Malcy’s Blog – Oil price, Union Jack Oil, Reabold Resources, SDX Energy & finally

WTI $102.98 +$7.94, Brent $106.64 +$8.62, Diff -$3.66 +98c, NG $4.99 +24c, UKNG 256.2p +2.3p

By Malcolm Graham-Wood

Oil price

A sharp rise in crude yesterday as there were admittedly vague stories of China giving support to Russia in Ukraine. Also most people are saying that Russia is still selling most of its crude, some will slow in April as the cuts bite.

Union Jack Oil/ Reabold Resources

Union Jack Oil and Reabold Resources have announced that the East Riding Planning Committee has approved the planning application for drilling and production at the West Newton A site and have separately approved a time extension to allow further exploratory drilling at the West Newton B site.

In September 2021, the Oil and Gas Authority’s domestic oil and gas production supply forecast were seen to fall below the Climate Change Committee projections for domestic oil and gas demand based on its Balanced Net Zero Pathway to 2050.

The current crisis has made even more clear the significant domestic oil and gas supply gap that will need to be filled either by further imports or new domestic production.  

The West Newton project is expected to support security of supply, contribute to reducing the widening supply gap and bring meaningful local inward investment and employment to the East Riding, consistent with the government`s levelling-up agenda.

Union Jack holds a 16.665% economic interest in PEDL183, encompassing an area of 176,000 acres and located within the Western Sector of the Southern Permian Basin, onshore UK north of the river Humber.   PEDL183 contains the West Newton A-1, A2 and B1z hydrocarbon discoveries.

For Union Jack this is clearly very important news but nowadays success or failure at West Newton isn’t the drag on expectations that it might once have been. This is because of the huge success at Wressle where substantial oil production has lifted the value of the project so much that revenues are piling in and the company has indicated that a dividend could be on the cards. Add an appeal at Biscathorpe and the UJO portfolio is capable of a share price well into three figures…

Reabold holds a c. 56 per cent. economic interest in West Newton via its c. 59 per cent. shareholding in Rathlin, which, in turn, has a 66.67 per cent. interest in PEDL183. In addition, Reabold has a 16.665 per cent. direct licence interest in PEDL 183.

Sachin Oza, Co-CEO of Reabold, commented:  

“As a low-carbon energy project, West Newton supports local investment in East Riding and contributes towards the UK’s ambitions for energy security, whilst supporting our pathway to Net Zero.”

“We are delighted by this approval and are extremely excited for the future of West Newton. We look forward to the next phase of progression towards development for this nationally significant asset.”

For Reabold whilst it may seem that the development of West Newton is crucial to their portfolio, which it clearly is, there are still other fish to fry which is why the recent significant rally in the share price may only be the start of the process. Speaking to Steve Williams this morning I detected, apart from a genuine delight in the news from Yorkshire that his other projects are still mainly very much still up and running.

 Reabold has a 49.99% interest in Corallian Energy, which has a 100% interest in the Victory Gas discovery in the West of Shetland, this is very much under review right now to maximise value to shareholders and with current UK natural gas prices, indeed even significantly lower this project  looks to be a runner. First gas could be ashore by 2024 which would appeal not just to the companies involved but as the UK searches for more domestic gas might edge Victory into development territory.

Steve also reminded me that we should not forget California where the Daybreak deal is still in process and we should expect to see Reabold owning a substantial stake in the merged vehicle before long. Overall RBD shares have had a rollercoaster ride in the last year, having quadrupled since January they are still only half of their peak of this time last year, my suspicion is that West Newton and expected news from Corallian and Daybreak should drive significant further growth in the shares. 

This news is incredibly positive for both companies who have spent a great deal of time on the planning process as they seem to do nowadays, but maybe the current macro hostilities may have had some influence on local authorities to do their best to bring forward safe, controlled onshore drilling. 

SDX Energy

SDX has announced its audited financial and operating results for the twelve months ended 31 December 2021. All monetary values are expressed in United States dollars net to the Company unless otherwise stated.

Twelve months to 31 December 2021 Financial Highlights

The table below reflects the results of the Company for the years ended 31 December 2021 and 2020. The North West Gemsa and South Ramadan concessions, which were sold in Q3 and Q4 2020 respectively, are classified as discontinued operations (as required by International Financial Reporting Standards “IFRS”). All revenues, costs and taxation from these assets have been consolidated into a single line item “profit from discontinued operations” in the previous reported period. Per unit metrics do not include North West Gemsa or South Ramadan.

Twelve months ended 31 December

US$ million except per unit amounts

2021

2020

Net revenues

53.9

46.1

Netback(1)

44.1

36.5

Net realised average oil service fees  US$/barrel

55.27

31.96

Net realised average Morocco gas price  US$/Mcf

11.34

10.80

Net realised South Disouq gas price – US$/Mcf

2.85

2.85

Netback – US$/boe

20.54

16.72

EBITDAX(1) (2)   

40.0

32.9

Exploration & evaluation expense(3)   

(14.1)

(5.8)

Impairment expense

(9.5)

Depletion, depreciation, and amortisation

(32.6)

(25.2)

Profit from discontinued operations

1.8

Total comprehensive loss

(24.0)

(2.1)

Capital expenditure

27.8

24.7

Net cash generated from operating activities(4)

28.7

21.3

Cash and cash equivalents

10.6

10.1

(1)         Refer to the “Non-IFRS Measures” section of this release below for details of Netback and EBITDAX.

(2)         EBITDAX for twelve months ended 31 December 2021 and 2020 includes US$5.3 million and US$5.1 million respectively of non-cash revenue relating to the grossing up of Egyptian corporate tax on the South Disouq PSC which is paid by the Egyptian State on behalf of the Company.

(3)         For the twelve months ended 31 December 2021 and 2020 US$12.3 million and US$4.5 million respectively of non-cash Exploration & Evaluation (“E&E”) write offs in total are included within this line item.

(4)         Excludes discontinued operations.

 ·     2021 Netback of US$44.1 million, 21% higher than the same period in 2020. Netback contribution from South Disouq was US$16.5 million (2020: US$16.2 million) due to lower gas and condensate production and increased water and sand production being more than offset by higher realised price for condensate. West Gharib Netback increased by US$2.5 million due to the increase in the realised oil service fee, partly offset by lower production. Morocco Netback was higher in 2021 by US$4.8 million due to significantly higher production and higher realised prices due to favourable FX. In 2020, Moroccan production was impacted by COVID-19 shutdowns.

 ·     2021 EBITDAX of US$40.0 million was 22% higher than the same period in 2020 of US$32.9 million due to higher Netback, partly offset by lower profitability from the Company’s investment in the joint venture that operates the West Gharib asset and slightly greater recurring G&A expenses.

 ·    2021 depletion, depreciation and amortisation (“DD&A”) charge of US$32.6 million was higher than the US$25.2 million for the same period in 2020 due to accelerated depreciation of the SD-12X borehole due to lower recoverable reserves from this well, and a downward revision of the reserves base at the start of 2021 for South Disouq and Morocco, partly offset by lower production.

 ·     Non-cash E&E write offs totalled US$14.1 million following the non-cash impairment charge ahead of the relinquishment of the Lalla Mimouna Nord concession in Morocco (US$10.3 million), the write off the Hanut-1X dry well drilled in South Disouq (US$1.3 million), a write-off of decommissioning assets for the Moroccan operations (US$0.7 million), a provision for obsolete inventory (US$0.2 million), and ongoing new venture activity (US$1.6 million).

 ·     Non-cash PP&E impairment of US$9.5 million was recognised for the South Disouq Cash Generating Unit (“CGU”) as at 31 December 2021, following a downward revision in the anticipated recoverable reserves from the producing fields.

 ·      Operating cash flow (before capex, excluding discontinued operations) of US$28.7 million, was higher than the same period in 2020 of US$21.3 million, primarily due to the EBITDAX drivers discussed above and lower tax payable for West Gharib due to lower 2020 profitability. These factors were partly offset by an increase in accounts receivable, driven by an increase in the ONHYM receivable for its share of completion and connection costs for wells drilled in 2021 and increased revenues from West Gharib during the period, and cash spent on inventory, the majority of which will be consumed in the next South Disouq drilling campaign.  

 ·      Capex of US$27.8 million, reflects:

 o  US$17.2 million (including US$0.3 million of decommissioning provisions) for the Moroccan drilling campaign and well tie-ins;

o  US$3.1 million for other projects in Morocco including seven well workovers partly offset by a US$1.4 million reduction in the decommissioning estimate for the Moroccan operations (net effect: US$1.7 million);

o  US$6.7 million for the completion of the SD-12X tie in at South Disouq, the drilling of the IY-2X and HA-1X wells (including a US$0.6 million exploration extension signature bonus), the SD-4X well workover, and other minor capex projects at South Disouq;

o  US$2.1 million for drilling/workovers in West Gharib; and

o  US$0.1 million for other assets.

 ·      Liquidity: Closing cash as at 31 December 2021 was US$10.6 million with the European Bank of Reconstruction and Development (“EBRD”) credit facility remaining undrawn with US$4.8 million of availability. This availability is likely to reduce on completion of the South Disouq disposal, with the next redetermination scheduled for Q2 2022.

 ·      Together with cash generated from operations, management believes the Company is fully funded for all its stated objectives in 2022.

 2022 Guidance

·      2022 production guidance of 3,300 – 3,550 boe/d is lower than 2021 production, predominantly due to the disposal of 33% of SDX’s interests in the South Disouq asset, as well as the decision not to immediately renew an expired customer contract in Morocco. At West Gharib, the development drilling is expected to arrest the natural decline in production and then grow volumes as the new wells come online.

·      An analysis of 2022 production guidance by asset is as follows:

Gross production

SDX entitlement

production boe/d

SDX entitlement production boe/d

Asset

Guidance – 12 months ended 31 December 2022

Actual – 12 months ended 31 December 2021

Guidance

12 months ended 31 December 2022

Actual

12 months ended 31 December 2021

South Disouq – WI 55% & 100% (36.9% & 67.0%1)

33 – 35 MMscfe/d

45.5 MMscfe/d

2,280 – 2,420

4,465

West Gharib – WI 50%

2,200 – 2,650 bbl/d

2,398 bbl/d

420- 505

457

Morocco – WI 75%

4.8 – 5.0 MMscf/d

7.7 MMscf/d

600 – 625

964

Total

3,300 – 3,550

5,886

(1)    After completion of the South Disouq disposal with effect from 1 February 2022, and net of minority interest. Gross of minority interest, production is expected to be 3,250 – 3,450 boe/d.

 o  South Disouq: Production guidance for 2022 reflects the disposal of 33% of SDX’s interest in the asset, 2-3% CPF and compressor downtime due to planned maintenance, and several well workovers. The existing wellstock is expected to continue to exhibit natural decline, some of which will be offset by drilling the SD-12_East development well. The SD-5X/Warda exploration well is assumed to be dry for guidance purposes but if successful, could increase gross production to 38-40 MMscfe/d and SDX’s total corporate entitlement guidance to 3,600-3,850 boe/d (net of minority interest) from the 3,300-3,550 boe/d currently presented. The Mohsen exploration well, if successful, will require to be tied in and therefore is not expected to contribute to production until mid-2023.

 o  West Gharib: The development drilling campaign will arrest the asset’s natural decline, with new wells beginning to grow production during the second half of the year and into 2023.

 o  Morocco: 2022 production guidance is lower than 2021 production as the Company decided not to immediately renew a five-year customer contract that expired on 31 December 2021 until the Company has better visibility on future gas supply and pricing to support the full term of a new contract. This decision is the main factor for a reduction in Moroccan capex guidance in 2022 which is c.US$6.0 million (32%) lower than FY21 capex.  The Company is exploring several options for re-entering into discussions with this customer.

 o  COVID-19: The 2022 production guidance presented assumes no significant production curtailments due to COVID-19. If there are disruptions, then production guidance may be revised.

2022 Capex Guidance

·      2022 capex guidance range of US$21.5-23.0 million is fully funded and predominantly relates to one appraisal and two exploration wells in South Disouq, up to eight new wells and facilities upgrades in West Gharib, and five new wells in Morocco.

Asset

Guidance – 12 months ended 31 December 2022

Actual – 12 months ended 31 December 2021

South Disouq – WI 55% & 100% (36.9% & 67.0%(1))

US$4.5 – 5.0 million(2)

US$6.6 million(3)

West Gharib – WI 50%

US$4.5 – 5.0 million

US$2.2 million

Morocco – WI 75%

US$12.5 – 13.0 million

US$18.9 million(4)

Total

US$21.5 – 23.0 million

US$27.7 million

(1)      After South Disouq disposal

(2)      Net of minority interest. Gross of minority interest, capex guidance is US$6.7 – 7.2 million.

(3)      Includes US$0.6 million of expenditure that was pre-paid as a project milestone in 2020 but has now been reclassified to capex.

(4)      Includes a net reduction of US$0.6 million in the decommissioning estimate for the Moroccan operation, following a review of assumptions.

·      The anticipated timings of planned key capex activities are outlined below:

Asset

Activity

2022 Timing

South Disouq

SD-5X (Warda) exploration well

Q1-Q2

SD-4X workover

Q2

SD-12_East appraisal well

Q2

SD-3X workover (AM-I)

Q2

MA-1X (Mohsen) exploration well

Q3

SD-3X workover (KES)

Q4

Morocco

Two well drilling campaign

Q1-Q2

SAH-4 workover

Q1

Three well drilling campaign

Q3-Q4

West Gharib

Eight development wells

Q1-Q4

Water injection well and facilities upgrades

Q2-Q4

 

o  South Disouq: One appraisal well, SD-12_East, and two exploration wells, SD-5X (Warda) and MA-1X (Mohsen), will be drilled consecutively, commencing in Q1 2022. SD-5X (Warda), the first well in the campaign, is a basal Kafr El Sheikh prospect targeting unrisked P50 recoverable volumes of 11bcf with a 40% chance of success. The well location is close to the producing SD-4X well, again enabling low-cost and quick tie-in in the event of success. SD-12_East will target the eastern part of the Sobhi field and is expected to be completed and tied back rapidly once drilled. MA-1X (Mohsen) is targeting a prospect further to the south-east, c.5.5km from the CPF. It too is a basal Kafr El Sheikh prospect and is targeting unrisked P50 recoverable volumes of 21bcf with a 45% chance of success. Following the disposal announced on 1 February 2022, all three wells are being drilled with partner participation. In addition to the drilling activity, several well workovers will be undertaken to maximise recovery from the fields.

 o  West Gharib: Up to eight infill development wells will be drilled as part of the field development plan, with additional facilities installed, including greater fluid handling capacity.

 o  Morocco: Five wells will be drilled in two campaigns in Q2 and Q3/Q4 2022. As in 2021, conducting two campaigns allocates the capital investment over a longer period of time and therefore allows the cost of these wells to be comfortably covered by cash generated by the asset. All five wells will target shallow biogenic gas that can be tied into the Company’s infrastructure quickly and at low cost, with one of the first two wells targeting a new area of the acreage which is as yet untested, but covered by 3D seismic. If successful, this well could open up further drilling and exploitation opportunities, some of which could be tested in the second campaign. Several wells will be worked over, including re-perforation and sliding sleeve operations to exploit behind-pipe reserves and maximise production and recovery from the existing well stock.

Outlook

·    Management believes that the Company is well-placed to weather the current macroeconomic uncertainties and continues to screen a number of business development opportunities.

·    Cash generation is expected to continue strongly through 2022 and beyond as approximately 80% of the Company’s cash flows are expected to be generated from fixed-price gas businesses, with the remaining 20% being generated from our West Gharib oil asset which is highly profitable in the current oil price environment.

·      The current strong oil price and outlook means that the Group also plans to continue with its thirteen well drilling campaign and capitalise on its recent production service agreement extension at West Gharib.

·      Anticipated 2022 and 2023 work programmes are fully funded.

·      The Company continues to assess the optimum use of capital in the interests of all stakeholders, whether that be investment into new projects or returning cash to shareholders. As previously announced, following the disposal of 33% of the shares in the entity that holds its interests across it South Disouq concession, the Company has stated its intention to initiate a share buyback program in H2 2022 of up to US$3.0 million.

Mark Reid, CEO of SDX, commented:

“2021 was a year of both challenges and successes. Our portfolio continued to perform well with production above mid-point guidance, and Netback and EBITDAX showing growth of 21% and 22%. Impairment charges relating to South Disouq and Lalla Mimouna Nord have resulted in a statutory loss for the year.

The Group had mixed drilling results. The disappointment was the unsuccessful Hanut well, however there were a lot of positives; the IY-2X development well was drilled successfully and production brought on quickly maximising value from the field. In Morocco all our three wells were drilled successfully and all were tied into production infrastructure soon after drilling. Our fourth Moroccan well has encountered some issues however we plan to recommence drilling the well in early Q2 2022.

At West Gharib in Egypt, the first well of our 13 well campaign was spud in October with the entire program looking to bring on additional barrels of oil and take advantage of the higher oil price environment. Post period end, we have been able to announce the successful drilling of the first and second wells and the testing and tie in of both.

SDX’s board and management has always approached the business from the perspective of maximising value for all stakeholders. As such, we were pleased to announce in February 2022 that the Group disposed of 33% of the shares in the entity that holds its interests across its South Disouq concession for US$5.5 million which was at a significant premium to the asset’s value within our market capitalisation. As a result, a share buyback program of up to US$3.0 million is planned to be initiated in the second half of the year.

I am very confident that the upcoming year will be a positive one for SDX and that with a healthy balance sheet and a fully-funded drilling campaign targeting some exciting value-accretive prospects, we will finish the year in an even stronger position. The share price performance has clearly been very disappointing and I and my board colleagues are focussed on reversing this trend. I would like to extend my thanks to our shareholders for their commitment throughout the period and to all of our wider stakeholders for the support they continue to give SDX.”

There is plenty of detail in this long announcement which I have not reproduced in its entirety for obvious reasons. There is also not much to add to my views that I have been making over the last few months. I took a more positive view towards the end of last year and the share price rallied but then lost all of the gains. 

On the positive side most of the wells have come in but some disappointments and the impairments clearly do not look good in the report. Whilst there is clearly value in the portfolio some might argue that there is not enough upside or beta to make SDX an attractive alternative to other equities in the sector. Some of this is surely reflected by the major shareholder so maybe some conversations need to take place for some sort of restructuring in order to boost finances and expand the portfolio…

And finally…

What a huge weekend of sport is coming up, pretty much anything you like is there somewhere!

Footy sees both the Prem and the FA Cup quarter finals, in the former tonight sees Wolves v Leeds and tomorrow Villa hosting the Gooners and on Sunday the Bees visit the Foxes and the Hammers go to White Hart Lane. In the FA Cup its Boro v Chelsea tomorrow and on Sunday it’s the Eagles hosting the Toffees, the Noisy Neighbours go to the Saints and Forest entertain Liverpool.

In the Champions League draw Chelsea got Real Madrid, the Noisy Neighbours have Athletico and Liverpool have Benfica. In the Boropa Cup, the Hammers after their huge win last night get Lyon and Rangers get Braga.

And the 6 Nations winds up with Super Saturday, Wales start off against Italy, Scotland are in Dublin and England are in Paris. The Irish need England to win in Paris to have any chance of winning the title. With England having lost two games down to Cowan Dickhead and Charlie Ewelsless being red carded might try to have 15 players on the pitch at the end of the game. What used to be the Red Rose of England is now the Red Card of England.

And F1 is back with the Bahrain GP kicking us off.  After the debacle that was Michael Masi illegally finishing last season we now have a brand new bunch of cars that all look different, fitting in viewing of quali tomorrow afternoon might be quite smart..

The cricket continues, England took advantage of a flat track to score 507-9 and by the close the West Indies were 71-1.

And the Cheltenham Festival finishes with the Gold Cup this afternoon, being held interestingly at the same time as the SDX results conference call….

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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