Malcy’s Blog – Oil price, Reabold Resources, Union Jack Oil, Scirocco Energy & United Oil & Gas

WTI $109.56 u/c*, Brent $114.13 +$1.01, Diff -$4.57 +$1.01.*

Author @mgrahamwood

USNG $6.94 +6c, UKNG 215.0p +10.0p, TTF €127.160 -34c.

*US Closed for Juneteenth Day

Oil price

Markets were closed in the US for the Juneteenth Day holiday but elsewhere where it was traded oil rallied modestly. A combination of taxes has emerged from the US, Sleepy Joe is hoping to suspend the Federal gasoline tax in order to get the price under control as the $5 barrier was breached last week. Secondly the US, along with Canada and other countries in Europe according to Reuters, are pitching for a price cap on Russian oil and gas.

The better news came from Libya where some peace came to the nation and some 700/- b/d has started to flow from there. Also there were some reports of China easing Covid regulations in major cities but it is still quite some way from total freedom.

Reabold Resources/ Union Jack Oil

Reabold has provide an update on the West Newton Project, in which the Company owns a 56% economic interest. Union Jack Oil  has a 16.665% interest.

Highlights:

·      The Company is progressing the conceptual development plan for West Newton as, predominantly, a gas development project following the completion of the significant work carried out by PEDL 183 Joint Venture partners and independent third-party experts

·      Post Extended Well Test analysis:

 Indicates the potential for good well productivity from new wells and,

 Underpins the strong economic returns of the project

·      Conceptual plan (subject to funding) envisages a phased eight well gas development, which will target recoverable hydrocarbon volumes of 35 Mboe with a sales gas component of 203 Bcf

 Following an initial five well development drilling campaign, First Gas is anticipated as early as 2025

 A further three wells will be drilled in 2028-2030, modelling plateau production rates of 44 Mcfd of sales gas

 Economic modelling calculated a Gross pre-tax NPV(10) of $448 million and a pre-tax IRR of 87%, based on recoverable sales gas and small volumes of associated liquids, for the development

 Potential for further fields within the Greater West Newton area to be tied into West Newton infrastructure; not currently included in the modelling

·      The Joint Venture intends to drill the low-cost wells in a manner which phases the development cost, significantly de-risking the financial profile of the project

·      Immediate next steps include:

 Completion of a Competent Persons Report (“CPR”) by RPS Group in Q3 2022

 First development well, planned for H1 2023 to materially de-risk the project at modest cost

A new presentation which details the work completed and the Company’s strategy to deliver production from West Newton can be found on the Company’s website here: https://reabold.com/investor-relations/reports-and-presentations/.

Project Background

Following the results of the first EWT programme at West Newton A-2 and B1-z in 2021, the Company, together with its Joint Venture partners and third-party experts, including RPS and CoreLab, have worked to understand how to deliver significant commercial hydrocarbon flow from future wells at West Newton. Following post EWT analysis, it is now understood that two key issues which constrained hydrocarbon production at last year’s test were local formation damage and a lower than anticipated benefit from the acidisation process, where acid stimulation only interacted with a small section of the perforated intervals.

Crucially, analysis completed by CoreLab demonstrated actual fluid flow through many of the reservoir samples supporting the view that optimised development wells could deliver good hydrocarbon productivity. Furthermore, this has enabled the Company to formulate a development concept for the West Newton field based on eight wells and the associated gas and liquid infrastructure.

In addition, it is estimated that the eight wells would recover substantially all the recoverable gas from West Newton of 203 Bcf, which equates to 25 bcf of recoverable sales gas per well. The initial five wells are expected to deliver the plateau production rate of 44 Mcf/d of gas, with the additional three wells to be drilled between 2028 and 2030 extending the plateau.

Economic modelling[1] indicates significant cash flow generation from the first year of production, anticipated in 2025, with cumulative gross cash flow calculated at ca. US$1.3 billion. The Gross NPV(10) of the project is modelled to be US$448 million pre-tax with a pre-tax IRR of 87%. Initial scoping work indicates a total pre-production capex of US$139 million for the initial five well development, facilities and tie-in with additional wells drilled from cash flow.

It is expected that successful drilling results on the follow-on targets (Spring Hill, Withernsea and Ellerby) would utilise parts of the infrastructure used at West Newton adding significant further value to the licence.

[1] Based on RPS forecast gas price as at April 2022.

Stephen Williams, Co-CEO, commented:

“We are delighted by the results of work completed by RPS Group and CoreLab, which have demonstrated the potential of West Newton as an extremely valuable gas development opportunity. Centred in an area of significant infrastructure and with substantial additional exploration potential within the licence, a development at West Newton could deliver substantial volumes of low-carbon gas and also facilitate further success in the Greater West Newton Area.

“These studies are the beginning of an exciting new chapter for this project, which we expect will see Reabold drilling multiple, high-impact wells at West Newton in the coming years.”

David Bramhill, Executive Chairman of Union Jack commented:

“We are delighted by the results of work completed by RPS Group and CoreLab and the resulting Conceptual Development Plan, which has demonstrated West Newton’s potential as an extremely valuable gas development opportunity.

“Located in an area that has access to both significant and relevant regional infrastructure and, with substantial additional exploration potential within the wider licence, the Conceptual Development Plan and a subsequent development decision at West Newton could deliver substantial volumes of low-carbon sales gas into the UK’s energy market and could also facilitate further exploration activity and development potential within the Greater West Newton Area.

These studies and the resulting Conceptual Development Plan now see the commencement of an exciting new drilling phase for West Newton which will see Union Jack drill a high-impact well in 1H 2023 and multiple development wells at West Newton in the coming years.”

A new presentation which details the work completed and the Company’s strategy to deliver production from West Newton can be found on the Company’s website at www.unionjackoil.com

This is a very detailed analysis from some of the best in the industry and whilst it has yet to persuade either of the quoted participants in terms of market cap appreciation there is absolutely no doubt in my mind that West Newton is in the process of becoming a huge, massively profitable development. 

Ever since discovery West Newton has challenged in terms of operational complexity, a smidge of drilling incompetence and even down to whether the development was one of oil or gas. It is therefore refreshing to see that this analysis proves for once and for all that it is a gas play with what might become significant liquids as a bonus. 

So, expect to see a solution that as a gas development starting with a five well programme that could see first gas as son as 2025  to target recoverable hydrocarbon volumes of 35 Mboe with a sales gas component of 203 Bcf which will increase after at least three further wells.

The numbers show a ‘robust’ economic case which whilst initially targeting the gas will mean that associated liquids can be easily distributed as part of the infrastructure. This makes enormous sense to me as delivering the gas first complies with national requirements for clean, transitional fuel producing significant benefits for the UK’s security of supply in the next few years. 

Investors would be well advised to look in some detail the presentations that both companies have added to their websites which give a wealth of additional information which to me show just how big West Newton is and could be. The size of it will dwarf the market caps of both companies which if not recognised by the market will, I am 100% sure, be taken over by an entity that has seen the same massive upside as I have done.

If Union Jack compound their value by starting to pay a dividend over the next few days then that would make them even cheaper, in my views both companies have a significant store of value here, how soon before someone takes a piece of this ultra cheap action…

Scirocco Energy

Scirocco has announced that Alastair Ferguson, Non-Executive Chairman, has written a letter to all shareholders providing additional context on the Board’s strategic rationale for its proposed transaction with Wentworth Resources as announced on 13 June 2022.

The full text of that letter is copied below.

“Dear fellow shareholders,

As communicated to you in the circular on 13 June 2022 and the webinar on 16 June 2022, the Company is proposing to dispose of its legacy Ruvuma asset and notice was given of a General Meeting of the Company to take place at 10:30am on 29 June 2022 at Pinsent Masons LLP, 141 Bothwell Street, Glasgow, G2 7EQ where the proposition will be put to a vote as an ordinary resolution for approval by holders of Ordinary Shares.

Under the proposed Asset Purchase Agreement, the consideration for the Ruvuma asset comprises:

·    initial consideration of $3,000,000 in cash payable upon completion of the Proposed Transaction and prior to Completion and subject to satisfaction of certain conditions Wentworth will make a loan of $500,000 available to Scirocco (the “Initial Loan Amount”); plus

·    contingent deferred consideration of up to $13,000,000 in aggregate, made up of the following payments:

 $3,000,000 to be paid following the date on which the operating committee provides final approval of a development plan under the Ruvuma JOA;

 $8,000,000 which shall be payable from first gas on the Ruvuma Asset where the net revenues payable to Wentworth under any sale arrangements shall be payable 75% to Wentworth and 25% to Scirocco until such time as Scirocco has been paid $8,000,000; and

 $2,000,000 following the date on which the cumulative gross production from the Ruvuma Asset is equal or greater than 50 billion cubic feet.

The Asset Purchase Agreement was the result of an exhaustive two-year process, and the Directors unanimously agree that it represents the best possible deal for Scirocco to realise value from the asset, while retaining material upside exposure in the success case of Ruvuma.

At the same time, the deal significantly strengthens the Company’s balance sheet by providing an immediate and non-dilutive injection of funds, allowing Scirocco to pursue its current investing strategy targeting cash-generative assets within the sustainable energy and circular economy markets, as approved by shareholders at the Annual General Meeting of 9 July 2021.

All shareholders are encouraged to vote in favour of the proposed transaction

It is the duty of the Board and management to safeguard the interest of all shareholders and make decisions that we believe are in the best interest of the Company.  The intention of the proposed divestment that we are asking shareholders to vote on has been communicated clearly by the Company through the two-year sales process and is wholly consistent with the revised investing strategy set out by Scirocco’s Board. 

Completion of the divestment will enable the Company to accelerate its growth strategy, which we believe will enable the Board to build a business with a long-term future capable of generating sustainable returns for its shareholders. As such, the Board encourages all shareholders to cast their vote and strongly recommend that shareholders vote in favour of passing the proposed acquisition at the upcoming General Meeting.

Should the resolution not be passed, the Company will be required to fulfil its near-term funding obligations on the Ruvuma asset which can only be achieved by raising further equity, likely in excess of its current market capitalisation, and at a level of issuance and price that would be highly dilutive for existing shareholders.  There are no guarantees that the Company will be able to raise the capital required to meet near-term obligations which would likely lead to the Company defaulting on its financial commitments and potentially relinquish its interest in Ruvuma for zero consideration.

It should also be recognised that success is not guaranteed in the upcoming CH-1 well and the ultimate approval, extent of or timing of a related development is also uncertain. The Ruvuma project involves significant technical and subsurface uncertainties, meaning the Company would retain material downside exposure associated with the project, as well as the potential long-term requirement for large capex expenditure, implying further dilutive capital raises in order to maintain our interest. Those factors and the significant concentration in a single asset lead to the Board and management to conclude that this is not an appropriate risk/reward profile for Scirocco and does not provide a reasonably deliverable path to growth or cashflow.

It is therefore the firm belief of the Director’s that the passing of the Resolution is in the best interests of the Company and Shareholders, and we unanimously recommend shareholders vote in favour

The Directors who hold shares, totalling 3.2% of the issued share capital, will be voting in favour of the proposal. Additionally, the Company has received letters from significant shareholders representing 11.1% of the Company’s issued share capital which confirm they are supportive of the proposed transaction and that it is their current intention to vote in favour of the resolution at the General Meeting.

Shareholders can submit their vote by completing the below proxy form (available on the website) and emailing the completed form to Voting@shareregistrars.uk.com.

https://d1ssu070pg2v9i.cloudfront.net/pex/scirocco/2022/06/13152517/FINAL-PROXY.pdf

We look forward to the successful completion of this transaction and moving forward as a well-funded, strategically focused company with a clear vision to deliver sustainable long-term value for the Company’s shareholders.

Sincerely,

Alastair Ferguson

Non-Executive Chairman of the Board of Scirocco

I think that the purpose of this message from the Chairman is clear enough, they feel that they need to get across to shareholders that the historic nature of the Ruvuma investment, made by previous management is not suited to the new growth strategy of the company.

Also given that the recent clear policy to monetise the Ruvuma asset at the best possible price has now been exercised, subject to approvals then the action that the board are taking is just what they have always been committed to. That they have been offered what they consider to be  fair offer, maybe the point that is being made here is that this is the only offer on the table and is one that shareholders should accept. 

United Oil & Gas

United Oil & Gas has announced the spudding of the Al Jahraa-14 development (“AJ-14”) well in the Abu Sennan licence, onshore Egypt.

AJ -14 summary

–       Drilling of the AJ-14 development well has commenced

–       The well is primarily targeting the main producing c Abu Roash C (“ARC”) reservoir on the Al Jahraa Field, with a secondary target in the Abu Roash G (“ARG”)

–       The well is expected to take approximately 60 days to drill and complete and is fully funded from operational cashflow

–       On completion of drilling, AJ-14 is expected to be rapidly brought into production

Following mobilisation of the Sino Tharwa-1 rig to site, the operator of the Abu Sennan licence, Kuwait Energy Egypt (“KEE”), has notified the Joint Venture (“JV”) partners that the AJ-14 well has commenced drilling.

The AJ-14 well is being drilled to intersect the ARC reservoir, targeting reserves from an undrained area of the Al Jahraa Field identified from reservoir and simulation modelling work. In addition, there is a deeper secondary objective in the ARG reservoir, with the well targeting an area up-dip of the AJ-12 well (drilled in 2019), which tested oil from this reservoir. If successful, the well is expected to be quickly tied into existing facilities, adding additional production and revenue for the Company.

The AJ-14 development well is the third well drilled in 2022. The Sino Tharwa-1 rig was previously used to drill the ASV-1X exploration well.

ASV-1X well update

The comprehensive testing programme on the ASV-1X well that was announced on 30 May 2022 is continuing, with a rig-less testing unit and downhole pump being put in place following the rig move to the AJ-14 location. A further update will be provided on completion of the test programme.   

United holds a 22% working interest in the Licence, which is operated by KEE.

Brian Larkin, CEO commented:

“We look forward to continuing the 2022 drilling programme with the spudding of the AJ-14 development well, the third of five wells expected to be drilled this year. As we have shown, successful development wells can be brought into production within days via existing infrastructure, adding production and revenue to the Company and with a typical well achieving payback within several months. Egypt offers a low-cost operating environment, with attractive fiscal terms and continues to deliver positive operational cashflow to United”.

I am looking forward to catching up with UOG next week as I like the look of their drilling programme in Egypt which by and large is delivering for them and finding out about what else might fit into what at present is a fairly narrow portfolio. 

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


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