Malcy’s Blog – Oil price, San Leon Energy, Challenger Energy, Arrow Exploration, Jadestone Energy, Canadian Overseas Petroleum & finally

WTI (Dec) $86.53 -$1.37, Brent (Jan) $92.81 -96c, Diff -$6.28 +31c.

Author @mgrahamwood

USNG (Dec) $6.35 +67c, UKNG (Dec) 294.0p, TTF (Dec) €118.515 -€8.09.

Oil price

Oil fell yesterday as the last day of the month gave the punters the chance to dress the windows as they say. With interest rate and Chinese Covid worries this week has plenty of banana skins although I’m not panicking, yet…But over the month both markers added just over $7 which rather makes the KSA right eh?

One of the bull points has been the Opec report published yesterday in which they say that they expect to see demand continuing to rise for another decade ‘despite the growing role of renewables and electric cars’. They go on to say that ‘it is expected that oil and gas will remain as the dominant fuels in the world’s energy mix until the middle of the century’. So they’ve been reading the blog then…

San Leon Energy

San Leon has announced the following update in relation to the Proposed MLPL Reorganisation and the Further ELI Investments, details of which were set out in the Company’s AIM Admission Document published on 8 July 2022.

New Eroton Debt Facilities

In order to acquire additional interests in OML 18 and take its economic interest to 45% of OML 18, Eroton proposes to enter into new senior secured reserve-based lending facilities totaling US$750 million, to be provided to Eroton by a lending consortium headed by Afreximbank.  The process of finalising the New Eroton Debt Facilities has continued during October 2022, and whilst nearing its conclusion, further additional time is needed to finalise the loan agreements and ancillary documentation.  Consequently, the condition relating to the New Eroton Debt Facilities being entered into, which had already been extended to 31 October 2022, has now been extended to 30 November 2022 by agreement with Midwestern.

In addition to the requirement to enter into the New Eroton Debt Facilities, the MLPL Reorganisation Agreement required the Sahara OML 18 Acquisition Agreement (as defined in the Admission Document) to be entered into by all parties by 30 September 2022, which was subsequently extended to 31 October 2022. The Sahara OML 18 Acquisition Agreement is not expected to be entered into until after the New Eroton Debt Facilities have been entered into and the funds are available, and therefore this date has now been further extended to 30 November 2022 by agreement with Midwestern.

San Leon US$50 million loan facility

As previously announced by the Company on 30 September 2022, whilst a loan facility of US$50.0 million has been made available to the Company by MM Capital Holding Limited for the purposes of funding its working capital requirements and financing the Further ELI Investments (as set out in the Admission Document), the Company has been discussing alternative financing on terms that are better aligned with the Company’s overall strategic and financing objectives. In this regard, progress has been made on securing alternative financing and the Board intends to finalise these discussions in the coming weeks with full loan documentation and drawdown of the funds thereafter.

No great surprise here as the literal weight of the documentation for the loan is extended to the end of November. Also the company are looking at the terms of the MM Capital $50m loan facility in case it can be tweaked. The market will have almost certainly have been expecting this as the deal is substantial and complicated. 

Challenger Energy Group

Challenger has provided the following update on its Trinidad and Tobago business unit’s operating results for Q3 2022:

·      Total gross oil production for Q3 2022 was 32,370 barrels, representing an approximately 5% decline on Q2 2022. The decline reflects the impact of especially adverse weather conditions causing grid and field level electrical failures through the quarter (and continuing into the beginning of Q4 2022), and which resulted in between three to eight days of production downtime (varying by field), as well as the need to delay / reschedule much of the production enhancement work that had been planned for the quarter.

·      Despite the lower gross oil production, the Company was able to maintain oil sales at a comparatively constant level during Q3 2022, through release of inventory build-up in Q2 2022, with total oil sales in Q3 2022 amounting to 31,267 barrels (marginally higher than Q2 2022 oil sales, by 0.3%).

·      Gross realised average price per barrel sold in Q3 2022 was US$85.02, an approximately 13% decrease over Q2 2022. Revenue received by the Company from oil sales (being gross revenues less Government royalties and mandatory source deductions and adjustments applicable under the relevant licences)1, amounted to approximately US$1.3 million in Q3 2022. This represents average net revenue to the Company of US$40.20 per barrel sold, an approximately 11% decrease on Q2 2022, largely as a consequence of a decline in oil price.

·      The Company’s business in Trinidad and Tobago operated on a break-even pre-tax operating profit basis in Q3 2022 (Q2 2022: US$0.2 million). In aggregate during the first nine months of 2022 the business in Trinidad and Tobago has generated field operating profits of approximately US$1.6 million, and a pre-tax operating cash surplus of approximately US$0.6 million (stated after field operating costs, in-country G&A and other Trinidad expenses, but before corporation and other taxes including supplemental petroleum tax where applicable, and noting that, given the extent of carry-forward tax losses, the Company is currently largely shielded from corporation taxes).

Eytan Uliel, Chief Executive Officer of Challenger Energy, said:

“We plan for a certain level of disruption each year during the rainy season, but during the third quarter we experienced considerably more than expected, resulting in production downtime, and it also became necessary to delay much of the routine maintenance and production enhancement activities we had hoped to undertake. At the same time realised oil prices declined from the highs seen in Q2. Operationally, therefore, the third quarter of 2022 was challenging. Nonetheless, in aggregate the first nine months of 2022 continues to represent an improving overall financial performance for the Trinidad business, with positive field level operating profits (unaudited, before G&A) and a positive unaudited pre-tax operating profit. During the fourth quarter, as weather conditions improve, we expect less production disruption, so we will be able to begin clearing the backlog of delayed field activity, which should benefit production levels further.”

Challenger’s update is an honest offering as the 3rd quarter was a bit of a washout but as Eytan Uliel points out the 9 month picture is overall one of growth. Right now the 4th quarter should be improving and the year will be better than what might have been thought. 

Arrow Exploration

Arrow has provided an operations update.

Canadian operations

·      East Pepper tie-in

 Following reporting of successful testing of the East Pepper well in September, the Company is now pleased to confirm the tie-in has been completed, and production began on October 25th

 Initial rate was 7.6 mmcf/d or approximately 1,260 boe/d 

 The well has been choked back to produce at 6 mmcf/d or approximately 1,000 boe/d 

 The Company expects typical production declines; accelerated initial declines which should level off to 4-5% per month

Colombian operations

·      RCS-1 and RCE-1 Workovers:

 The workover program on RCS-1 and RCE-1 is progressing as expected and the Company anticipates reporting on production rates in the next few weeks once the wells have cleaned-up

·      RCE-3 and RCE-4 Development Drilling:

 Operations remain on track for RCE-3 to spud in December, with RCE-4 operations to follow immediately after completion of RCE-3

·      Carrizales Norte

 After drilling RCE-3, RCE-4 and the RC water disposal well, the same rig will be moved to the Carrizales Norte field

 Currently Arrow is building a road and pad for the Carrizales Norte field

 Drilling at Carrizales 1 & 2 is anticipated to begin in Q1 2023

Corporate Production

Corporate production as of October 27, 2022, is approximately 2,530 boe/d net.

Total net production from the Rio Cravo field is 760 bopd prior to any contribution from the current workover program. 

The Pepper Field has been producing approximately 1,270 boe/d, comprising approximately 270 boe/d from West Pepper and approximately 1,000 boe/d from East Pepper. Production at West Pepper is currently being curtailed due to third party facility constraints. Expectations are that production will return to approximately 400 boe/d in early Q4 2022.

The two wells, along with continuing and expected robust natural gas prices in North America, are expected to further enhance the value of the Pepper field. Arrow has 23,000 acres of contiguous Montney rights in the Pepper Area.

Marshall Abbott, CEO of Arrow Exploration Corp., commented:

“Arrow is extremely pleased with the results of the tie-in of the Alberta East Pepper Montney well. The East Pepper well results show the potential for the large, 100% owned, 23,000 acre Pepper land block. The workover program in Colombia is also progressing to plan, and we look forward to providing further updates on these wells as well as the development drilling of the RCE-3 and RCE-4 wells when updates are available. We are excited about the upcoming capital programs and we expect material production and reserve additions. The Arrow Team continues to execute our strategy to increase shareholder value.”

More good news from Arrow which readers will know that I am a big fan of having met with Marshall Abbott when he was last over, the company has aggressive but achievable targets which make the current rating incredibly attractive. 

With the East Pepper well delivering some 1,000 boe/d and the currently curtailed West well adding 270 boe/d and increasing to 400 boe/d imminently, production is increasing. In Colombia workover wells are succeeding and the development wells at RCE-3, which should spud in December and be followed by the RCE-4 well and the RC water disposal well. After that it’s off to the Carrizales Norte field where the company are currently building a road and a pad for two wells expected to spud in Q1 2023. 

Putting all this together Arrow is producing approximately 2,530 boe/d net and with plenty of upside at the huge Pepper area and also in Colombia. They have significant capital investment planned from which I expect to see even more in terms of next year’s production and of course increased reserves to go with that. 

My initial note a few weeks ago gave a starting target price of 50p per share and after this update I have not changed that, indeed I remain convinced that Arrow offers significant upside backed by good management with strong finances and a big capex budget to spend in 2023. 

Jadestone Energy

Jadestone has announced the completion of the acquisition of a non-operated 16.67% working interest in the Cossack, Wanaea, Lambert, and Hermes oil fields development, offshore Western Australia, from BP Developments Australia Pty Ltd, following the satisfaction of all conditions precedent as per the terms of the sale and purchase agreement dated 28 July 2022. 

The headline acquisition cost to Jadestone is US$20 million[1], as originally announced. Inclusive of agreed adjustments, which results from the accumulated economic benefits of the CWLH assets for the period from the effective date of 1 January 2020 to completion, Jadestone will receive from the Seller a cash amount of US$5.75 million. In line with the original acquisition announcement, Jadestone has paid an initial US$41 million into the North West Shelf Oil Project’s Abandonment Trust Fund.[2]

The acquired interest includes the Seller’s entire 16.67% working interest in the CWLH oil fields, subsea infrastructure, Okha FPSO, and full abandonment liabilities estimated at US$82 million, and represents 10.4 mmbbls of acquired reserves and resources as of the effective date of 1 January 2020. According to the operator, production from the CWLH fields averaged 14,196 bopd for the three months ended September 2022, or 2,366 bopd net to Jadestone’s acquired interest.

Liftings of crude oil from the CWLH fields are implemented on an equity basis, with the next lifting attributable to Jadestone’s acquired interest of approximately 650,000 barrels scheduled for mid-November 2022, with receipt of the cash proceeds by Jadestone expected in December 2022.

Jadestone will now apply to the National Offshore Petroleum Titles Administrator for approval of the dealing and registration on the petroleum titles relating to the acquired interest.

Paul Blakeley, President and CEO commented:

“We are very pleased to have gained access to this material asset, particularly as we see very significant upside through further investment in the future.  Our transaction is benefiting from the effective date, which was nearly two years ago, and the strengthening of the oil price in that same period. We will also see a positive impact from the next equity lifting, which is likely to generate significant cash proceeds for Jadestone before the end of 2022.  This transaction is typical of the natural transfer of interests in maturing assets from large IOCs, where materiality thresholds do not compete within their portfolios, to smaller companies willing to invest for incremental reserves and production.

We firmly believe that the CWLH fields will be a key asset and a strategic stepping-stone for Jadestone going forward. Over time we hope to work with the existing North West Shelf Oil Project Operator and joint venture partners to add value through sharing our expertise in the management of mature oil assets.”

Whilst this is only the completion of an already announced deal, any chance to remind the market of the company’s ability to do excellent quality, accretive acquisitions should never be missed. As Paul Blakeley says, opportunities like this from IOC’s are meat and drink for the likes of Jadestone and I am hugely confident that there are more where this one came from. 

Canadian Overseas Petroleum Limited

Canadian Overseas Petroleum has presented an update on its Wyoming oil field operations and its corporate objectives.

·    The miscible flood at Barron Flats continues to exceed the Company’s initial expectations thus resulting in a re-simulation of the field which is underway.

·    Flaring gas has commenced at Barron Flats with production from restricted wells being brought up incrementally post approval of the flaring permit on October 11. Oil production increases are expected as the process proceeds.

·    Six wells have currently been identified for recompletion in the Frontier 1 at Cole Creek offering a near term low-risk opportunity to materially increase oil production and reserves.

·    Select US and International Banks have been approached to refinance the Company’s Senior Credit Facility and fund the retirement of hedges currently in place.

·    Due diligence is being conducted by a large oil company with respect to a possible Joint Venture on the Company’s deep oil discovery.

Barron Flats Shannon Unit 

On October 11 the Company was granted a permit by the Wyoming Oil and Gas Conservation Commission to flare gas at the BFSU to enable it to reduce production restrictions at certain high pressure flowing oil wells. Since then, the wells have been incrementally brought back on line in parallel with the commissioning of well site facilities to recover the vapours from the produced volatile oil. The process has been designed for safety and efficiency considerations as these wells have been restricted for several months. Oil production from these wells is not yet stable as the process is continuing, but is expected to increase once complete. Current flared gas volumes are approximately 900 Mcf/d, which is well below the permitted volume of 3,500 Mcf/d.

On October 1 enriched gas injection recommenced on the western injection patterns with lean gas injection continuing on the eastern injection patterns to continue to move the miscible bank in eastern area. As such, purchases of Butane have recommenced at 300,000 gallons per month, well below the volumes of 1,800,000 gallons per month in 2021.

In the 3rd quarter the Company internally re-evaluated the performance of the Shannon miscible flood and its gas injection strategy that it commenced in April 2021. This evaluation reached the following conclusions:

·    The reservoir volume of the Shannon appears to be underestimated as approximately 30% more volume of enriched gas has been injected into the reservoir to achieve the production response observed this year than assumed in the original simulations. As such, the eastern injection patterns are full to design with movement of the miscible bank being observed.

·    Unexpected high pressures experienced in 5 production wells appears to be due to previously unrecognized trends in the reservoir, which only became apparent after the increase in reservoir pressure and movement of the emplaced miscible bank were studied.

·    The delayed production response from the original reservoir simulations is likely due to the observed increase in reservoir volume and unrecognized production trends thus effecting the movement of the miscible bank in these areas.

COPL has provided its internal evaluation to International Reservoir Technologies (“IRT”), its specialist reservoir engineering firm. In late September IRT tested the internal evaluation which resulted a field wide re-simulation of the miscible flood in early October. Completion of the field-wide re-simulation is expected this month with the objective of allowing the Company refine its future injection strategy, better predict the high-pressure trends and provide a refined model for future production forecasting.

Deep Oil Discovery Update

The Company continues to refine its interpretation of its deep oil discovery made in September of last year at 14-30-T35-R76W. As previously disclosed the oil discovery is a combined structural-stratigraphic trap In the Dakota, Frontier 2 and Frontier 1 Formations extending from the Cole Creek anticline at the Company’s 100% WI operated Cole Creek Unit to the 85% WI operated Barron Flats Federal Unit. At the CCU the Company has substantial booked Proved and Probable undeveloped reserves in the Dakota and Frontier 2 for future development with horizontal wells, and Contingent Resources in both formations at the BFFDU. To date no completion attempts have been undertaken in the Frontier 1 at Cole Creek despite excellent oil shows documented during drilling operations and industry protocols of completing the deepest productive reservoirs first.

COPL is in continuous review of the Frontier 1 Fm in its inventory of well-bores at Cole Creek for low-risk recompletion candidates. The Company has identified the following:

·    Six (6) well-bores have currently been identified as low risk re-completion candidates as they exhibit very good production casing and cement integrity.

·    All of the wells identified had strong oil shows in the Frontier 1 during drilling with one well observed having oil flow into the drilling fluids exhibited at surface during penetration.

·    All wells with open hole wire line logs show good reservoir porosity in the intervals of the 3 Frontier 1 sands correlating to those in the 14-30 discovery well, with evidence of natural fractures due to the anticlinal nature of the structure.

·    Re-completion will consist of suspension and plugging back of the current Frontier 2 completions, then perforating up-to 165′ of the three Frontier 1 sands followed by 2 staged fracture treatments.

The Company’s current estimate of the cost of the re-completion per well is US$600,000. Minimal wellsite facility upgrades are expected as the well sites currently have surface well site production facilities.

Debt Refinancing

The Company has approached and is in discussions with select US and International Banks regarding the re-financing of its current Senior Credit Facility of US$42 million and funding the closing of outstanding hedges currently estimated to cost US$10 million. The volatility in the debt markets in late September and October resulting from inflationary pressures and central bank policies caused the Company to slow down its approach. Stability appears to be returning, and as such the Company continues to pursue its objective to secure term sheets.

Deep Discovery Possible Joint Venture

COPL has been approached by a large oil company with operations in Wyoming to explore a Joint Venture between the companies to appraise and develop the Company’s deep oil discovery. Technical due diligence is in process, and COPL will update its progression when appropriate.

Arthur Millholland, President and CEO commented:

“As one can see we have a number of things going on, all being undertaken by a relatively small staff. What is most important is that we are progressing with our plan as outlined earlier in the year. We are very excited about the Frontier 1 recompletions at Cole Creek. This information was in hard files in storage when our Atomic affiliate bought these assets from the previous operator. We believe that Atomic had not reviewed these files making it likely the opportunity had been missed. We will begin recompletion and testing in December. Finally, observers of our production at the Shannon miscible flood should understand that production will rise incrementally from the gas flaring initiative. It is not as simple as just opening valves. The wells have been restricted for some time; thus, the produced oil is extremely volatile requiring the most prudent of oilfield practice.”

This is a detailed and important update from COPL who are progressing steadily at Barron Flats with what looks like plenty of upside. Financially the company are in the process of speaking to ‘select US and International Banks’ about a refinancing which would release those hedges into the bargain, and what a bargain that would be. 

Finally, maybe the jewel in the crown could be the snippet with regard to the approach by a large company in Wyoming to explore a JV for the deep oil discovery and this could also lead to significant potential upside. 

I have only recently come back to COPL after a long while and have had just the one meeting with the CEO. But I like what I see and will look forward to further, detailed chats and then maybe be able to more carefully judge the situation which looks very promising.

And finally…

In the T20 World Cup washout England beat New Zealand to remain just about in the tournament although it will likely be decided on run rates as to who goes through. In the same group Sri Lanka beat Afghanistan.

Tomorrow the Zimmers play the Netherlands and India play the Bangas.

In the Champions League tonight Liverpool host Napoli, Rangers entertain Ajax and Marseille host Spurs

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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