footprint to Appalachia, and meets our expansion criteria in terms of asset quality, infrastructure, market dynamics, opportunity set and supportive regulatory environment. This first strategic acquisition outside of Appalachia also reflects our continued commitment to a consistent asset profile and valuation while affording us expanded value-accretive roll-up opportunities in this new region that will enable us to quickly build scale and drive efficiencies. Our financial and operational strengths continue to uniquely position Diversified to capitalise on current market conditions as the PDP buyer of choice.

“I’d also like to commend our field team on their continued commitment and diligence through the first quarter and its harsh winter climate. Despite the challenging environment, our team continued to deliver strong financial performance through the quarter with continued strong Cash Margins. As detailed in our recently released second Sustainability Report, we also made significant progress enhancing our sustainability practices as we seek to optimise the stewardship of our assets in line with the global energy transition. I’m proud of what we’ve already accomplished, and look forward to working with our team of dedicated professionals to further build on this success as we responsibly enlarge the Diversified footprint.”

With its excellent portfolio, top quality management and a new area to grow in and maybe with partners, there is much upside for DGO and the shares should go back up to and overtake the 131p high before long.

Jersey Oil & Gas

JOG has announced the introduction of a Carbon Policy as they recognise that ‘ commitment to a sustainable and lower-carbon energy future is central to delivering its vision’.  The management of carbon emissions and the commitment to low-carbon targets and initiatives in the production of oil and gas are integral to JOG’s operational objectives, risk management, corporate structure, company values and culture.

The Carbon Policy confirms JOG’s commitment to risk-managed growth, which will involve reducing its carbon footprint to the lowest possible levels for the benefit of its shareholders and other stakeholders. Through this Carbon Policy, as well as the strategies and programmes that stem from it, JOG will seek to position itself as an oil and gas company leading in the energy transition on the UKCS.

The Carbon Policy applies to all of JOG’s current assets through the development phase and into production and will potentially be applied through the addition of other assets, if and when acquired. JOG has developed a number of comprehensive targets, summarised below:

Scope 1, Scope 2 and material Scope 3 emissions will be identified through the scrutiny of JOG’s operational activity both offshore and onshore. This includes JOG’s supply and customer chains as it evolves into an active UKCS operator.

Emissions will be recorded and reported in line with all applicable UK emissions related legislation and in line with the recommendations of the Taskforce for Climate-Related Financial Disclosures (TCFD) on an annual basis from 2021.

All existing JOG operations to be carbon neutral from the point of first oil for Scope 1 and 2 emissions.

Source the largest possible percentage of renewable power in the energy mix when electrifying from shore, where this demonstrably presents the best lifecycle emissions profile and asset value creation.

Andrew Benitz, CEO of Jersey Oil & Gas, commented:

“I am very pleased to announce the adoption by JOG of this important Carbon Policy as part of our ongoing risk management. Through its implementation, we will be contributing to the energy transition and to global net zero ambitions. We understand that responsibly sourced hydrocarbons will be fundamental to a successful global energy transition ensuring vital energy supply during the period. JOG is committed to differentiating itself as a sustainable and responsible 21st century energy company. This Carbon Policy is central to the delivery of that ambition.”

JOG are cleverly leading the pack of those energy companies who have realised that a low-carbon future is important and this policy has many important parts to it. Like Equinor and Lundin have done successfully in Norway, it is going down the route of power from shore with platform electrification, indeed they may be the first facility in the UKCS to be fully electrified.

JOG are putting in place policies one might expect from a much larger company, leading the pack in a new age of low carbon development and energy transition in general. Like most, the company believe that hydrocarbons will be a critical part of global energy supply for a long time to come and as WoodMack said recently, we will still need oil but only the best barrels will come to market.

Jadestone Energy

Jadestone has announced that it has executed a sale and purchase agreement with SapuraOMV Upstream Sdn. Bhd, to acquire SapuraOMV’s interest in Peninsular Malaysia, for a total initial headline cash consideration of US$9 million, to be funded from the Company’s cash resources, and certain subsequent contingent payments.

The deal establishes a new operating presence for Jadestone in Malaysia which adds immediate cash flow from around 6,000 barrels oil equivalent per day of low operating cost production, on a net working interest basis, of which over 90% is oil. It increases the Company’s 2P reserves by 34%, adding 12.5 million barrels oil equivalent of net working interest 2P reserves, based on the Company’s best estimate 2P reserves production profile.

In addition it provides upside potential through reservoir optimisation opportunities, additional infill wells and cost efficiencies, and is thus ‘an excellent fit with Jadestone’s capabilities and field operating philosophy’.

As per the Production Sharing Contracts, the Company is to undertake the abandonment of facilities and wells at the end of the contract period or production, whichever is earlier. The abandonment of facilities is funded through a cess fund arrangement, accumulated during the production phase, while the abandonment of the wells will be cost recovered via petroleum operations.

Paul Blakeley, President and CEO commented:

“I am delighted to add these Peninsular Malaysia assets to the Jadestone portfolio.  We have always viewed Malaysia as a highly prospective jurisdiction for upstream investment, and have been looking for the right entry opportunity.  We see this Acquisition as a high margin tuck-in, which meets our investment criteria, and sets the stage for us to establish operating credentials in-country while we continue pursuing more materiality and growth through our acquisition and development led strategy.

 “We are very pleased to work with SapuraOMV on this transaction.  Both companies are focusing their portfolios on core strengths – SapuraOMV on discovered gas resources, and Jadestone on near-term cash generating producing assets, such as the East Piatu, West Belumut and East Belumut fields.  They are a perfect fit with our strategy, and further bolster our ability to generate quick cycle returns for shareholders.

 “By our estimate, the Acquisition will add 12.5 million barrels oil equivalent of 2P reserves, increasing total Group reserves by over 30%.  Production will increase by 50% over the mid point of our 2021 guidance, and with the immediate add of cashflow from a high-value stream of 6,000 barrels oil equivalent per day, we are forecasting rapid payback, and therefore believe the Acquisition will be value accretive to the business within the year. 

 “We are excited by the potential for follow-on investment as well, and see significant running room, particularly in the East Belumut field, and will explore the option to conduct further infill drilling in the near term.  As always, the potential to add value through follow-on investment is a key part of our acquisition criteria, and features alongside our usual priorities to drive cost efficiency wherever possible, and strive for continuous improvement in how we operate.”

I listened to the conference call and will probably add more after speaking to the management again, today has been full of calls. However it does seem to make a lot of sense even if the tax bloke lost me at hello. The significant add to both production by a half, and 2P reserves by a third, ups the cashflow and whilst it is a new jurisdiction Jadestone clearly like Malaysia.

Knowing that the company look at almost everything for sale in the region makes me happy that they have snapped up this little gem with some alacrity and for good reasons and whilst I am quite surprised that the shares have been such a poor performer of late, this has rightly kickstarted the process and 80p should be the very minimum short term target with twice the low of 45p the next stop. After that I expect good results, further acquisitions and delivery of targets to take the shares well above 100p, this is a class act with top management and a fine portfolio and I’m sure it won’t let the grass grow under its feet.

President Energy

President provides another operational update with regard to certain activities in the Rio Negro Province, Argentina. The gas well LB-1002, Las Bases field successfully completed with initial production levels 30% better than anticipated and has now been successfully completed with a total perforated interval of 5 metres (16 feet) in the lower Centenario 5 and 6 intervals without any form of stimulation.

These intervals were not in the primary target, nor expected to be productive at the time of well planning and are therefore somewhat of a bonus. Production was stable at some 55,000 m3/d of gas (1.94 MMsft/d or circa 323 boepd), a 30% increase versus pre-drill and post-drill estimates of 40,000 m3/d. Pressure remained robust through the test with no formation water identified. It is expected that the well will be on stream by the end of next week.

Remaining to be tested is the main target, the Centenario 3 section, a known productive and thicker pay interval higher up the hole. President will first produce from the lower Centenario 5 and 6 sections and use the data to further improve understanding of the Las Bases field.
For illustration, using the prevailing spot gas price of US$4 MMBtu, the tested production levels would generate income net to President per month after relevant opex of some US$200k per month.

Peter Levine, Chairman, commented
“There is understandably significant investor interest in the progress of the much discussed exploration farm-out in Paraguay, in respect of which I continue to urge patience given the time it can take for a state energy company to complete requisite authorities now documentation has been largely completed.
“However, it is important to keep in mind that we are, relative to our size, a significant and successful operational company as once again demonstrated by the continued progress set out in this announcement. We do not take each progression in operations on the ground as some side show to be taken for granted and ignored. Each step has challenges to navigate.
“Exciting and potentially transformational exploration is great and of value to have in our portfolio but it is the continued progress in our core activities driven by the hard work of our people on the ground that will deliver a substantial improvement in the financial position and prospects of President in 2021 compared with last year.”

Hurricane Energy

Hurricane has updated on the previously announced stakeholder engagement process and discloses operational and financial projections which have been shared with an ad hoc group of bondholders, holding in aggregate approximately 69% by value of the Company’s $230 million convertible bonds due 24 July 2022 as part of business planning, financing and balance sheet restructuring discussions.

As part of this process, in recent months, the Company has been engaging with the Ad Hoc Committee.  Hurricane can now announce that it has entered into a lock-up agreement with the Ad Hoc Committee, pursuant to which the Ad Hoc Committee agrees to support a transaction that will materially deleverage the Company’s balance sheet, enhance its liquidity position and extend its debt maturity profile, thereby providing Hurricane with the required financial flexibility to pursue a revised business strategy.

The Company will execute a debt for equity conversion, which entails (amongst other things) a $50 million release of the principal amount outstanding under the Convertible Bonds in exchange for the issue of ordinary shares in the Company comprising 95% of the fully diluted pro forma equity of the Company immediately following the Restructuring.

As if that wasn’t enough of a kick in the teeth for shareholders then it goes on, ‘The Company will pursue a revised business strategy which contemplates (i) an extended production case (which would see production from the Lancaster 205/21a-6 well (the “P6 well”) continue until its economic limit is reached) and (ii) if supported by the Bondholders in the future, an opportunity for subsequent investments in the Lancaster field (notably a potential P8 production well drilled during the summer weather window in 2022’.

Antony Maris, Chief Executive Officer, commented:

“This has been a difficult period for Hurricane and its stakeholders. Following the significant downgrade to Lancaster Field reserves and future production profiles, coupled with oil price volatility, current financial projections show we will not be in a position to repay our convertible bonds at maturity from Lancaster Field cash flows. Significant time and effort has been focused on all available technical, financial and commercial options and, after careful consideration, we believe that implementation of the proposed Restructuring will deliver the best possible outcome. We acknowledge that this proposed course of action entails significant dilution for our existing shareholders, but it marks an important and necessary step in the Company’s efforts to secure a viable capital structure.”

You really couldn’t make it up,  a lot of companies would give their eye teeth for 11,000 b/d of light oil at $68 a barrel and many shareholders and commentators including me are saying how did it get to this turn of events. I was clearly wrong in a big way and whilst I am always happy to plead mea culpa I am not convinced that I had it that wrong when the plans for HUR were so substantial. Maybe when the board were being so ruthless in despatching the founding executives it may have been a trifle hasty….

And finally…

Last night was semi finals time in the Boropa Cup, Europe’s equivalent of the Haribo Cup. The Red Devils hosted Roma and were shocked to be 1-2 down but fought back and ran out 6-2 winners. The Gooners were also down by 2-0 at Villareal but at least got a valuable away goal to go back 2-1 for the second leg.

In the Prem over this Bank Holiday weekend there is a full fixture list with one or two tasty fixtures. Tonight sees the Saints host the Foxes and tomorrow the Noisy Neighbours go to the Eagles, the Seagulls host Leeds, the West London derby where the Cottagers go up the Kings Road to Chelski and Villa go to the Toffees. On Sunday the Magpies host the Gooners, the Blades to to Spurs and in the game of the weekend Liverpool go to the Theatre of Dreams. Monday sees the Baggies v Wolves derby and the clarets derby between Burnley and the Hammers is on.

A big horseracing weekend as in the UK it’s the 1,000 and 2,000 Guineas at Newmarket kicking off the Classics and in the US it’s the Kentucky Derby at Churchill Downs in Louisville, Kentucky.

It’s the Portuguese GP at the Algarve International Circuit, Portimao this weekend and if we have learned anything from the season so far is that it is no longer a one car and one constructor in the race for the title

(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 blog

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