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By Malcolm Graham-Wood
Whaddya know, huh? Markets are all over the place, selling in May, possibly but starting with the Fed saying that they might, possibly one day maybe, perhaps if needed just, tighten monetary policy if tested, so nobody knows let alone the Fed. Commodities, equities, Cryptos funds and listen to news and Bitcoin was down 50% from the highs and bounced 30%.
In oil the panic was to do with the virus spreading from India to Asia but Iran production and the Russians had another go about their status into the bargain. EIA inventory stats were OK, Crude built modestly but after the Colonial Pipeline debacle gasoline and distillates added by 2m barrels and more.
Finals for 2020 today from Sound where the transition is starting to become pretty noticeable under Chairman Graham Lyon. Progress has been made on the gas development / monetisation strategy at Tendrara which is most important. This is has been illustrated by the following events.
Advancement of Phase 1 Micro LNG engineering and commercial gas sales contracts, and micro LNG Development Heads of Terms signed in June 2020 to partner with Afriquia Gaz, an established gas distributor and marketer. A 10 year Take or Pay Gas Purchase and Financing structure developed with Afriquia Gaz and a letter of exclusivity signed with Italfluid in December 2020, an EPC contractor providing Lease to Own structure.
Phase 2 pipeline development commercial and planning activities undertaken as well as Phase 2 Tendrara TE-5 Horst Development EIA approvals for 120-kilometre 20-inch pipeline and gas treatment plant/compression station received in January 2020 and March 2020 respectively.
In addition there was a successful renegotiation of the terms of the Anoual exploration permit in July 2020 and the company obtained a two-year extension of the Sidi Moktar exploration permit in October 2020.
Before investors forget it, Sound remains largest onshore licence holder in Morocco with significant exploration potential for scalable growth. The company has also under the new management worked very hard on streamlining the company to match its new asset base.
It successfully implemented major cost savings with continued focus on disciplined cost and cash management, this led to a structural reduction in administrative expenses by 52% compared with 2019.
Equity placings to raise an aggregate of £4.6 million after costs completed in January 2020 and August 2020 at a weighted average price of c.2.1 pence per ordinary share was followed this year by a post period end successful restructuring of €28.8 million corporate loan notes in April 2021.
Finally, Sound is ticking the sustainable business model box with ESG principles at its core, with gas as a transition fuel providing a key element in Morocco’s Energy policy for secure, affordable and sustainable energy replacing imported alternatives.
Graham Lyon, Executive Chairman said:
“2020 was a year of transition and stabilisation for the Company. Transition to a development led strategy, monetising our discovered resource and stabilisation in rationalising the Company’s cost base. Our gas development / monetisation strategy is advancing towards realising our objective of generating cash flow from Tendrara’s significant 377bcf discovered resource. As part of the Phase 1 micro LNG development, we are delighted to have been able to attract a market leading partner like Afriquia Gaz in Morocco and Italfluid as our facility provider. Concluding arrangements with each will enable the Micro LNG project to come into being. We thank our loan note holders for having the confidence in management and in our ability to execute on our strategy by providing their support for the successful bond restructuring exercise undertaken in April 2021. We look forward to 2021 with the Company moving into project execution mode.’’
As I have said a couple of times recently there is a transformation underway at Sound and as well as a significant reduction in ongoing costs. They now have Afriquira Gaz as a partner (they are a £1bn market cap company) and that future is mapped out now all about delivery as well as the facilities situation. I thought that the deal with the bondholders was a specifically immense achievement which bodes well for the future.
Q1 results from SDX today and it was a busy quarter, Q1 2021 entitlement production of 5,862 boe/d was 2% higher than 2021 mid point market guidance of 5,770 boe/d and 10% lower than Q1 2020 mainly due to natural decline, well workovers and expected sand and water production in two of the five wells at South Disouq.
Capex of US$4.0 million was within guidance, with the majority of activity scheduled for the remaining nine months of the year. 2021 guidance for capex is US$25.0-US$26.5 million. The Company’s operated assets recorded a carbon intensity of 2.7kg CO2e/boe in Q1 2021 which is one of the lowest rates in the industry.
Planning for the two-well South Disouq drilling campaign continued, and subject to receipt of final Ministerial and Parliamentary approval for a two-year exploration concession extension, the Company plans to drill the Hanut prospect targeting 139bcf of P50, unrisked prospective resources with a chance of success of 33% in Q3 2021.
Hanut will be preceded by the IY-2X well, a development well in the eastern part of the Ibn Yunus field, seeking to bring forward production and cash flow. The Company’s partner has confirmed that it will participate in both wells.
In March 2021, SDX obtained approval for a ten-year extension to the West Gharib Production Services Agreement increasing audited 2P reserves in this core oil asset as at 31 December 2020, by 60% year on year, or 119% taking account of 2020 production, to 3.52 million barrels.
Preparations were completed for the first three wells of a four to five-well programme in Morocco, with the first well, the OYF-3, spud at the end of April.
It wasn’t all plain sailing for the company though as post-period end, the Company received the COVID-19 delayed laboratory analysis of the cuttings and side wall cores from the LMS-2 well. This information confirmed that LMS-2 had successfully encountered the targeted thermogenically-sourced gas in the Top Nappe horizon but that the reservoir in the Lalla Mimouna Nord concession has low permeability and the well is unlikely to flow conventionally. As such, the Company will not risk US$0.5 million testing this well, nor will it commit to further investment in the Lalla Mimouna Nord concession post the end of the concession date in July 2021 as a result of the low permeability in this concession and limited likelihood of it being commercially developed. Accordingly, the Company expects to recognise a US$10.2 million non-cash impairment charge in Q2 ahead of relinquishment, of which US$2.8 million relates to LMS-2.
As the analysis of LMS-2 has confirmed that a working thermogenic petroleum system exists and feeds the Top Nappe horizon, which exists throughout the Company’s acreage, work will continue to identify drillable prospects at this horizon, with the objective of potentially testing the Top Nappe in drilling planned for 2022/23.
The numbers looked good in-line with operational and demand strength. A netback of US$10.8 million, 5% higher than the same period in 2020 of US$10.3 million, was primarily driven by strong demand in Morocco, which at the end of Q1 2020 was impacted by COVID-19 shutdowns at three customers. West Gharib netback increased due to higher service fee realisations, which outweighed the impact of lower production due to natural decline. These factors were partly offset by a lower netback at South Disouq as a result of lower production due to natural decline and well management activity, and a well workover.
EBITDAX of US$9.8 million was 4% higher than the same period in 2020 of US$9.4 million due to the netback factors described above. Depletion, depreciation and amortisation (“DD&A”) charge of US$7.4 million was higher than the US$6.7 million for the same period in 2021 due to higher production and lower 2P reserves in Morocco, partly offset by lower production at South Disouq and West Gharib.
There were no non-cash E&E write offs in Q1 2021. In Q1 2020 US$4.4 million was written off following the drilling of two sub-commercial wells, SD-6X in South Disouq and SAH-5 in Morocco. Operating cash flow (before capex, excluding discontinued operations) of US$6.1 million, was higher than the same period in 2020, US$4.9 million, primarily due to the netback drivers discussed above, as well as lower spend on inventory, finally Capex was US$4.0 million.
Liquidity: Closing cash as at 31 March 2021 was US$9.7 million. The Company has now satisfied the conditions precedent on the new, five-year EBRD credit facility, which is undrawn and has US$10 million availability. Together with cash generated from operations, management believes the Company is fully funded for all planned activities in 2021 – 2022.
Mark Reid, CEO of SDX, commented:
“The first quarter of 2021 has been a positive start to the year as we have continued our strong production and cash generation from our assets in Egypt and Morocco with all our key financial metrics improving from the same period last year and our current production and capex either beating or being in line with guidance. Consumption from our customers in Morocco was notably stronger this quarter compared to last year as demand has now fully recovered from the effects of the pandemic seen in the same period of 2020. We saw slightly reduced production at South Disouq due to natural decline, well workovers and expected sand and water production in two out of the five wells, however this was mostly offset by the new SD-12X well which came onstream in December, and we remain on track to meet our guidance.
As a business we remain in a financially strong position, fully funded for our 2021/2022 work programme with robust cashflows and now with the full US$10 million available in our credit facility to draw upon. In this regard, I would like to reiterate my thanks to the EBRD for their continued support in renewing the facility. We have now commenced our drilling in Morocco and have made significant progress with the planning of the Ibn Yunus-2X development well, and the transformational Hanut-1X exploration well in Egypt, which will be drilled consecutively, commencing in Q2 2021. I would finally like to thank the team for their continued high work rate throughout this period and I look forward to updating the market as we progress our work streams in the year.”
Confirmation today of the details of the Convening Hearing relating to the Restructuring Plan will take place on Friday 21 May 2021 at 10:30 a.m. (London time) before Mr Justice Zacaroli, with case number CR-2021-000852. Attendance at the Convening Hearing will be virtually via Microsoft Teams in light of the COVID-19 pandemic.
The Convening Hearing is for the purposes of seeking an order making certain directions in relation to the Restructuring Plan including permission to convene a single meeting of Bondholders for the purpose of considering and, if thought fit, approving the Restructuring Plan.
The Company also confirms that an updated draft of the Explanatory Statement (including appendices) has been uploaded to the Company’s website at www.hurricaneenergy.com.
Capitalised terms used but not defined in this notice shall have the meaning given to them in the Practice Statement Letter.
The USPGA starts today at the rather tricky Kiawah Island course which apparently is the longest in modern Championship history.
The final penultimate matches in the Prem were played last night, the Toffees beat Wolves 1-0, the Magpies beat the Blades 1-0, Spurs lost at home to the Villa 1-2, the Eagles lost 1-3 to the Gooners, Burnley effectively gave Liverpool their 4th position in the league and a CL place and the Baggies lost 1-3 to the Hammers and Big Sam resigned.
(The opinions expressed here are those of the author, a columnist for Share Talk.)
Website Link www.malcysblog.com
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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