Malcy’s Blog – Oil price, Serica Energy, Pharos Energy, Far Ltd, Gran Tierra & finally

WTI $86.96 +$1.53, Brent $88.44 +93c, Diff -$1.48 -60c, NG $4.03 -25c, UKNG 170.0p -14.5p

By Malcolm Graham-Wood

Oil price

More of the same so my comments remain as before, the UK has started to relax Covid regulations and are back to Plan A, so it’s back to work for those who prefer to eat sleep Zoom.

The US Secretary of State is visiting Europe this week and indeed meets the Russian Foreign Minister in Geneva tomorrow. Worries of Russian activity in the Ukraine were not talked down by Sleepy Joe in his words yesterday and activity by Russia is clearly very much in the oil price.

Serica Energy

 Serica today releases a Corporate Update presentation for the year ended 31 December 2021 which can be found on the Company’s website at www.serica-energy.com

Production

·     With the introduction of R3 and Columbus, Serica’s production is now 85% gas, a vital part of the UK’s energy mix as we move towards Net Zero. As operator of Bruce, Keith and Rhum, Serica is responsible for over 5% of the UK’s gas production. This production has a significantly lower carbon footprint than imported LNG and helps maintain the UK’s security of supply

·   The Rhum R3 well was put into production in late August 2021 and has boosted total Rhum production significantly, adding up to 6,000 boe/d net to Serica

·    First production from the Columbus field was achieved in late November 2021. Early production was initially constrained due to temporary unavailability of full capacity in the export system but average rates of 3,270 boe/d net to Serica were achieved in the period up to year-end

Financial

·     Gas prices closed 2021 very strongly, contributing to a market average for the year of over 113p/therm (2020: 25p/therm) with oil also higher, averaging over $70/bbl (2020: $45/bbl)

·    This allied to growing production volumes drove Serica’s total cash resources to £218.4 million at 31 December 2021 of which £103.0 million was held as cash and deposits (2020: £89.3 million) and a further £115.4 million was lodged as temporary security with gas price hedge counterparties (2020: £1.8 million)

 Security is lodged based on future period gas price hedge valuations and the high year-end level reflected the exceptional gas price spike in December. Surplus security is returned to Serica as forward prices fall and when monthly contracts expire

Such valuations reflect the impact of high forecast forward prices on hedged production but do not reflect the far greater revenues that would be realised should actual prices match those forward prices

·    The BKR net cash flow sharing arrangements came to an end on 31 December 2021. From 1 January 2022, we enter a new phase for the Company where we will be retaining 100% (2021: 60%) of the net cash flow from the BKR fields, benefitting fully from the recent increase in production levels

Outlook

·     Serica intends to continue with its programme of through-cycle investment in its diversified portfolio of assets. A rig has now been contracted for the drilling of the high-impact North Eigg exploration well in the summer of 2022. North Eigg is a gas prospect located close to Serica’s BKR fields and it is expected that a successful discovery could be tied back to existing infrastructure in a carbon neutral manner

·   Plans are also in place for a well intervention campaign to take place in 2022 to improve the production potential of several Bruce and Keith wells during subsequent years

·    Growing cash balances offer increasing options for further investment, acquisition, and distributions. Serica’s Board continues to evaluate the optimum balance between these elements to deliver further shareholder returns

Mitch Flegg, Chief Executive of Serica Energy, commented:

“2021 was a very busy year for Serica, which reinforced the value of our through-cycle investment strategy as our expenditure during the low gas price environment of 2020 on the R3 and Columbus projects bore fruit this year. The importance of our contribution to the provision of vital lower carbon gas to the UK’s energy market was also demonstrated. We will continue to pursue our investment-led strategy this year with a planned well intervention programme on Bruce and Keith in addition to our exploration well at North Eigg. As always, we continue to look for acquisition opportunities that fit our criteria and will add value for our stakeholders.”

I have just listened to the conference call which thank goodness was pretty much more of the same from Serica which remains the poster boy for UK E&P companies. 2021 saw 1H production of 18,900 boe/d, 2H of 25,500 with December at 30,000.  The average gas price was 113p/Therm which is equivalent to $88 oil against the 2020 price of 25p/Therm, this puts a lot into perspective. 

As I said much is the same, hedging whilst possibly tempting is still 25% of gas sales or 20% of combined oil & gas, this means that capex is covered and leaves 80% exposure to combined oil & gas prices. For the future the company will continue to invest within  its own portfolio and an intervention campaign on Bruce and Keith wells is planned which should add profitable production. The company continue to look at acquisitions but to me they seem, correctly, to be very picky about what they are offered. 

I have to repeat previous comments, Serica is one of the very best management teams in the sector and that goes from top to bottom, they continue to deliver at a time when national production is as important as ever. It delivers through the Bruce platform over 5% of the UK’s gas production which they rightly remind us is a  ‘vital contribution to the country’s security of supply’. 

Last year Serica was up 253% putting it in 4th position in my Bucket List, I see no reason why that cannot be equalled or even beaten this year…

Pharos Energy

Pharos has announced that the Third Amendment to the El Fayum Concession Agreement has been signed by His Excellency Eng. Tarek El Molla (Minister of Petroleum & Mineral Resources of the Arab Republic of Egypt), EGPC and the Company on 19 January 2022. The agreement has become effective upon signature, with retroactive application of the improved fiscal terms as from November 2020.

More specifically, under the new terms, the Cost Recovery Petroleum percentage (i.e. the share of gross revenues that is available for the Contractor to recover its costs) will be increased from 30% to 40%, allowing Pharos a significantly faster recovery of all its past and future investments. In return, Pharos has agreed to waive its rights to recover a portion of the past costs pool ($115 million) and reduce its share of Excess Cost Recovery Petroleum from 15% to 7.5%.

While in full cost recovery mode, Contractor’s* share of revenue increases from c.42% to c.50% as from November 2020 (corresponding to additional net revenues to Contractor of c.$7 million to date) significantly lowering the development project break-even. The new arrangements will strongly encourage new exploration and development investments, aimed at maintaining and increasing production rates and optimising resources, to the mutual benefit of Egypt and the Company.

The Third Amendment also grants Contractor a three-and-a-half-year extension to the exploration licence term, with an additional obligation on Contractor to drill two exploration wells and acquire a 3D seismic survey in the northern area of the license.

Signature of the Third Amendment was a key Condition Precedent for the transfer of a 55% participating interest (and operatorship) in the El Fayum and North Beni Suef Concessions to IPR Lake Qarun, a transaction which the Company expects to complete in Q1 2022.

 An important piece of paperwork completed for Pharos which now must be almost ready to complete which will make the jigsaw complete, Egypt funds the excitement of Vietnam. 

Far Ltd

The Gambia Blocks A2/A5 (FAR 50% WI and Operator)
During the quarter, FAR concluded the drilling and formation evaluation operations for the Bambo-well and Bambo-1ST1 side-track well in Block A2,m offshore The Gambia. Bambo-1 was initially drilled to a depth of 3216m MDBRT (measured depth below rotary table) and wireline logging data was obtained. The Bambo-1 well was then plugged and the Bambo-1ST1 (side-track) well drilled to a depth of 3317m MDBRT after which wireline logging was conducted (refer to FAR ASX announcement dated 23 December 2021).

Although no moveable oil was interpreted, the drilling and logging data obtained on the main well and the side-track well indicate that several target intervals in the well had oil shows, confirming a prolific oil source is present in the
area. Samples were recovered from several levels. The presence or otherwise of any oil will be confirmed by laboratory analysis.

The side-track well was planned to be drilled to the final total depth through all target reservoirs and also to intersect zones of interest from the main well in a different location which will provide additional data and to sample potential oil. Interpretation of the cuttings and wireline logging information indicates that these zones have been charged with oil in rather poor-quality reservoirs and in traps that might have been breached, leaving behind some residual oils in the reservoirs.

The side-track well also intersected oil shows in the Soloo Deep units not previously encountered by the original
well or other wells in the area. The oil shows encountered were persistent over several hundred metres,
confirming access to the prolific oil-generative kitchen is present which may open additional material exploration
opportunities and running room in both the A2 and A5 Blocks. Interpretation and integration of these data are
ongoing.

FAR is Operator and a 50% interest holder in the A2 Licence, offshore The Gambia in which the Bambo well has
been drilled. The well fulfils the minimum work obligation of drilling one exploration well for the Initial
Exploration Periods for both the A2 and A5 Licences.
FAR remains highly encouraged by the data collected in the Bambo drilling program and its implications for
potentially large oil accumulations in Blocks A2 and A5 offshore The Gambia, which FAR currently has under
licence with partner, Petronas. FAR is accelerating the evaluation of the well results and looks forward to
announcing a revised plan for exploration in the area in the coming months.

FAR had US$55.6M cash at the end of the period (including US$1.1M in restricted cash held in The Gambia Joint
Venture account). During the period, FAR completed drilling operations on the Bambo drilling program (inclusive
of the Bambo-1 and Bambo-1ST1 side-track wells). FAR’s share of the Bambo program is expected to be
US$28.8M, with US$15.3M expected to be paid in Q1.
Further to the previous quarterly report, the Company has taken further steps to reduce costs and expects
employment, administration and corporate costs for the forthcoming quarter to be US$0.82M.
FAR’s strong cash position allows FAR to consider its options for the future, not limited to its current portfolio of
oil assets.

I have to say that the process looked more like a success than was actually announced, we shall wait and see. 

Gran Tierra

Gran Tierra yesterday announced a corporate update. All dollar amounts are in United States dollars and all production volumes are on a working interest before royalties basis and are expressed in barrels of oil per day, unless otherwise stated.

Highlights

  • 2022 Production Year to Date: Gran Tierra’s current average production1 is approximately 30,000 BOPD.
  • 2021 Production In-Line with Guidance: Total Company 2021 average production was approximately 26,500 BOPD, in-line with prior guidance.
  • Significant Debt Reduction: Gran Tierra’s credit facility has been reduced to a remaining balance of $67.5 million as of December 31, 2021, down $122.5 million or 64% from a balance of $190 million as of December 31, 2020. With forecast 2022 free cash flow2 and recovery of tax receivables, Gran Tierra expects to fully pay off the remaining balance of its credit facility in the first half of 2022.
  • Key Upcoming 2022 Catalysts: At a $70/bbl Brent price, Gran Tierra’s 2022 capital program of $220-240 million is expected to generate 2022 cash flow2 of $270-290 million and EBITDA2 of $360-380 million. At an $80/bbl Brent price, the Company forecasts 2022 cash flow2 of $330-350 million and EBITDA2 of $440-460 million. The Company’s development program continues to focus on asset optimization, maintaining a low operating cost structure and increasing oil recovery factors across its extensive portfolio. Gran Tierra’s 2022 exploration campaign of up to 6-7 wells is expected to be fully-funded from forecast internally generated cash flow2 and is designed to focus on near-field prospects in proven basins with access to infrastructure, providing short cycle times from discovery to bringing production on-stream. Key upcoming catalysts include:
    • Acordionero: Gran Tierra has allocated capital of $70 million towards 2022 development activities for the Acordionero field (14-16 development wells) in the Middle Magdalena Valley Basin. Drilling is expected to commence in the first quarter of 2022 with one rig on the Southwest Pad. Gran Tierra plans to continue to focus on quick-cycle times, thereby driving down drilling and operating costs and increasing oil recovery factors through its waterflood program. Since Gran Tierra acquired Acordionero in 2016, this field has produced approximately 27 million bbl of oil and generated about $1.3 billion in oil and gas sales and $353 million of free funds flow from operations3 (both figures are estimates as of December 31, 2021).
    • Costayaco and Moqueta: Gran Tierra has allocated capital of $40 million and $30 million respectively to the Costayaco (4-5 development wells) and Moqueta (3 development wells) fields in the Putumayo Basin in 2022. The first Costayaco well is scheduled to spud in the first quarter of 2022. The Moqueta work program is expected to commence in the second half of 2022 and is planned to continue into 2023.
    • Ecuador: Gran Tierra expects to drill 2-3 exploration wells in 2022, targeting multi-zone prospects near existing fields with access to infrastructure. Gran Tierra’s first exploration well in Ecuador is scheduled to spud in the second quarter of 2022 on the Chanangue Block.
  • Additional 2022 Hedges In-Place Designed To Protect Cash Flows2: The Company recently added to its 2022 hedging program and currently has the following Brent oil price hedges in place:
Strike Prices ($/bbl, Weighted Average)
Time Period Volume
(BOPD)
Swaps Sold Put Purchased
Put
Sold Call Premium
January 1-June 30, 2022 3,000 60.00 70.00 87.71
January 1-June 30, 2022 2,000 77.80
January 1-June 30, 2022 1,000 70.00 4.00
The Company expects to hedge approximately 25-40% of forecast production on a rolling basis.
  • SASB Report Published: Gran Tierra has released its first Sustainability Accounting Standards Board (“SASB”) Report. The Company continues to enhance its Environmental, Social and Governance (“ESG”) disclosure to drive a stronger understanding of the ESG risks and opportunities that its business faces and seeks to show how the Company is positioning itself to mitigate key risks and capture opportunities. Gran Tierra’s SASB report can be accessed here: https://www.grantierra.com/investor-relations/sasb-report.

Message to Shareholders

Gary Guidry, President and Chief Executive Officer of Gran Tierra, commented:

“Gran Tierra is in a strong position for the continued development and enhanced oil recovery activities in 2022 to optimize value from each of our assets. In addition, we plan to allocate modest capital to prioritized, high-impact exploration drilling opportunities. Gran Tierra is well-positioned to navigate the current volatile environment with our low base decline, conventional oil asset base and our operational control for capital allocation and timing. Our waterflood programs across all of our assets continue to perform well and we expect another strong year of free cash flow2 from these high quality, low decline assets. ”

I’m watching Gran Tierra as it looks like a decent management running an interesting portfolio of assets at which it has decided to up the beta somewhat. It can do this as at present it has what could be described as providing a somewhat uninspiring return in a world where that is a positive attribute. I’m looking forward to meeting the team as soon as the pandemic is over, and btw it’s over here now. 

And finally…

Last night in the Prem Spurs who were 1-2 down after 95 minutes scored twice in 2 minutes and ended up beating the Foxes 2-3…The Bees lost 1-3 to the Red Devils.

Tonight in the Haribo Cup Liverpool go to the Gooners in the second leg of the semi-final, it’s 0-0 from the first leg so all to play for.

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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