Malcy’s Blog – Oil price, Diversified Energy, Zephyr Energy, Lamprell, President Energy, Prospex Energy & finally

WTI $92.31 +$2.04, Brent $93.27 +$2.16, Diff -$96c +12c, NG $4.57 -32c, UKNG 186.67p -10.33p

By Malcolm Graham-Wood

Oil price

Oil had another good week, WTI rose by $5.49 and Brent $3.24 after the March contract expired and all the usual reasons kept the price simmering. Incredible US jobs data moved markets and the cold weather in the US saw the natural gas price all over the place. Obviously any further activity in The Ukraine would create more geopolitical uncertainty but Germany who buy 40% of their gas from Russia will know where to stand…

Diversified Energy Company

Diversified Energy Company has announce its closing on 4 February 2022 of a sustainability-linked asset backed securitisation (“ABS”) involving certain of its Appalachian assets.  The Assets were previously pledged as collateral under the Company’s Revolving Credit Facility (“RBL”) led by KeyBank National Association and are substantially similar to assets securitised in the Company’s previous ABS transactions. The Company will use the ABS proceeds to reduce its RBL borrowings and create additional liquidity.

Highlights of the transaction include:

•      Attractive key terms

◦  ABS note amount of $365 million ($349 million, net of a certain transaction costs and $12 million restricted cash interest reserve for the Notes that reduces to $8 million in 2Q22).

◦  Fixed coupon of 4.875% (Notes issued at par)

◦  Rating of BBB (Fitch Ratings, Inc.)

◦  Scheduled fully-amortised maturity of November 2030

•      Moody’s ESG Solutions has provided an ESG Assessment on Diversified Energy. The coupon rate on the sustainability-linked financing will be tied to Diversified Energy’s ESG Assessment from Moody’s ESG Solutions.

•      Favourable hedge structure

◦  2022 to 2026 natural gas swaps sold at a weighted average price of $3.34/MMBtu

◦  2027 and 2028 natural gas puts purchased at a strike (floor) price of $3.00/MMBtu

◦  2022 to 2025 NGL swaps sold at a weighted average price of $37.82/bbl

•      Assets constitute 53.7% of Appalachia assets currently pledged under the RBL

◦  Leverage neutral – ABS proceeds reduce outstanding RBL borrowings and increase liquidity

◦  RBL borrowing base of $550 million on the remaining RBL collateral pool

◦      Proforma as of 31 December 2021, liquidity approximates $316 million

 Rusty Hutson, Jr., CEO of the Company, commented:

“We are pleased to close our third ABS note that demonstrates expanding investor support of a financing structure that fits well with the Company’s production-focused strategy. Fully amortising in less than nine years, the ABS structure remains consistent with our stated commitment to systematic debt reduction as we generate strong cash flow.  Having issued ABS notes in both 2019 and 2020 to exceptional investors, we now welcome several new quality institutional investors to the Diversified story.  The increased liquidity with this transaction positions us to further our pursuit of accretive, meaningfully-sized acquisitions without the need to issue new equity, all while maintaining our leverage targets. 

Also, incorporating our ESG score from Moody’s ESG Solutions into the coupon of the notes aligns with our steadfast commitment to improving all aspects of our ESG performance.  We look forward to pursuing additional ABS transactions this year given a favourable commodity price backdrop and increasing investor demand for oil and gas ABS financings underpinned by high-quality assets coupled with a proven operator.”

Things at DEC are in very good nick, demonstrated by the fact that so many high quality investors keep joining the now regular funding rounds as part of the incredibly successful model. The CEO says it all in his statement and whilst I have known the company for many years I found the Capital Markets Day in Houston in November extremely helpful in confirming my view that that model throws off strong cash flow across the board. 

This is possible not least because the company has a truly exceptional control of costs across the board which facilitates the profitable nature of the company and of course provides the ability to reward shareholders with super competitive dividends. Finally, and again back to Houston where we learned quite how hard the company has been working on its ESG credentials and this has been rewarded financially by the Moody’s score leading to further attraction of the notes. All going well and as always I am confident about both capital and income return on offer in the shares.

Zephyr Energy

Zephyr has provided an update on fourth-quarter 2021 (“Q4”) hydrocarbon production from its non-operated asset portfolio in the Williston Basin, North Dakota, U.S.

Williston Basin Production update
Q4 operational production rates from the Company’s Williston Basin portfolio averaged 548 barrels of oil equivalent per day net to Zephyr. In addition, three wells on the Sundance Kid pad were brought online in late December, which added an additional net 106 boepd on an operated basis.
As a result, Zephyr’s existing non-operated portfolio produced at a total run rate of 654 boepd by the
end of Q4. Zephyr sold 43,185 barrels of oil equivalent (“boe”) during Q4, and net sales to Zephyr for the quarter
were broken out as follows:
Oil: 35,895 barrels at an average sales price of $72.34 /bbl
Natural Gas: 19,081 million cubic feet at an average sales price of $5.35 /mcf
Natural Gas Liquids: 5,132 bbls at an average sales price of $56.56 per bbl
(Note: Fourth quarter production volumes and average sales prices figures include field estimates in respect of December 2021 production and sales)

Zephyr began Q4 with interests in 7 non-operated producing wells, with 8 additional wells brought onto initial production by the end of the quarter. Newly producing wells include the Company’s interests in the Sundance Kid wells, which are currently producing on flowback only – production from the pad is expected to further increase when artificial lift is installed in mid-February. An additional 7 wells in the existing portfolio are expected to come on line during the first half of 2022.

Williston Basin Production Outlook
Production from the Company’s non-operated portfolio is expected to further increase over the coming months as additional wells from the existing portfolio are brought online and when the Company’s proposed $36 million acquisition of further non-operated assets in the Williston Basin is completed as expected in mid-February.

On completion of the proposed Acquisition, working interests in 163 additional producing wells will be integrated into Zephyr’s portfolio. The proposed Acquisition has an effective date of 1 December 2021, and cash flows associated with the proposed Acquisition’s December and January production will accrue to Zephyr’s benefit post-closing. In December 2021, production from the proposed Acquisition averaged 1,105 boepd, giving Zephyr’s non-operated business a net pro forma combined run rate of 1,759 boepd at the end of December.

Zephyr has not hedged any production to date. The Company plans to hedge a substantial portion of
the combined non-operated production after completion of the proposed Acquisition.

These numbers from the original investment and reinvested cash flow is more than handy with the Q4 number of 548 boed but the quarter ended at 654 boed from the 15 wells at Williston alone. With layering on of other production this is accretive growth with the Kaiser deal yet to come, this has an effective date of December 1 so that current cash flow accrues to Zephyr post the close.

Sometimes when stocks have incredibly good performance and particularly if that is followed by a deal and a raise the market takes a fresh look at a stock to see if there is significant further growth yet to come. For Zephyr the answer is a resounding yes as the high quality non-operated acreage build is showing ahead of exciting times back at the Paradox. It seems as if the market has forgotten this already successful find and now with dedicated cash flow being lined up to pay for this season’s drilling  

Back down at the 5p level these shares are as cheap as chips and at the risk of repeating myself has one of the best boards in the industry well capable of delivering Zephyr at a share price a lot higher than this. 

Lamprell

Lamprell announces an update on its trading performance ahead of the 31 March publication of its audited financial results for the year ended 31 December 2021.

·    Revenue of USD 389 million, 15% year on year growth

·    Financial performance affected by additional costs associated with significant impacts of COVID-19 on the supply chain and labour availability

·    Backlog at 31 December stood at USD 343 million, the majority of which is scheduled to run off in 2022

·    Over 30% year on year bid pipeline growth to USD 7.9 billion, with circa 60% of opportunities in renewables and a number of award decisions imminent

·    Further funding of the Lamprell Reimagined strategy expected in H1 2022 following successful completion of working capital funding arrangements in 2021

Business update

Lamprell has continued to deliver a good operational performance in 2021, while managing the ongoing challenges of the COVID-19 pandemic. Multiple lockdowns and travel restrictions affected our supply chain and labour availability during the year. Lamprell has been successful in managing pandemic-related disruption effectively, although incremental costs due to reduced productivity and rephasing of work have impacted the Group’s profitability in 2021. The yards continued to operate throughout the period in spite of the impacts of these issues, albeit less efficiently, and the Group made progress on all of its ongoing projects whilst demonstrating excellent safety performance. Group TRIR for the year was 0.10, the best result in the Group’s history.

Renewables

We are currently in the process of completing our third major renewables project, Seagreen.  20 of the 30 jackets have been handed over to client with final deliveries scheduled through Q1 2022. We were pleased to have been selected as a preferred supplier on a major renewables project in January 2022. We are currently finalising the terms of the reservation agreement with a leading offshore wind farm developer ahead of the anticipated full award later in the year. The reservation agreement is an encouraging trend amongst offshore wind developers, flagging limited global engineering and fabrication capacity. With a significant track record in jacket foundations fabrication and an optimised yard set up, Lamprell is a key player in the offshore wind supply chain globally.

Oil & Gas

Our Oil and Gas business unit demonstrated good operational performance in both fabrication and refurbishment of offshore assets for our clients in the Middle East although the projects suffered some impact as a result of the above-mentioned issues arising from COVID-19.  Our services businesses which include operation & maintenance, small projects, and safety services performed well throughout the year and are seeing significant opportunities for growth in the near and medium terms.  The two IMI new build jackup rigs are going through the key equipment installation phase. In 2021, we were successful in winning our first two projects through the Saudi Aramco LTA programme, for the delivery of offshore production deck modules, pipeline and cables in one case and the supply and installation of drilling jackets and well observation platforms in the other. These were our first direct awards from Saudi Aramco and we are pleased to report good progress on both of them. Our rig refurbishment segment benefited from the oil price recovery and has provided a steady flow of work from our long-standing and new customers.  

The IMI facility in Saudi Arabia is progressing despite a period of disruptions during the pandemic. Phased commissioning of certain zones is anticipated to commence in 2022. Lamprell invested USD 85 million in the joint venture to date and will be required to contribute a further USD 55 million over the next two years.

Digital

We also made very good progress with developing our Digital business unit in 2021. We are pleased to have secured crucial partnerships with leading digital investors and developers, Injazat/G42*1 and Akselos*2, which now enable us to progress a variety of ventures. Our yards are already benefiting from robotic welding, which we successfully employed on the Seagreen project in 2021.  We are also making progress with bringing digital twin solutions to our clients, and are currently using this technology on a proprietary lifting frame in the Hamriyah yard.

Financial performance

Subject to audit, revenues in 2021 amounted to USD 389 million. The national lockdowns and travel restrictions early in the year affected our productivity and supply chains resulting in both additional costs as well as rephasing of project delivery schedules. This impacted revenue recognition, whereby certain project milestones were moved to 2022, and affected full year EBITDA. COVID-19 impacts eased in Q2 and Q3 2021 but resumed with the emergence of the Omicron variant in late 2021 and early 2022, when around 1,200 of our staff were in quarantine. Productivity was further affected by adverse weather conditions causing a week-long disruption to our operations.   The Group remained focused on fiscal discipline, retaining the majority of the cost-cutting measures introduced at the start of the pandemic, but the above-mentioned disruptions affected Group financial performance in H2 2021.

Net cash at 31 December 2021 was USD 53 million of which USD 26 million is unrestricted.  

Backlog at 31 December stands at USD 343 million, the majority of which is scheduled to run off in 2022.

Bid pipeline

Following a significant step up in bidding activity in 2021, our total pipeline of opportunities across both of our end markets of renewables and oil & gas grew to USD 7.9 billion at 31 December 2021, from USD 6 billion at the end of 2020.  Renewables pipeline grew to USD 4.6 billion at the end of 2021, from USD 2.5 billion at the end of 2020. This reflects our ability to be involved in high scope bids across the globe, with an increasing number of US-based projects entering our pipeline, a region set for a steep increase in offshore wind energy over the coming decade.

The recovery in oil price has also improved bidding dynamics in Oil & Gas, which currently includes USD 3.3 billion of bid pipeline opportunities. In the past few weeks there has been a number of large-scale offshore awards in the Middle East totalling circa USD 10 billion.  We view this development as an indication of significant pressure on capacity in the near and medium term, which improves our position on a number of outstanding bids and we are actively engaging with potential customers on a range of bids. 

Strategic Progress and Outlook

The Lamprell Reimagined strategy has aligned the Group to the energy transition and opened Lamprell to significant future opportunities across our three business units of Renewables, Oil & Gas and Digital. The Group is now in the process of implementing the strategy through its business and operations.

·    Renewables

In Renewables, where to date our experience has been in jacket foundations for UK offshore wind farms, we are broadening our standing both geographically and in the scope of the services we offer to our clients. Current global fabrication capacity in this rapidly growing industry is limited and over the past three years Lamprell has made continuous incremental investments in its yard to optimise throughput, increase its revenue generating capacity and improve margins. In 2021, the Group has completed a comprehensive review of its fabrication capacity and the Board has approved the first stage of an investment programme aimed at increasing its revenue generation whilst improving margin performance.

·    Oil & Gas

Our Oil and Gas Unit continues to have a differentiated standing with our long-standing clients in the Middle East and through the strategic partnership with Saudi Aramco on the IMI joint venture our goal is to move the centre of gravity for this unit to the Kingdom of Saudi Arabia. We continue to evaluate a number of options to progress this strategy. In Q3 of 2021, we applied for Aramco’s Industrial Investment Programme aimed at enabling localization of technology and industrial infrastructure in the Kingdom of Saudi Arabia.

  ·    Digital

Digitisation and automation of products and services in the energy industry are significant long-term trends. Combining our long-standing operating experience with  complementary skills of our partners has the potential to create a market leading offering that benefits our own business and creates additional revenue streams.  In this regard, our digital focus ranges from company-own solutions in our own yards, aimed at improving safety, efficiency and cost to service offerings for our clients across the energy industry, backed by our Joint Venture partners Injazat/G42. 

Financing

In 2021, the Group took a number of steps to improve its liquidity and alleviate the pressure on its working capital commitments. As such, it successfully secured a USD 45 million working capital facility for the delivery of the two IMI rigs with an option for an additional accordion facility of USD 45 million, currently expected to be agreed in H1 2022, in line with project working capital requirements. It also successfully raised USD 30.1 million through an oversubscribed placing of shares.

The Lamprell Reimagined strategy has aligned the Group with the energy transition and has opened a growing opportunity set in markets with significant barriers to entry. The current bid pipeline consists of more complex high value projects in all its addressable markets and to this end, the Group has identified a number of opportunities to deploy capital across each of its three business units.  Given the Group’s extensive experience gained in serial fabrication over the last 5 years, there is significant scope for yard investment that can materially improve capacity, efficiencies and margin performance on renewables projects. To this end, allocation of capital will be prioritised on value creation, including a rigorous assessment of return on investment. The Group continues to assess its future financing options to deliver its strategy, improve its fabrication capacity and strengthen the Group balance sheet as it seeks to access higher margin, larger scope projects in both renewables and oil and gas end markets. The funding strategy will be influenced by the timing and quantum of new awards over the coming weeks and months and may include additional equity, project specific financing, including small working capital facilities with Saudi banks, and hybrid facilities with a view to complete in H1 2022. 

Christopher McDonald, CEO of Lamprell said: 

“We are pleased to deliver revenue growth for the third year, albeit with continuing impacts of the COVID-19 restrictions on the bottom line. Lamprell is embracing the energy transition with its Lamprell Reimagined strategy, we are very encouraged by the market outlook and bidding dynamics in both our end markets of renewables and oil and gas and the continuing significant growth of our bid pipeline. We are grateful for the support of our shareholders and lending partners in securing the funding for the delivery of our ongoing major projects and look forward to further strengthening our balance sheet in the months to come as we deliver on our growth-defined strategy.”  

 If you made it to the end of the voluminous statement then well done, Lamprell never use one word when two or even three might be better. The bottom line is that Covid-19 impacted quite a lot, not unlike others in the same boat and as often is the case with Lamps the future looks bright if you can see the wood for the trees.

The bidding pipeline is very healthy and if you look at the company’s history you will see that in its rags to riches and back again story now would look like the right time to buy the shares. With the company seemingly at the leading edge of the renewable area and in traditional oil and gas the IMI JV seems to point to Saudi Arabia in the future. 

 The chart looks awful but the prospects are good and if history does repeat itself now is the time to have a look at Lamprell where its exposure to the faster growing parts of the energy sector going forward could easily make for a premium rating when transition justifies it.

President Energy

President has provided an update on its operations.

Salta operations update

Well DP-2001

The first of the wells drilled in the current programme at the Dos Puntitas field, Puesto Guardian Concession is now in production and flowing the first commercial oil from a new well in the Concession for the first time in the last 12 years.

It is early days and the Company is in the process of testing to assess optimum steady state levels and performance. The positive news is that the well is successfully cleaning up and producing 90% oil with little water. Further announcements will be made after the well has been stabilised.

Well DP-2003

The second well in the programme is being tested with results expected to be able to be announced by the end of this week.

Secondary recovery project Puesto Flores Concession, Rio Negro

One of the important objectives in Rio Negro is to mitigate natural production declines in mature fields as well as sweeping as much oil as possible to enhance total recovery factors in a profitable way.

The Company has previously announced a successful pilot waterflood programme in a small part of the field. President has now received a detailed plan from independent experts which is optimistic that a successful secondary recovery campaign to fulfil those key objectives can be achieved. This comprises of both utilising existing wells and drilling new injector wells.

This is not an overnight process nor will there be instantaneous results as with all waterflooding. The Company will now proceed to obtain all necessary consents and make preparations to roll out the project on a step by step basis in the Puesto Flores field. The field work and injection subject to consents is projected to start mid this year with results of the first section of injections likely to be seen in twelve months. It is necessary to review progress and pressure response at each stage.   

President has issued this statement where the waterflooding is the key part, should it go ahead it will bring on significant production and associated revenues that will show that President is still very attractive

 Prospex Energy

Prospex today announces that it has raised £2.395 million before expenses, through the conditional placing and subscription of 68,428,572 New Ordinary Shares of £0.001 each at a price of 3.5 pence per share, a 16.7 percent discount to the closing share price on 4 February 2022.  The fundraising was oversubscribed and supported by existing and new institutional and retail investors, as well as Directors of the Company and is subject to shareholder approval.

Highlights

·    Proceeds of the fundraising will be used to:

o  Acquire 20% of the Selva Field in Italy, more than doubling the company’s current holding from 17% to 37%, estimated to add 2.7 billion cubic feet (“Bcf”) of 2P gas reserves to Prospex’s portfolio

o  Fund the development costs of the Selva project to first gas expected in Q1 2023

·    Full Director participation in the subscription

·    Existing shareholders who have not had the opportunity to participate in the placing, will be able to do so now at the same placing price through Broker Option Shares via Peterhouse Capital Ltd (contact details below) to raise up to a further £0.24 million

·    Proposed removal of pre-emptive rights over 41.3 percent of the enlarged share capital to allow the Company to capitalise on the fast-moving opportunities within the energy sector and advance its existing portfolio

Commenting on the placing, Mark Routh, CEO of Prospex said:

“This placing has exceeded expectations and we have surpassed the minimum amount we needed for Selva from existing and new investors.  We have had full support from our major shareholders and participation from all Board directors and we have closed the placing without issuing any warrants.  It will provide Prospex with the funds needed to significantly increase our interest in the Selva Field in Italy, fund the development costs of that project to first gas and will enable us to fund other opportunities.

“I am particularly pleased to be offering all existing shareholders the opportunity to participate in this placing via the broker option at the same price as the placees in this subscription.  The broker option will be available to existing shareholders until 16:30 on Tuesday 8 February 2022.

“Any extra funds received via the broker option scheme will allow us to accelerate and advance work on the infill well drilling campaign on the El Romeral concession in Spain currently waiting on permits to drill the first three infill wells.  The first two wells to be drilled on two proven gas-bearing structures are expected to bring the generation utilisation of the plant up to full capacity.

“I would like to take this opportunity to thank existing shareholders for their support and welcome our new shareholders as we look to accelerate growth and increase shareholder value.”

I have a great deal of respect for Mark Routh and have seen companies run by him at many stages of existence over the years. It will be interesting to see what happens to Prospex but a raise at a whopping discount in order to invest even more money in Italy takes quite a bit of grappling with but let’s see how it goes. 

And finally…

In the FA Cup 4th round there was one big-time upset as Boreham Wood won at the Cherries but another great performance by Forest sent cup holders the Foxes packing and Boro won 7-8 on pens at Old Trafford.

In the 6 Nations, France was mighty impressive as expected but may not be as big a win as some might have expected. Ireland cruised past Wales and England committed hari-kari at Murrayfield and but for Cowan-Dick would have won.

The opinions expressed here are those of the author

Malcolm Graham-Wood

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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