Malcy’s Blog – Oil price, Diversified Energy Company, Jadestone Energy, President Energy & finally

WTI (Sept) $97.26 +$2.28, Brent (Sept) $106.62 +$2.22, Diff -$9.36 -6c.

Author @mgrahamwood

USNG (Sept) $8.69 -28c, UKNG (Aug) 360.0p -29.9p, TTF (Aug) €202.55 -€19.48.

Oil price

Oil rallied sharply yesterday, the Fed only added the 75 bp’s and the dollar weakened. More importantly the EIA inventory stats showed a clean sweep with crude drawing 4.5m barrels, gasoline 3.3m and distillates 784/-. With the SPR adding 5.6m and refinery runs down 1.5% at 92.2% lifted gasoline out of the equation as the fall in retail price increased demand.

Diversified Energy Company

Diversified has announced that it has entered into a Purchase and Sale Agreement to acquire certain upstream assets and related facilities in Oklahoma and Texas, within the Company’s Central Region, from ConocoPhillips Company.

The Company has posted an Acquisition presentation website at ir.div.energy/presentations.

Central Region Acquisition Highlights

•     Purchase price of  $240 million before customary purchase price adjustments

•     Estimated net price of ~$210 million with a late September closing 

•     Fully financed from existing liquidity

•     Cash margins^(a) of ~70% on estimated Adjusted EBITDA of $82 million^(b)

•     Uplift of ~20% to Diversified’s 2021 Hedged Adjusted EBITDA per share^(c)

•     Acquisition Cost represents a ~2.5x purchase multiple^(d) and PV17 of PDP reserves

•     Pro-forma Net Debt / Adjusted EBITDA of 2.2x^(e) with ~95% of debt in fully amortising notes

•     Consolidated corporate declines unchanged at ~8.5%^(f) 

•     Net production^(g) increase of ~9 MBoepd (~52 MMcfepd; 60% operated), (+6% vs 1Q22 exit rate)

•     Upside available through field level synergies, Smarter Asset Management acreage swaps, non-operated development opportunities

Commenting on the Acquisition, CEO Rusty Hutson, Jr. said:

“I am pleased to announce another strategically-aligned acquisition at a compelling valuation in the Company’s Central Region that reinforces our commitment to create long-term value for shareholders. Financed entirely with existing liquidity, this non-dilutive acquisition represents a compelling opportunity to further scale our Central Region portfolio while maintaining a strong balance sheet. Building on our success in Appalachia, we are excited to increase our holdings within the Central Region that position us to drive greater synergies and unlock additional shareholder value through scale.”

Delivering Significant Per-Share Value on Low Multiples with Non-Dilutive Financing

The Company signed a PSA with the Seller on 27 July 2022 for a purchase price of $240 million. The estimated Acquisition Cost due at Closing of  ~$210 million reflects the estimated customary purchase price adjustments through the close date and represents a ~2.5x Acquisition Price multiple^(d) before any anticipated synergies. The Acquisition highlights Diversified’s ability to execute accretive acquisitions throughout the commodity price cycle.

Diversified is acquiring the Assets unhedged and, upon closing, will evaluate its consolidated hedged levels consistent with its commitment to protect cash flows that underpin its consistent dividend and debt repayment. The Company expects to close the transaction in late September 2022, following customary due diligence. Closing is subject to customary conditions being met, including title an environmental review.

Diversified will finance the Assets with cash on hand and existing availability on its Revolving Credit Facility (“RCF”) resulting in a pro-forma Net Debt / Adjusted EBITDA of 2.2x^(e) (1Q22: 2.2x). After funding the Acquisition, approximately 95% of the Company’s borrowings will exist in fixed-rate, fully amortising and predominantly investment grade rated notes that benefit from hedge-protected cash flows. The Company’s post-acquisition funding liquidity approximates $250 million^(h) before any increase in the Company’s RCF borrowing base for the additional collateral from the Acquisition. Accordingly, the Company expects liquidity to rise with its next borrowing base redetermination scheduled in the fall of 2022.

By financing this Acquisition without new equity and only with existing liquidity, at the current price strip the Company estimates the Acquisition adds ~20% to Diversified’s previously reported 2021 Hedged Adjusted EBITDA per share (2021: $0.43/shr). Combined with the Company’s previously reported acquisition of East Texas Assets in April, the Company increased per share accretion by ~30% vs. 2021 Hedged Adjusted EBITDA per share.

With an effective date of 1 June 2022, the Acquisition adds ~31 MMBoe (186 Bcfe) of net PDP reserves, with a PV10 of ~$297 million, using NYMEX strip pricing as of 25 July 2022. Accordingly, the Purchase Price represents an estimated PDP valuation of PV17. The Assets complement Diversified’s existing portfolio, contributing an estimated Adjusted EBITDA of $82 million^(b) underpinned by high cash operating margins of ~70%^(a) and a modest annual decline of ~8%^(f) that continues to shallow. Including the Acquisition, Diversified’s consolidated corporate decline rate remains industry-leading at approximately 8.5%^(f).

Expanding Presence and Scale in the Central Region

The Acquisition, which includes an interest in ~1,500 producing wells located in Oklahoma and Texas represents Diversified’s sixth major acquisition within the Central Region since May of 2021 and the second acquisition in the Mid-Continent area since mid-2021. The proximity of the Assets to previously acquired Tapstone assets creates further potential to develop operational synergies of scale in the Central Region and benefits from a constructive regulatory environment.

The Company will operate ~60% of the Acquisition’s net production of ~9 MBoepd (52 MMcfepd; ~90% natural gas and NGLs), which represents a 6% increase to Diversified’s 1Q22 exit rate (136 MBoepd; 816 MMcfepd).

The Assets provide high cash operating margins through realised pricing that benefits from low regional commodity differentials and a largely variable expense structure that is consistent with the Company’s other Central Region assets.

•     Total Lease Operating Expense of $1.90-$2.00/Mcfe ($11.40-$12.00/boe)⁽ⁱ⁾

•     Natural Gas pricing differentials of $(0.20)-$(0.30)/MMBtu

•     Production-weighted average well age of 16 years

Consistent with the Company’s asset acquisition strategy, Diversified intends to retain certain ConocoPhillips Company experienced personnel who will complement Diversified’s asset stewardship operating philosophy designed to improve well performance, enhance margins, and lower emissions.

Yet again DEC has delivered an acquisition, this time in the Central Region, of 1,500 producing wells in Oklahoma and Texas and which contain synergies to the previous Tapstone deal. For a net $210m which will be found from existing funds this deal is accretive and the cash flow will ensure the famous DEC dividend is covered.

At the price of $7.75/boe this deal adds $82m of adjusted EBITDA, with cash margins of c.70% which uplift some 20% to Diversified’s 2021 Hedged Adjusted EBITDA per share. The deal will fit in well with the company’s other Central Region assets, as is often the case in these acquisitions fit well with existing assets, drive greater synergies and unlock additional shareholder value through scale. 

An active week already for DEC but no great surprise as they deliver two different deals that still maintain a strong balance sheet that will deliver the promised payouts from structured free cash flows. The shares remain very attractive on both yield and capital growth aspects and will remain well supported at these levels and a great deal higher. 

Jadestone Energy

Jadestone has announced that it has executed a sale and purchase agreement with BP Developments Australia Pty Ltd, to acquire the Seller’s non-operated 16.67% working interest in the Cossack, Wanaea, Lambert, and Hermes oil fields development, offshore Western Australia, for a total initial headline cash consideration of US$20 million, to be funded from the Company’s cash resources, and certain subsequent contingent and decommissioning payments.

 Paul Blakeley, President and CEO commented:

“This acquisition is another example of our strategy in action, acquiring low-cost barrels at less than US$3/bbl, while establishing an entry position into a very high-quality long-life asset with very low decline rates.  We believe that over time we can exercise increasing influence and deploy our skills in mid-life oil field management.  In particular we see material upside potential through infill drilling into reservoirs with very significant oil-in-place and, together with optimisation of operating costs, the life of the producing fields can be extended for several years.  In the near to mid-term, further interests in the asset may become available, over which we would have pre-emption rights.  We will initially participate in the joint venture without any incremental headcount or cost and will fund the acquisition through existing cash resources.

“The acquisition also fits well with our sustainability principles and climate strategy with flaring minimised due to available gas export infrastructure, and we look forward to working with the joint venture partners to further minimise the greenhouse gas footprint of the acquired assets.  We also believe recovery from existing upstream assets should be maximised to provide the resources required to support near-term transition towards a low-carbon future.  In addition, we will fund our share of the forecast decommissioning costs for the assets through early payments, demonstrating our commitment to providing clarity on this important issue for all our stakeholders.”

Highlights

·    A tuck-in acquisition, within Jadestone’s Asia-Pacific core area;

·    Jadestone is acquiring 10.4 mmbbls[1] as at an effective date of 1 January 2020, comprising 1.5 mmbbls of production since the effective date, 5.1 mmbbls of 2P reserves and a further 3.9 mmbbls of 2C resource. Based on a consideration of US$24 million[2], this represents an acquisition cost of ~ US$2.30/bbl. The transaction includes the Seller’s entire 16.67% working interest in the CWLH fields, subsea infrastructure, FPSO, and full abandonment liabilities estimated at US$82 million;

¡ In addition to the consideration, Jadestone will also pay US$41 million upfront into the decommissioning trust fund for the assets.

¡ It is anticipated that, due to an effective date of 1 January 2020, any closing adjustment will significantly offset the initial headline cash consideration and US$41 million decommissioning payment.

¡ Jadestone will make further payments to the decommissioning trust fund via two equal instalments of US$20.5 million payable on or about 31 December 2022 and 31 December 2023.

·    A recent independent expert report1 prepared for the operator of the North West Shelf Oil Project valued a 16.67% stake at approximately US$80 million, based on an effective date of 1 January 2022;

·    Cash flow positive oil production of approximately 2,100 bbls/d net to Jadestone, based on average production from the North West Shelf Oil Project in 2021; 

·    Oil production from the North West Shelf Oil Project is low-sulphur, low-density and commands a premium to Brent;

·    Unit operating costs for the Seller’s interest are estimated at US$22-23/bbl, and would be accretive to the Company’s current unit operating cost guidance for 2022 of US$23-28/bbl;

·    The acquired assets are expected to generate EBITDA of approximately US$40 million in 2023 at a realised oil price of US$100/bbl;

·    Potential to add incremental reserves through infill drilling, targeting unswept oil across all four fields; and

·    Opportunity to extend asset life beyond 2031 (the initial design life of the Okha FPSO).

As usual Jadestone have delivered an acquisition of significant quality through buying a 16.67% stake in the NW Shelf from BP for c.$65m, backdated to January 2020. To these 1.5m barrels of production since then you can add 5.1m b’s of 2P reserves and some 3.9m of 2C resource all of which total $10.4m. 

JSE has done this deal for an acquisition cost of $2.30/bbl and has bought a portfolio of high quality, accretive premium priced barrels with substantial upside within the acreage as well as pre-emption rights to buy some more of the asset should it become available. 

At 95p I would expect to see the shares at least move back up to and above the recent 110p high but for a business with this quality management and able to deliver on an organic and inorganic growth such as Jadestone I would expect a much higher share price.

President Energy

President has provided an update on trading and corporate matters.

Argentina

The three new wells at the Puesto Guardian Concession, Salta Province, Argentina are all on stream and each producing in the range of 125-185 barrels of oil per day. In addition, intervention work is being made on older wells at the Concession to enhance production.

Trading overall in Argentina remains operationally profitable with President generating good free cash flow and exporting oil to the extent possible and appropriate. Domestic oil prices continue to increase with oil prices being in our core Neuquen Basin area presently some $67 per barrel and progressively increasing step by step. The price invoiced by the Company for the export cargo sold in July was US$105.8 per barrel.

Being a US Dollar based business insulates President to a material degree from the high inflation unfortunately suffered in Argentina at present and careful management of Peso balances is being exercised to mitigate exposure.

Louisiana

To maintain and enhance production in Louisiana a gas lift system is currently being installed and implemented with wells expected to be fully operational again in August.

Non-Executive Director

Notwithstanding the above, Trafigura continues as a significant shareholder in President and the parties continue to enjoy a strong and mutually beneficial trading relationship

Peter Levine, Chairman, commented:

“We would like to place on record our thanks to Martin for his services and professionalism towards President throughout his tenure. Our colleagues in Buenos Aires continue unabated to work closely with Martin and Trafigura in Argentina on a day-to-day basis for which we remain grateful.

“Operations continue to progress in Salta and the levels of realized prices achieved when we export is particularly pleasing.”

All is going according to plan operationally at President although the share price should be a great deal higher. Peter Levine has a master plan for that by stepping down and changing the name, we shall see…

And finally…

In a T20 played on a pitch the size of a postage stamp a big score was gong to be crucial and when Buttler and Roy were out early England’s chances didn’t look too clever but man of the season Jonny B and Mo put on enough even the bright young Stubbs for South Africa couldn’t match.

Tonight they are all back on duty again at Cardiff, 1830 hrs.

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