Malcy’s Blog – Oil price, Hurricane, Echo Energy & Union Jack Oil

WTI $39.55 +$2.14, Brent $42.30 +$2.31, Diff -$2.75 +17c, NG $1.78 -4c

By Malcolm Graham-Wood

Oil price

The very fact that Opec+ did what it said it would at the weekend caught the bears by surprise and oil not only ended up on the week, WTI +11.4%, Brent +11.7%, but both are up again this morning albeit modestly. The Opec+ meeting first then, the cartel not only agreed to add one month to the 9.7m b/d deal but also agreed to watch the mavericks ie Iraq and Nigeria for signs of adherence. The communique said that the deal will ‘stabilise the global market’ which has already ‘borne fruits’ of Opec+ action ‘over the course’ and the next meeting will be the Monitoring Committee on June 18th.

Next is a combination of economic news and markets where clearly the experts are being seen off by the retail as indices across the board are on fire. With the US NFP on Friday showing a rise of 2.5m jobs against a whisper of an 8m fall…China crude oil demand is up and for the time being and stocks are coming down in line with expectations. TINA trades and FAANG stocks are driving stocks better and even the oils are seeing buyers from time to time.

Hurricane Energy- A shock but no surprise…

Hurricane has announced that Dr Robert Trice, CEO has resigned, and that Beverley Smith is taking over as Interim CEO. As part of the changes Richard Chaffe is confirmed as CFO, joining the board, whilst Kerogen’s nominated director, Roy Kelly, is replaced by Dr Alan Parsley (Mr Kelly having recently taken a CEO position at Victoria O&G).

With the announcement comes an operational update from the Lancaster EPS where the 6 well has been producing on its own at a steady rate of c.10,300 bopd with an 8% water cut. The company increased the choke size at the weekend, as part of the strategy to incrementally increase production to find the optimum sustainable rate. Production rose to 12,000 bopd, in line with the expected size of step-up increments, which is encouraging. The existing Technical Committee has been formalised and will review all information and findings which will be factored into an updated CPR scheduled to be published before the end of Q1 2021. Part of the technical review will include a reassessment of data collected to date and an examination of all possible reservoir models, for maximum prudency. It seems sensible to take this cautious approach given the market volatility and volatility and the company’s reliance on once source of production.

I think it is fair to say that the market is still out as to whether the play is a success or a failure but I would contend that a year of production demonstrates that this is a material development already. The challenge comes from the fact that the existing well configuration has not delivered production levels this year and therefore as a production company Hurricane has yet to deliver. The well configuration is unfortunate, and it is possible that something as simple as a side-track will get the production back up to the 20,000 b/d and HUR will be seen as a decent developer and producer.

As they are saying, all scenarios are being looked at and they will take the most prudent as possible decisions with regard to all reservoir scenarios, whatever happens they want to avoid taking an action that risks production if a shallower oil/water contact was to prove correct despite not having been the base case scenario for the company based on reviews of data to date.

With a completely new market-facing team in Hurricane there is little doubt that a new look is going to be taken across the whole process. I get the impression from the company that as the company transitions from explorer to developer and producer it is a ‘logical time’ to change the guard. At this stage I am still convinced that there is still plenty to go for in Hurricane even though up until now things have proved to be somewhat more difficult that initially expected. Dr Trice should, despite inevitable frustration in the end be proved right with regard to the fractured basement potential in the Hurricane portfolio.

Echo Energy

A Santa Cruz Sur reserve and resource update from Echo today where operationally things continue to look up. Production in November and December was a net 2,505 boed with Q1 coming in at 2,394 boed and in addition the company has identified 16 low cost workover and intervention opportunities at SCS to bring onto production and therefore migrating to PDP reserves at very low cost and easy to bring online.

Of this portfolio of potential projects, four initial opportunities (consisting of 3 well workovers to bring associated PDNP 1P reserves into production and one project targeting 2P reserves) are estimated to be capable of adding expected combined  additional production of up to 4.8 MMscf/d of gas and 84 bopd (total combined additional production potential of 884 boepd) and offer a combined estimated value of approximately US $9 million in NPV10 uplift based on an aggregate gross cost of approximately US $1 million and fast payback periods of between two to six months.

Martin Hull, CEO commented “The addition of the important work in maturing the production enhancement opportunities reconfirms the flexibility and range of well-balanced risk-reward upside options contained within the Santa Cruz Sur portfolio. In addition to the existing revenue generating producing proved reserves, the combination of PDNP 1P and 2P production enhancement opportunities with exploration upside provides a diversified portfolio in a single set of assets at Santa Cruz Sur.”

Union Jack Oil

Union Jack has acquired a further 12.5% economic unit in PEDL 180 and 182 from Humber Oil & Gas for £500,000 in cash as well as paying on to Celtique £1.04m taking over a previous Humber commitment (on first oil). This takes UJO to 40% in the Wressle field a highly value accretive move and increases 2P reserves + 2C contingent resources by 45.5%. The IRR is 46% and has a highly attractive cash break-even of c.$17.62 pb.

There is also a pay of a 2.5% NPI which doesnt come in until all capex is paid and firstly should be fairly minor but secondly is only on PEDL 180, not 182…UJO is in a strong financial position with £5.5m in the balance sheet and is fully funded for both Wressle and West Newton commitments. The company has an interesting mature portfolio which will in due course be able to be funded by debt probably between now and first oil. A great deal for UJO which continues to flourish and is very much on the radar screen with canny deals like this.

Malcolm Graham-Wood

Source Link www.malcysblog.com/2020/06/oil-price-hurricane-echo-union-jack/

Website Link www.malcysblog.com

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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