Malcy’s Blog – Oil price, Diversified Energy Company, Union Jack Oil, SDX Energy & finally

WTI (Dec) $88.96 +$2.49, Brent (Jan) $95.99 +$2.32, Diff -$7.03 -17c

Author @mgrahamwood

USNG (Dec) $5.87 -36c, UKNG (Dec) 237.9p -13.1p, TTF (Dec) €102.0 -€79c.

Oil price

Whilst the end of week rally in oil and markets in general didn’t mean that oil finished in the black the US inflation figures plus the Chinese relaxation on Covid regulations keeps the kettle boiling. I remain pretty sure that as and when the Chinese economy picks up demand for crude oil will surely follow. The second largest economy in the world and the thirstiest is poised and ready to rumble, 2Q ’23 might be the time to pounce, no time to be short of oil and MbS would surely say.

The Baker Hughes Rig Count for last week came in at up 9 units to 779 overall and also for oil up 9 to 622.

Diversified Energy Company

Diversified has announced it is trading in line with expectations and provided the following operations and trading update for the quarter ended 30 September 2022.

Recent Strategic Highlights

•     Declared 3Q22  dividend of 4.375¢  per share, an annualised increase of ~3%  

•     Announced share repurchase program for up to 10% of outstanding shares

◦     Purchased ~8 million shares since announcement

◦     Acquired shares at attractive value given the strength of the US dollar

•     Closed $210 million acquisition of ConocoPhillips assets, increasing Central Region operational scale

•     Closed $215 million net ABS securitisation, Diversified’s fourth securitization in 2022

•     Converted the revolving Credit Facility to a Sustainability-Linked Loan (“SLL”)

◦     Completed its semi-annual redetermination with a borrowing base of $250 million

•     Published an updated Asset Retirement Supplement with an illustrative 50-year model

◦     Generates significant cash flow to cover current  plugging liabilities

◦     Illustrates potential ~$5 billion of dividends (base and excess) equal to ~4x current market capitalisation

3Q22 Operating and Financial Highlights

•     Average production rate of 135 Mboepd (808 MMcfepd)

◦     Pro Forma exit rate of 144 Mboepd (862 MMcfepd) including ConocoPhillips assets

•     Realised 50% Cash Margin(a) (76% Unhedged Cash Margin); >20% free cash flow yield

•     Recent hedging has increased 2023 and 2024 average natural gas hedge price by 8% and 4%, respectively

•     Substantially all borrowings are fully amortising in fixed-rate notes with a weighted average coupon of 5.7%

•     2.2x Net Debt / Adjusted EBITDA leverage ratio(c) as of 30 September 2022, pro forma for recent acquisitions

•     ~$400 million of current liquidity(d) after ABS issuance and Fall redetermination

Recent ESG Highlights

•     Awarded Gold Standard from United Nations Oil and Gas Methane Partnership (“OGMP 2.0”)

•     Next LVL Energy becoming a regional leader in asset retirement and on track to exceed goals

◦     Retired 150 wells through 3Q22, exceeding full-year 2021 retirements by 10%

◦     Performing third-party work with independent operators and state agencies

•     Completed handheld emissions surveys of >99% of operated Appalachian assets, ahead of original commitment timetable of mid-2023

◦     Conducted ~60,300 unique emissions surveys of Appalachian assets, including repeat surveys on approximately 75% of sites surveyed

◦     Achieved consistent rate of no detectable emissions after survey completion on ~90% of assets, with repairs being prioritised based on emissions rates

•     Completed LiDAR aerial surveillance over 9,000 miles of midstream, repairing ~75% of verified leaks and progressing additional repairs

◦     Aerial surveillance included 850 miles of repeat flyovers to support asset inspections following extreme flooding in the state of Kentucky

Rusty Hutson, Jr., CEO of Diversified, commented:

“I am pleased to announce an increase to our quarterly dividend reflective of strong asset performance, higher commodity prices and consistent cash margins.  Our unique, yet simple, business model continues to deliver tangible and sustainable returns amidst volatile capital markets. In addition to our dividend and to capitalize on the strength of the US dollar, we also acquired approximately eight million shares under our recently announced share repurchase program that enhance shareholder returns.

Having closed our fourth ABS transaction this year and completed our semi-annual borrowing base redetermination, we have nearly $400 million of liquidity available for accretive acquisitions as we remain nimble in dynamic market conditions.  

In addition to our success integrating and optimising our new Central Region assets, I am pleased with the progress we are making as we integrate of our Next LVL asset retirement business.  Our commitment to vertical integration will allow us efficiently retire our own wells while also generating third party revenues that can effectively offset the cash impact of asset retirement activities. Importantly, our Next LVL team will become a leader focused on process optimisation, innovation and application technology to drive cost efficiencies and safe, effective results.” 

DEC continues to deliver, its model is straightforward and has been proven since it came to this market, the strategy of acretive acquisitions is proven time and time again. The model makes for increasing production, 135 Mboepd in Q3 increasing to 144 at the quarters exit as the Conoco deal feeds in. 

Opex rose slightly but on the back of higher gas prices and is still low and gives sector beating cash margins staying over 50%. The 20% fcf yield remains a highly positive metric, it ticks a lot of boxes and with successful hedging increasing gas prices in 2023 by 8% and in 2024 by some 4% means that the company has been able to increase the 3Q dividend to 4.375c as well as buying back some 8m shares with more to do. 

It is worth looking at just how attractive DEC shares are, especially when compared to its peer group. On the dividend front the company reminds us that it has the potential to deliver ~$5 billion of dividends equal to ~4x current market capitalisation which significantly proves the point, as does the point made above by using the strong dollar to buy in undervalued shares. 

Also the strong cash flow covers current plugging liabilities and the asset retirement performance is making significant progress with its ‘illustrative’ 50-year model along with the Next LVL team where market dominance is expected. 

I remain positive that the company are delivering in all areas, I expect more acquisitions and therefore more ABS securitisations which will yet again firm up the base. This in turn funds fcf, dividend payments and buy-backs and gives me confidence that the shares will perform via both capital and income returns, holders should be delighted.  

Union Jack Oil

Union Jack has announced that material landmark net revenues of US$11,000,000 have been achieved from the Wressle hydrocarbon development, located within licences PEDL180 and PEDL182, in North Lincolnshire on the western margin of the Humber Basin. Union Jack holds a 40% economic interest in this development.


·    Landmark US$11,000,000 revenues generated to Union Jack since re-commencement of production at Wressle on 19 August 2021

·    Well continues to produce under natural flow with zero water cut

·    Site upgrades ongoing and gas monetisation plan in place for both Ashover Grit and Penistone Flags reservoirs

·    Union Jack continues to be cash flow positive covering all G&A, OPEX and contracted or planned CAPEX costs, including any drilling activities or work programme commitments for 2023 and into 2024

·    At 11 November 2022, cash balances, short- term receivables and liquid investments stood at over £10,800,000

·    Unaudited Q3 2022 accounts show a further profitable period for the Company

·    Unaudited revenues from 1 January 2022 to date are in-excess of £7,900,000 (Audited 2021: £1,894,875)

·    Debt free

·    Maiden Special Dividend of 0.8 pence per Ordinary share announced

·    Share buy-back programme initiated, boosting Earnings per Share

Executive Chairman of Union Jack, David Bramhill, commented:

The revenues of in-excess of US$11,000,000 from the Wressle development continue to bolster the Company’s Balance Sheet.

“Since the last production update, another impressive performance from the Wressle-1 well has been recorded and the trend, as seen throughout 2022 remains positive.

“Cash balances are expanding significantly on a monthly basis and we are funded for G&A, OPEX and contracted or planned CAPEX costs, including any drilling activities or work programme commitments, for 2023 and into 2024.

“We are pleased to have announced a maiden special dividend of 0.8 pence per ordinary share, payable on 16 December 2022, as well as the commencement of a share buy-back programme where the Company controls the number of shares to be bought, within the authorities approved at the Annual General Meeting in June 2022.

“Your Company has achieved a number of significant milestones during 2022, which include a strengthened balance sheet, cash generation, profitability, and an upgraded reserve and resource base.

“We have high expectations that this strong performance will continue for the foreseeable future.”

This is yet more exceptional news for both Union Jack and its shareholders, revenues on this scale are funding all operational and capex costs and have also made for the buy-back and dividend payments. 

Going forward it also funds site upgrades and monetisation plans for both Ashover Grit and Penistone Flags reservoirs, not to mention the financial cushion it gives for the rest of the portfolio, accordingly I am extremely confident that the UJO share price should be substantially higher than not just today’s 34p but also the year’s high of 53p. 

SDX Energy

SDX has announced a successful two well drilling campaign in Morocco that opens up a new producing area. Further wells are planned in Morocco for 2023 to drive production and revenue growth.

In Morocco, the Company announces two discoveries from the recently completed SAK-1 and KSR-20 wells.  The SAK-1 well has already been connected to the Company’s infrastructure and testing results indicate that in place volumes will be on the higher side of the pre-drill P50 estimate of 0.44 bcf.  Crucially, the well opens a new production area to the north-west of the Company’s historical producing area, with several other follow-on prospects identified within the SAK cluster.

The KSR-20 well has also discovered gas in this well-known area and is currently undergoing a pressure build up test.  The well will be put on production as soon as permitting and tie in are completed and an announcement on anticipated in place volumes will be made in due course.

Following these successes, and the identification of further similar drillable prospects, the Company plans to expand its drilling operations in 2023.  To date, over 70 prospects have been identified on the portion of Moroccan acreage that is covered by high-quality 3D seismic, of which 25 have been high-graded and total around 20 bcf P50 EUR unrisked. 

Mark Reid, CEO of SDX, commented:

“We are pleased with the results of both the SAK-1 and KSR-20 wells.  In addition to opening a new play fairway with numerous follow-on drillable targets, the wells will contribute immediately to production and revenue growth in an area where demand and gas pricing is robust. Morocco remains a key area of potential growth for SDX and we look forward to planning further drilling in 2023. I would also like to add my thanks to our partner ONHYM for the provision of the excellent drilling team and the ONHYM 525 rig which was used to great effect during the campaign.”

I’m afraid that going forward as they say, announcements like this just do not coupe the moutarde. The disaster of the behaviour of some of the major shareholders in the last 18 months has resulted in a new shareholder base and some management changes,  whilst these are good they don’t go far enough and there is much still to do at SDX.

This means a cleanout of these Augean stables which I am sure that Jay will do, for a start it needs a big hitting CFO with the ability to raise proper, and I mean proper money as well as a strategy to completely change the asset base. 

Accordingly this RNS about a couple of wells, whilst good in their own right, does not signal anything pertinent for SDX in the future, any recommendation on the shares must be suspended for the time being, but if investors are looking for a signal it is the appointment of Jay Bhattacherjee as Chairman, he is  not there to cling on to old SDX. 

And finally…

The weekend started with the England Women losing the World Cup Final, down to 14 players after a sending off after 18 mins they fought back and it was nip and tuck at the end but lost 34-31.

Elsewhere in the mens game, Ireland beat Fiji, Italy beat the Wallabies, England beat Japan, Wlaes beat the Pumas and Scotland lost to the All Blacks.

In the T20 World Cup Final England beat Pakistan and whilst never safe they stayed up with events in the light rain.

In the Prem the Bees beat the Noisy Neighbours at the Emptihad, the Cherries beat the Toffees, Liverpool beat the Saints, Forest won against the Eagles, Spurs beat Leeds, the Hammers lost to the Foxes, the Magpies beat Chelsea, Wolves lost at home to the Gooners, the Seagulls lost to the Villa and the Red Devils won at the Cottage.

That makes the Gooners top of the table and at Christmas so we are all now off to the World Cup, next home fixture is on Boxing Day.

In the Brazilian GP George Russell won for the first time as Mercedes took 1st and 2nd with Carlos Sainz 3rd. More interestingly was the action of our resident spoilt brat, you know who I mean, who was told by his team to ‘let cheka through’ as he had done to him but oh no, your Dutch kid wasn’t even giving up 6th place to a teammate who had let him through earlier in the race. He must work Tuesday Wednesday and Thursdays…

Author @mgrahamwood

Disclaimer & Declaration of Interest
The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. The writer may or may not hold investments in the companies under discussion.

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