WTI $120.67 -84c, Brent $122.01 -$1.06, Diff -$1.34 -23c, USNG $8.85 -11c, UKNG 148.0p -0.65p, TTF €82.5 +€0.036

Oil price

Oil was up on the week but faded late in the day after the US CPI came out which trashed markets but rallied the dollar ahead of the Fed meeting tomorrow. Perhaps worse was the fact that the Chinese have restarted serious Covid testing again…

Elsewhere Opec can’t hit their targets, you were warned, Libya is closing more in and the rig count showed a rise of 6 overall and in oil too.

Wentworth Resources

Wentworth has announced that it has reached agreement with Scirocco Energy plc to acquire its 25% non-operated working interest in the Ruvuma Production Sharing Agreement, in Tanzania.

The 1.9 Tscf (mean GIIP) Ntorya gas discovery located within Ruvuma, Tanzania is operated by ARA Petroleum Tanzania (50% working interest, Aminex plc 25%) and is adjacent to Wentworth’s Mnazi Bay gas producing asset.

The consideration is comprised of an initial cash payment of $3 million due upon Completion, with further deferred and contingent cash payments of up to $13 million dependent on certain development and production milestones.

The consideration will be funded through Wentworth’s cash resources whilst allowing the Company to maintain its commitment to a long-term, sustainable and progressive dividend for shareholders.

Strategic Rationale

• Value accretive transaction represents an attractively priced, low risk entry into a high growth opportunity with the majority of the consideration only payable upon meeting development and production milestones
• The Ruvuma development is expected to deliver a transformational increase in Wentworth’s production and resources alongside Mnazi Bay enabling Wentworth to support both the growing energy needs and industrialisation of Tanzania
• Progresses Wentworth’s stated strategy of increasing scale and driving growth through a focus on natural gas projects in Tanzania
• Positions Wentworth as the leading domestic gas player in Tanzania with a diversified production, appraisal and development portfolio
• Ruvuma will become the third producer of domestic gas in Tanzania alongside Mnazi Bay (Wentworth 32% working interest) and Songo Songo
• Enables Wentworth to continue to support the Government of Tanzania’s ambition to increase energy access through lower-carbon solutions and reach universal energy access by 2030
• Underscores Wentworth’s position as a key partner for the Government of Tanzania
• Transforms Wentworth into a multi-asset domestic gas producer in Tanzania and represents a first step into asset diversification and towards a full-cycle portfolio
• Wentworth’s in-country expertise and track record of delivery will support the Ruvuma JV to maximise the potential of a world class asset
• Wentworth remains committed to offset all existing Scope 1 and 2 emissions and partially offset Scope 3 emissions in 2022 and will work with the Ruvuma JV partners to ensure the development of the project is aligned with these aspirations to enable the Company to continue to have one of the lowest carbon intensities per boe in the UK plc market

The Ruvuma Asset

The Ruvuma asset contains the Ntorya-1 discovery well, drilled in 2012, and the Ntorya-2 appraisal well, drilled in 2017, and is estimated by RPS (2018) to have a mean estimated GIIP of c.1.9 Tscf. The Ntorya-1 gas discovery well is located approximately 30 km from the Madimba gas plant which is within the Mnazi Bay concession.

Development activity is progressing with a 338 km2 3D seismic survey currently underway before the drilling of the Chikumbi-1 appraisal well in late 2022 or early 2023.  The Chikumbi-1 well aims to confirm 2C resources of 763 Bscf.  The cost of the seismic survey and appraisal well net to Wentworth is estimated at $6.25 million.

Final Investment Decision (“FID”) is targeted for 2023 with first gas expected in late 2024 and an ultimate target production rate of up to 140 MMscf/d. The project will require construction of a pipeline from the gas field to the government operated Madimba gas facility, located approximately 30 km eastward, which is capable of handling 210 MMscf/d and is currently receiving most of the production volumes from the Mnazi Bay gas field. Gas from the Madimba gas facility will then be distributed via existing gas infrastructure to end users.

A commercialisation study performed by io oil and gas consultancy (a Joint venture between Baker Hughes and McDermott) in 2017 showed that a 140 MMscf/d Full Field development project would require approximately $143 million (gross) of capital expenditures. Actual costs and project scope will be dependent on a development plan agreed to by the Ruvuma JV partners and the government.

Details of the Transaction

The economic date of the Transaction is 1 January 2022.

The consideration structure ensures that the majority is only paid in a success case. The headline consideration of up to $16 million is payable in cash. Initial consideration of $3.0 million is payable in cash payable upon completion of the Proposed Transaction. Upon satisfaction of certain conditions Wentworth will make a loan of $0.5 million available to Scirocco (the “Initial Loan”). 50% of such Initial Loan is repayable in the event completion does not take place.  

Deferred and contingent payments represent the remaining cash payment of $13 million which is due upon the following key milestones:

• $3.0 million on reaching FID;
• Up to $8 million through a minority share of net profit to Wentworth; and
• $2.0 million on reaching gross cumulative production of 50 Bscf. 

Wentworth has agreed to a loan arrangement of up to $6.25 million with Scirocco (the “Facility”) to enable Scirocco to meet its cash call obligations and provide continuity to the work programme in the interim period to Completion. Any drawdowns under the Facility are subject to Scirocco shareholders’ approval and partner non pre-emption and the full amount of drawdowns (less $0.25 million of the Initial Loan) are repayable in the event of non-completion. The Facility will be secured by assignments of security by Scirocco in favour of Wentworth over the Licence Documents for the Ruvuma Asset. The grant of such security will be subject to the consent of the Minister for Energy in Tanzania and both parties will look to obtain such consent as soon as possible. The first $3.0 million to be drawn under the Facility is interest free, however, any amounts drawn in excess of $3.0 million will incur interest at a rate of 7% per annum until such time as the grant of the security in respect of the Facility is approved by the Minister for Energy in Tanzania.

In line with the requirements of Schedule Four of the AIM Rules, Scirocco recorded its interest in the Ruvuma Asset at a gross asset value of £14.63 million ($18.0 million) per its unaudited accounts for the six month period ended 30 June 2021. For the audited year ended 31 December 2020, Scirocco incurred losses relating to the Ruvuma Asset of £0.81 million.

Timetable and Conditions

The proposed Acquisition is subject to formal shareholder approval from Scirocco’s shareholders at a General Meeting to be held in due course, as well as certain regulatory approvals plus the non-exercise or waiving of pre-emption rights by the other Ruvuma Asset JOA partners.

The Transaction will not result in any changes to the Board of Wentworth.  The Company currently expects the Transaction to complete ahead of the Longstop Date of 30 June 2023. 

Katherine Roe, Chief Executive of Wentworth:
“This is a transformational transaction for Wentworth establishing us as a dual-asset, full-cycle E&P with a significantly enhanced resource base and production profile.  The deal represents an attractively priced, low risk entry into a high growth opportunity which cements our position as a leading supplier of domestic gas to Tanzania. 

“This compelling growth opportunity is fully aligned with our commitment to support the Government to reach its goal of providing universal energy access by 2030 in accordance with our purpose to empower people with energy and deliver value for Tanzania, Wentworth and all our stakeholders.”

Wentworth has announced this major acquisition in Tanzania with a 25% interest in Ruvuma which brings into the WEN portfolio a ‘world class asset’ with c. 1.9 Tscf which when it comes onstream late in 2024 could deliver initial production of 149 MMscf/d (gross). The cost of the deal is up to $16m with only $3m down which will give a very decent long term return on the modest capital sum invested.

The acquisition fits well with the existing Tanzanian asset at Mnazi Bay where it has developed significant in-country expertise as well as a meaningful relationship with the Government who have exhibited an exemplary approach to hydrocarbon policy. This is proved only today as they have signed an agreement with Equinor and Shell for a $30bn LNG export terminal which will go a long way to their goal of providing universal energy access by 2030.

I think for me the key about this transaction has been the timing and structure. Ruvuma has already been an interesting and strategically important licence to be involved with but it was  important to ensure that the new Operator was committed and motivated to move forward with the work programme and that the consideration structure would match the de risking of the project to financially protect Wentworth.

Both of these have been achieved: there is activity underway on the work programme with near-term newsflow and catalysts and the majority of the consideration will only pay out in a success case where everyone wins. Here it is structured as a clean cash asset purchase with no dilution for shareholders and more importantly, no impact on the dividend policy .

The transaction has been carefully crafted such that the only real risk is the $3m. Even the money spent on the work programme goes into the cost recovery pools, the pro rata share of which we understand to be materially higher than the max consideration of $16m.

Wentworth will end up with a combined Ruvuma and Mnazi Bay asset with long term profitable production in a stable political and fiscal environment with significant exploration upside. I would contend that the deal will substantially enhance the share price and that the market cap of £47m should grow by a considerable amount. 

Scirocco Energy

Scirocco has announced that it has entered into a conditional binding agreement with Wentworth Resources plc to divest its 25% non-operated interest in the Ruvuma asset, Tanzania, for a total consideration of up to US$16 million.

Ruvuma Transaction Highlights

Total consideration of up to US$16 million comprised of:

• Initial consideration of US$3 million payable on completion of the Proposed Transaction;
• US$3 million payable upon final investment decision being taken by the parties to the Ruvuma Asset Production Sharing Agreement or the JOA as the case may be;
• Deferred consideration of up to US$8 million payable in the form of a 25% net revenue share from the point when Ruvuma commences delivery of gas to the gas buyer;
• Contingent consideration of US$2 million payable on gross production reaching a level equal to or greater than 50Bcf.
• Wentworth to provide Scirocco with a loan of up to $6,250,000 to meet all cash calls pursuant to the Ruvuma JOA arising between the Economic Date of 1 January 2022 and expected Completion timeline.
• The first $3m to be drawn under the loan is interest free however any amounts drawn in excess of $3m will incur interest at a rate of 7% per annum until such time as the grant of the security in respect of the loan is approved by the Minister for Energy in Tanzania.
• The total consideration represents over 200% premium to Scirocco’s current market capitalisation.
• The deal strengthens Scirocco’s balance sheet and, critically, removes the imminent need to raise capital to fund the Ruvuma work programme.
• Completion of the Proposed Transaction follows a formal sales process for the asset and enables Scirocco to accelerate its strategy of building a portfolio of cash generative assets within the sustainable energy and circular economy sectors.
• Pursuant to Rule 15 of the AIM Rules for Companies, the Proposed Transaction is subject to shareholder approval by way of an ordinary resolution at a General Meeting scheduled for 29th June 2022, the details of which will be included in a shareholder circular published today. Please refer to the end of this announcement for an extract from the circular containing more details on the Proposed Transaction and the General Meeting.
• Those Directors who hold shares, representing 3.2% of the Company’s issued share capital, believe the Proposed Transaction to be in the best interests of the Company and will be voting in favour at the General Meeting.
• In addition the Company has received letters of support for the Proposed Transaction from significant shareholders representing 11.1% of the Company’s issued share capital which confirm that it is their current intention to vote in favour of the resolution at the General Meeting

In line with the requirements of Schedule Four of the AIM Rules, the Company notes that it recorded its interest in the Ruvuma asset at a gross asset value of £14.63 million per its unaudited accounts for the 6 month period ended 30 June 2021. For the audited year ended 31 December 2020, the Company incurred losses relating to Ruvuma asset of £0.81 million.

Capitalised terms are as per the definitions section at the end of the announcement.

Commenting on the Proposed Transaction, Tom Reynolds, Scirocco’s CEO stated:
“This is a transformative deal that follows lengthy engagement with Wentworth and a two-year sales review process.  The deal enables Scirocco to crystallise firm value from this asset which can be deployed into compelling opportunities in line with the Company’s strategy to focus on opportunities within sustainable energy and the circular economy.  The deal is appropriately structured to reflect the risk profile of the asset and ensures Scirocco retains value exposure to the ongoing success of the project as it reaches various milestones.  Critically, it also provides the Company with the funding to meet the imminent cash calls associated with the work programme on the Ruvuma Asset until the deal completes, meaning we avoid the material dilution that would have been required in the event we retained our interest in the project.

The Board has no doubt whatsoever that this is wholly in the best interest of the Company and its shareholders. After an exhaustive sales process over the last couple years, it is evident that this is the best possible deal that we could achieve based on the macro backdrop and the investment required to further de-risk and commercialise our interest in Ruvuma.  In Wentworth, we have found the perfect counterparty that can add value to the JV going forward, and their existing profile in Tanzania ensures lower deal execution risk and the best chance of a swift completion.

Upon completion, this deal enables the Board to focus on the execution of its stated strategy, with a significantly stronger balance sheet and cash that can be deployed right away to capitalise on the compelling opportunities that we have within the EAG JV’s deal pipeline.  Those opportunities reflect our stated intention to create a cash generative, diversified business model which can grow through acquisition of and/or investment in sustainable energy assets. The divestment of Ruvuma simplifies our investment thesis and enhances our appeal to a broader universe of investors, including ESG investors who we believe will be attracted to our growth strategy.”

Scirocco has delivered on its promise to sell Ruvuma and through the rigorous formal conducted over two years has come up with a deal that enables them to move into the sustainable energy market and with significant respect. This is a very fair price and more importantly with a very solid counterparty in Wentworth.

Given the alternative of running Ruvuma with its associated costs not deemed core for the long term the Scirocco management have avoided the dilution that would have been needed to take it through to development. As it is it means that SCIR can add to the existing building blocks in the EAG deal pipeline which looks exciting and as it says will be attractive to ESG investors. 

The valuation of this deal suggests significant upside to SCIR’s current share price on the firm consideration and the FID consideration alone, with the further consideration components adding more value further down the line and enables SCIR shareholders to retain exposure to the project upside without the execution risk and financial dilution.

The shares have rallied somewhat this morning as the process finally comes to an end and investors can now look at the company as a clean, sustainable play in its new chosen path. With a management team in place I wouldnt be at all surprised to see action sooner rather than later.

Diversified Energy Company

Diversified Energy Company PLC, announced on 22 March 2021 a dividend in respect of the fourth quarter to 31 December 2021 of 4.25 cents per share (“Q4 2021 Dividend”).  The Company will pay the Q4 2021 Dividend on 30 June 2022 to those shareholders on the register on 27 May 2022.

The Company announces that Shareholders who have elected to receive their dividends in GBP sterling will receive an equivalent payment of 3.43 pence per share, based on the 10 June 2022 exchange rate of GBP 0.80620=US $1.00.

Just to highlight the dividend and pay date for UK shareholders.

Orcadian Energy

Orcadian has provided the following update.

Highlights:

• The Company has submitted a draft Field Development Plan for the Pilot oilfield to the North Sea Transition Authority (NSTA)
• A structured farm-out process has been initiated for the Pilot oilfield
• New tax regime has transformed economics of North Sea investment for tax-paying companies.

Summary

Orcadian has 79MMbbls of 2P reserves in the Pilot oilfield and the Pilot oilfield Field Development Plan (“FDP”) builds upon work done in the concept select process which culminated in NSTA sending a “letter of no objection” to the low-emissions concept selected by Orcadian, as announced on 1 December last year. 

Orcadian’s proposed low emissions, FDP for Pilot is based upon a Floating Production Storage and Offloading vessel (FPSO), with thirty-four wells to be drilled by a Jack-up rig through a pair of well head platforms and provision of power from a floating wind turbine. Emissions per barrel produced are expected to be about an eighth of the 2020 North Sea average, and less than half of the lowest emitting oil facility currently operating on the UKCS. On a global basis this places the Pilot oilfield emissions at the low end of the lowest 5% of global oil production. The draft FDP will be discussed and agreed between NSTA and Orcadian over the coming months but it cannot be approved until the associated development finance has been finalised. The structured farm out process, that has been initiated for Pilot, is a key part of that process.  

At the same time, the Directors understand that the introduction of the Energy Profits Levy (“EPL”) by the UK Government last month, has radically improved the economics of a farm-in deal for some potential farminees. Whilst the EPL did introduce a further tax on profits from UK oil and gas companies, it also introduced significant investment allowances to encourage oil and gas companies to reinvest their profits to support the economy, jobs and UK energy security. Accordingly, for companies that pay both EPL and UK ring fence corporation tax (a modified form of corporation tax only payable by the UK oil and gas industry), the after-tax cost of development could be reduced by up to 75% when compared with a non-tax paying company.  The Board believe that this will make investment in the development of the Pilot oilfield an increasingly attractive opportunity.

There is more information on the workings of the UK ring fence tax system, and the impact of the EPL, available in a Treasury briefing note here: https://bit.ly/Treasury_EPL

Steve Brown, Orcadian’s CEO, said:
“Submission of the draft FDP is a further important milestone for the Pilot development and highlights the maturity of the project. Our focus on minimising emissions means that the project will be especially attractive to companies that wish to drive down their emissions intensity whilst the introduction of the investment allowances as part of the Energy Profits Levy will surely incentivise operators to double down on investing in domestic energy security. We look forward to a heightened level of interest in our project and providing further updates as the process progresses.”

Readers will know that I have had Orcadian on the radar screen since it came to the market, it has a top management team loaded up with experience and few know their way around the North Sea better than them. 

As they kick off the farm-out they are convinced that they have an interesting offering which might even appeal to some more since the Looney tax came in…

KeyFacts Energy Industry Directory: Malcy's Blog