Malcy’s Blog – Oil price, Sound, Echo, Solo,DGO, Jadestone & finally

WTI $38.49 -23c, Brent $41.02 -3c, Diff -$2.53 +20c, NG $1.50 +1c

By Malcolm Graham-Wood

Oil price

Oil fell small-time last week mainly due to a surge in COVID-19 virus cases pretty much around the world, this led to some downgrades of particularly US gasoline demand numbers and scared the IMF into further GDP downgrades.

The Baker Hughes rig count on Friday saw the number of overall rigs fall by just one unit to 265 and oil followed also by 1 to 188 rigs.

Interestingly, it is reported that at its peak Chesapeake Energy, the poster boy of the US shale revolution had 175 rigs working, on its own… Today sees the company file for bankruptcy which comes as no surprise save that it didn’t happen before, remember that at one stage the company had almost as much debt as Exxon and Chevron combined…Aubrey can’t have been all bad, after he left the new CEO found a secret wine cellar hidden behind a broom cupboard full of fine wine…

Sound Energy

Sound has announced an LNG HoT with a Moroccan conglomerate with significant liquified petroleum gas, butane and propane distribution and marketing operations in country, and to which the Company has now entered into exclusive discussions with the company in order to enter into agreements for both the purchase of LNG to be produced from the TE-5 Horst development, as well as the partial financing of the Phase 1 Development by the Partner.

Under the HoT, the parties have agreed to use their reasonable endeavours to negotiate and enter into a gas sales agreement to deliver a GSA with which  Sound Energy Morocco East Limited, on behalf of the Concession joint venture partners, will commit, over a period of 10 years from first gas from the Concession, to produce, process, liquefy and sell to the Partner an annual contractual quantity of 100 million standard cubic metres of gas from the Phase 1 Development, and the Partner will commit to an annual minimum “Take or Pay” quantity of 90 million standard cubic meters of gas, priced within a range of $7 to $9 per mmBTU with an indexed formula using a combination of the European Title Transfer Facility and United States Henry Hub benchmark indexes.

This looks like a clever deal from Sound, it gives a good lead to EPC conversations to deliver the LNG plant as this is confirmation of size of plant needed and a good idea of revenue to be generated.  That said a 10 year Take or Pay contract of a guaranteed minimum really helps underpin project funding from other sources of cash and Friday’s ‘modest’ placing at no discount must please shareholders as the board are clearly trying to avoid anything but minimum dilution. I am also assuming that the repayment terms of the loan are not too harsh and give Sound a chance to ramp up production before any payments are due.

Finally, the Company continues to progress negotiations with potential service providers in relation to the design, procurement, construction and operation of the gas processing and liquefaction unit, mLNG,  required for the Phase 1 Development and with additional funding partners for the balance of the finance required for the Phase 1 Development.

Despite COVID-19 outbreak restrictions, which have delayed progress of the Phase 1 Development Plan, the Company aims to take a Final Investment Decision, subject to the approval of the Concession joint venture partners, during H2 2020, again good news for investors.

Echo Energy

A commercial update from Argentina today as Echo confirms that it has secured a further extension to existing contracts with two key gas customers for a further 6 months to 17 December 2020. These two extensions provide a weighted average contracted gas sales price of US$4.37 per mmbtu for combined net sales volume of 5.6 MMscf/d.  The successful contract extensions pricing represents a significant premium to the current spot market of approximately US$1.95 per mmbtu which has increased by 45% per cent since 20 May 2020.

This is further proof that management at Echo are continuing to deliver the goods for shareholders and makes the next few months a much more interesting time after what can only be described as a hesitant start to the year.

Solo Oil

Solo has announced that it has entered into an investment facility for up to $5m with Prolific Basins, a specialist, leading US Institutional investment group. Solo has drawn $500,000 and the tranched investment structure allows the company to have flexible funding options for either the planned appraisal in Tanzania or general working capital purposes.

With the board actively looking at deals and seeing a lot of projects I consider this a wise move as it strengthens the hands of the management in any negotiating process and it sits better alongside the strategy update also announced this morning.

Following the disappointment of the failure of the ONE-Dyas deal the board has commenced a ‘broader energy market review’ with the criteria as follows.

  • cash generative, with the potential to re-invest operational cash flow in further growth;
  • situated within the broad energy space, a market which the Board knows well;
  • primary targets within the natural gas space, augmented by opportunities which may benefit from low carbon and electrification dynamics;
  • assets which can attract the necessary investment capital, taking appropriate account of growing investor sentiment towards ESG and SRI indicators; and
  • assets which deliver stable returns, with lower exposure to global commodity prices.

At the risk of over-quoting the board I also believe that they have a valid view of the markets they are looking at viz, ‘With the inevitable increase of renewables replacing traditional hydrocarbon sources of energy, there will be an increased frequency of imbalance in European national grids due to the requirement of flexibility of supply from renewable energy generation. The Board, will therefore, consider broadening the remit of the Company’s acquisition and investment strategy to consider energy transition opportunities in the European power sector including gas storage, gas peaking and battery storage which are complimentary to producing gas assets and meet the above objectives’.

Finally, the company are continuing to make significant, aggressive cost cutting moves including a 50% reduction in directors fees in February and March and 100% since April. They are introducing a share option scheme in lieu of fees, outsourcing the finance function and losing the CFO.

CEO Tom Reynolds said in the RNS ‘We want to reassure shareholders that we are working hard to deliver our strategy, whilst running the Company as cost-efficiently and effectively as possible.  Our ongoing sales process is progressing and we are encouraged by the interest in the Company’s natural gas assets in Tanzania. The Board will base any decision on what is in the best interests of Solo’s shareholders, updating the market when we can with any developments. In parallel, we continue to screen opportunities in line with our augmented growth strategy and believe that the recalibration of the European gas market in light of the current turmoil will present the Company with an increased pipeline of compelling opportunities a broader range of revenue generating gas and power opportunities’.

Diversified Oil & Gas

DGO has announced that its bank lending group has completed the semi-annual redetermination of the company’s senior secured credit facility and reaffirms its existing $425m borrowing base. The Bank Group also approved amendments enhancing the Company’s hedging capabilities and there were no changes to pricing or covenant terms.

Following the redetermination, DGO’s net debt approximates $756 million and current liquidity approximates $213 million, comprised of cash on hand and availability under the Facility.  The Company’s current borrowings result in a Net Debt to EBITDA ratio of approximately 2.2x, below stated targets and debt covenant thresholds.

Rusty Hutson Jnr stated that ‘the reaffirmation of our borrowing base in this challenging environment speaks to the quality of our production, reserves and our strategy that is focused on generating steady positive cash flow to reduce debt and maintain a healthy balance sheet while consistently returning cash to shareholders through the dividend.  This redetermination, together with other financings completed this year, demonstrates our ability to access competitive capital against a difficult economic backdrop’.

I would have to say that the DGO share price, at 94p is admittedly reflecting the recent fall in the price of Henry Hub gas but with shale oil being shut-in and therefore cutting gas supplies longer term I would expect that fall to cease before long. Yielding in excess of 11% and with a very strong and successful model I would expect any purchases of stock at these levels to be highly rewarding.

Jadestone Energy

Another what looks like a cracker of a deal from Jadestone this morning who have announced the acquisition of an operated 90% interest in the Lemang PSC onshore Sumatra, Indonesia from Mandala Energy (KKR) for an initial cash consideration of $12m from cash resources and ‘certain subsequent contingent payments’.

The PSC includes the Akatara gas field which was intended to be an oil field but has reached its economic limit for oil production. Apparently the JSE team looked at this asset a year ago but the price was too rich, a year later with the seller keener to sell for the usual reasons this has now fallen into their lap. This also demonstrates just how good the team at Jadestone is, they are so experienced in the area nothing much goes past them and although I have heard this deal has been touted around recently once they had looked at the excellent fit it was as they say, a no brainer.

The deal needs Government approval prior to FID but that looks highly likely, also they can back in for 10% leaving JSE with an 81% interest in the PSC. Overall the deal ticks a number of boxes for JSE, it is low-cost with pre-existing infrastructure and drilled wells, no near-term commitments, spend mainly coming from production and maximum flexibility, ie ‘it goes ahead only when we can afford it’.

On acquisition it costs $0.70/boe of 2C resource, a life of field gas sales agreement needs  to be signed, it has anticipated incremental production of approximately 5.3 mboe/d , based on management’s estimated average plateau gas production rate of 18.8 mmscf/d gas. It also contains associated condensate and LPG, with a duration of six years and gives  NPV10 of $57 – $80 million with a NAV per share accretion of 4.3-6.3%. In addition it also comes with a handy $126 million of sunk cost pools arising from prior spend, to be recovered through the PSC cost-recovery mechanism to further increment field economics.

The Indonesian domestic gas market is very positive, it has a CAGR of , 4% p.a. over the next 10 years and the country imports 20% of its domestic gas demand via LNG. So the deal does appear to tick all those boxes, it is a natural fit in terms of gas as a %age of the portfolio, it has diversity, flexibility and plenty of upside. In this respect JSE will share synergies with nearby developed infrastructure as well as having further exploration opportunities and finally has an additional structure identified on seismic.

This looks to me like a classic Jadestone deal for all the reasons above, it also doesn’t preclude further M&A and as this one is pretty lean as well as being accretive it should please shareholders, one of the best managements in the sector has pulled off another coup.

And finally…

In the FA Cup the Canaries lost to the Red Devils and the Blades went down 1-2 to the Gooners, the Foxes lost 0-1 to Chelski and the Magpies lost 0-2 to the Noisy Neighbours. A very boring last four has Man U v the Gooners and Chelski v the Noisy Neighbours.

In the Prem the Hornets lost to the Saints and Villa lost to the Wolves.

Malcolm Graham-Wood

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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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