WTI $75.29 -16c, Brent $79.09 -44c, Diff -$3.80 -28c, NG $5.84 +13c, UKNG 210.0p +3.29p
By Malcolm Graham-Wood
After showing its head above the parapet of $80 yesterday Brent fell back and settled down 44c, this morning both crudes are back some more from what had been the top of the trading range. As they might have said in Dad’s Army, they dont like it up there…
A mixed bag of reasons though, continued supply shortages across the board keep the market tight although the API stats after the bell showed a build across the board, hence the fall this morning. Also China is a mixed bag, still importing plenty of crude but there are worries about the economy.
The storm season continues and the latest one is named Teresa, and with only two names left on the list it looks like they are going to need a bigger list…
IOG has provided an update on the Blythe well 48/23a-H1, the second Phase 1 development well. The well was successfully drilled, cleaned up and flow tested to a maximum gas rate of 45.5 mmscf/d through an 80/64th inch choke within two months of spud. That is in line with expectations and the gas in place and recoverable volumes at Blythe are estimated to be in line with prognosis.
Unsurprisingly it was a good improvement in drilling performance over the Elgood well even though they did have some mud losses which the drilling team had to manage. Phase 1 First Gas guidance is reiterated for Q4 2021 and with initial Blythe Hub production rates expected to be within planning case range, at current gas prices, 2021-22 cash flows are ‘expected to substantially exceed planning case’.
Andrew Hockey, CEO of IOG, commented:
“Delivering the Blythe well within two months and achieving a maximum well test rate of 45.5 mmscf/d gas is another important step forward for IOG. Phase 1 First Gas is now coming firmly into sight which is a testament to the dedication of the whole IOG team and the excellent collaboration with our contractors.
We are now integrating the well data into our planning for the start-up of both Blythe and Elgood in Q4. The improvement in drilling performance at Blythe is also very encouraging as we progress on to Southwark and then on to drill the Goddard and Southern Hub appraisal wells in mid-2022.
Gas market conditions not just for this coming winter but throughout the forward curve indicate the potential for very strong cash flow generation for IOG over the coming years. We plan to start executing a sensible hedging strategy once onstream, while we also maintain our prudent planning price deck as we work up the next phases of growth.
As a committed Net Zero company we firmly believe that domestic gas produced at very low carbon intensity is an indispensable part of the UK’s energy transition and IOG’s gas will make a positive contribution in that regard.”
IOG are making great headway operationally as the rig will shortly move across to Southwark, the third of the Phase 1 fields, where it will spud the next production well through the Southwark platform. Before long the prize of first gas will be in its grasp and along with it the additional prize of the current gas prices being in excess of 200p/Therm which dwarfs the initial planning expectations and even if of a temporary basis will make IOG’s start in Phase 1 a highly successful one.
Predator Oil & Gas
After I wrote about the Predator announcement yesterday in slightly straightened circumstances between meetings in London I listened to the Predator webcast and in particular the detailed analysis of the MOU-1 well. I thought that Paul Griffiths, in great detail, made the progress in Morocco much more understandable and I think that shareholders would have been comforted by the enthusiasm he portrayed.
With exciting wells to come I feel that the MOU-1 well has probably de-risked the area by more than the market had initially thought and of course I remain very excited about Morocco as a place to operate.
PetroTal has announced it has commenced drilling development well BN-9H, the Company’s next horizontal well, and continued robust field production in excess of 15,000 barrels of oil per day. It will be PetroTal’s longest reach horizontal well to date, will cost approximately $13.9 million and is the first to be drilled with a synthetic mud system. Drilling and completion should be finished in the second half of November 2021; and is expected to contribute materially to exit 2021 production.
The Bretana field continues to achieve robust field production, average field production for the ten days ended September 27, 2021 was 15,494 bopd which demonstrates success of the revised water disposal strategy, allowing full water disposal into the two disposal wells.
Using an $80/bbl Brent oil price and PetroTal’s estimated EBITDA netback of approximately $47/bbl, annualized earnings before interest, taxes, depreciation and amortization at 15,000 bopd would be approximately $255 million; and, this expected significant EBITDA growth, will easily allow PetroTal to complete the remaining Bretana development wells, retire the bond obligations early and examine ways to return value to shareholders, in due course.
Manuel Pablo Zuniga-Pflucker, President and Chief Executive Officer, commented:
“We are entering the fourth quarter in the strongest position PetroTal has seen, from both an operational and financial perspective. The recent rise in Brent oil prices has created an environment for substantial returns on invested capital and we look to continue our momentum into Q4 2021, and beyond. PetroTal is showing it is well positioned as a dynamic emerging market play, given our strategic investment in Peru’s Bretana field, that is delivering strong results.”
It is clear that PetroTal is going from strength to strength, its recovery from the darker days has been exceptional and today we can see a further increase in production on the road to 16/- b/d and higher, moreover highly efficient, more profitable production.
The shares are starting to move upwards, it has passed the years high of around 18p but my target of 50p is now looking if anything somewhat parsimonious. It takes no great stretch of the imagination to more than double the current share price and based on solid, profitable and increasing production, PetroTal looks like a very safe bet to justify investment.
Hurricane has provided an update on production guidance from the Lancaster field, which takes into account additional production and pressure data gathered since the annual maintenance shutdown in July 2021.
On 30 April 2021, the Company provided annual production guidance for the full year 2021 of 8,500 – 10,500 bopd. The Company continues to forecast that average production for the year is expected to remain within this range. This annual guidance is based on an FPSO production uptime assumption of 90% and production from the P6 well alone on artificial lift via ESP. The production uptime assumption of 90% includes the impact of the annual maintenance shutdown, evenly spread across the year.
As previously announced, the Company has committed to providing six-monthly updates on production guidance. Management’s production guidance from the Lancaster field for the six month period 1 October 2021 to 31 March 2022 is 8,500 – 10,000 bopd, which is based on an improved FPSO production uptime assumption of 96.5% and production from the P6 well alone on artificial lift via ESP. The increase in the uptime assumption is a combination of there being no planned maintenance shutdowns anticipated in the Period, and reflecting the excellent production uptime that has been seen on the FPSO to date.
The guidance for the Period is slightly lower than the average for the full year 2021 due to the expected gradual production decline from the reservoir over time, partially offset by the higher FPSO uptime assumption.
Based on current trends, management estimates that wellhead flowing pressure in the Lancaster reservoir may reach the bubble point by the end of Q1 2022, consistent with the time range estimation previously announced on 25 May 2021. Whilst this has been factored into the guidance for the Period, there will remain a degree of uncertainty regarding the full impact of this, along with the risk that gas liberated from the reservoir could be produced which could result in production either being reduced or ceased altogether.
Antony Maris, CEO of Hurricane, commented:
“The Company has benefited from higher than expected oil prices and excellent performance to date of the FPSO. As a result of the combined efforts of the Hurricane and Bluewater teams, we anticipate being towards the upper end of our production guidance for 2021 and this is also reflected in our guidance for the next six months to 31 March 2022.”
To say that I don’t understand this set of numbers significantly is an understatement, operationally Hurricane is actually appearing to go well, prices are creating operating cash flows materially ahead of market forecasts including my own but are not recognised.
Also the FPSO is going at amazing uptime rates, given it was getting such bad press makes me feel that it has to fight its corner every step of the way. If I didn’t know any better I would say that the ghost of directors past was trying to create unnecessary disquiet in the hood.
Simple is as simple does in the Serica results yesterday, I went to the meeting where CEO Mitch Flegg gave the up to date situation which is decidedly rosy. The figures speak for themselves, gross profit of £46.0 million (1H 2020: loss of £19.8 million) and cash flow from operations of £63.8 million (1H 2020: £19.3 million) came from group 1H average production of 18,900 boe per day net to Serica, compared to 21,600 boe per day for 1H 2020 after extended field maintenance shut-ins during H1 following last year’s COVID-19 related deferrals.
The Rhum R3 well workover was completed, not without some trials and commenced production in late August 2021. Columbus production well drilled and tied into the export system ready for first production in Q4.
There was a closing cash balance up at £92.0 million (31 December 2020: £89.3 million) despite significant capex spend of £43.0 million (2020: £26.6 million) all funded from internal cash resources. Average realised sales price of US$43.30 per boe (1H 2020: US$15.20 per boe) before net hedging gains/losses.
Average operating cost of US$16.05 per boe for 1H 2021 (1H 2020: US$15.12 per boe) reflected lower production in the period – underlying costs reduced by 10% during 1H 2021 (2020: 10%). Operating profit of £5.5 million (1H 2020: loss of £12.7 million) after £30.3 million of unrealised hedging provisions. Profit before tax of £2.2 million (1H 2020: £20.4 million). Profit after tax of £1.3 million (1H 2020: £12.4 million) after non-cash deferred tax provision of £0.9 million (1H 2020: £8.0 million).
Operationally it was a good period although things were far from straightforward. A 10% reduction in operating costs during 1H 2021 builds on similar reduction already achieved during 2020. This translates into a reduction in operating costs per boe as new production volumes delivered from R3 and Columbus during 2H 2021.
The Rhum R3 well workover adds more than 4,000 boe/d to Serica’s share of Rhum gas production capacity and the Columbus well drilled to measured depth of 17,600ft and flowed predominantly gas at over 8,000 boe/d gross (Serica 50%).
New production from Rhum R3 and Columbus was well timed to benefit from the unprecedented rise in gas prices from 2020 lows. In view of the extraordinary volatility in global gas markets over the past 18 months we will maintain a prudent hedging programme whilst retaining material upside – over 80% of projected oil and gas volumes unhedged.
A 2020 dividend of 3.5 pence per share (2019: 3 pence per share) was paid in July. The level of dividend for 2021 will be reviewed in light of the strong gas price trends currently unfolding in the second half of this year, for what it’s worth a special payment might be in the company’s mind.
Perhaps much more importantly, Serica’s share of receipts retained under the BKR Net Cash Flow Sharing mechanism increases from 60% to 100% on 1 January 2022.
Mitch Flegg, Serica’s CEO stated:
“In the current environment Serica’s focus on gas production and investment in new projects is expected to generate very significant returns for shareholders and help support further investment.
In the first half of the year, we continued to pursue our strategy of capital investment in our assets. This has allowed us to recomplete the Rhum R3 well and bring it into production in August and to drill the Columbus development well which is now ready to produce. Serica’s production is over 80% gas and we are delighted that we are already seeing the benefits of our investment strategy in the second half through increasing production levels at a time of record high wholesale gas prices.
We expect first production from Columbus in Q4 this year and then Serica’s share of receipts under the BKR Net Cash Flow Sharing mechanism increases from 60% to 100% on 1 January 2022. Later in 2022 we intend to drill the North Eigg well which, if successful, will enhance gas reserves in the BKR area and potentially extend the life of Bruce and related infrastructure.
Serica is currently responsible for around 5% of UK gas production and our role in enhancing and extending the life of that production and helping to maintain forward supply during a period of energy transition, is essential to meet UK energy needs.”
These figures were excellent but going forward it gets better, investment is for the time covered until the North Eigg well due next year. Eigg could be very substantial, the company have South Eigg as well and whilst they could keep it in-house they are exploring a potential farm-out if industry interest was to emerge. This is ironic as Serica are keeping an eye out for acquisitions to bolster the portfolio which so far have been to no avail.
Either way the company are in a cracking position, the strong capital investment has resulted in a success at Rhum, not without its technical difficulties and at Columbus where production is imminent. With gas prices where they are currently it’s difficult not to get very excited about revenue going forward which gets better when you know that the company has only hedged C. 25% of the 80% of the gas content, some 75% overall.
This is where I get my feeling about a possible special divvi at some stage if this price deck continues and of course with the take from BKR about to roll over from 60% to 100% there are few clouds on the horizon. Serica is a solid member of the Bucket list for all the reasons above, in addition the management of the company is absolutely top notch from the Chairman through CEO, CFO Andy Bell has joined the board as has former Premier CFO Richard Rose as a NED. But it is worth noting that this excellence carries on right the way through the ranks of sub board troopers.
With the shares up 2.85x over a year they have proved a good investment but in my view there is still plenty to go for, all the stars are aligned and the company deserves its success.
Union Jack Oil
Whilst I was out yesterday I noticed that UJO had put out a new presentation and updated video, both are state of the art and a really informative look at the company’s assets and decidedly worth a gander.
It’s Champions League week again and last night it was mixed, PSG beat the Noisy Neighbours 2-0 but Liverpool won 1-5 away at FC Porto.
Tonight The Red Devils host Villareal after the opening disaster against Young Boys whilst Chelski are at Juve.
The opinions expressed here are those of the author
Malcolm Graham-WoodRead More
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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