WTI (Oct) $87.31 -47c, Brent (Nov) $93.17 -83c, Diff -$5.86 -36c, USNG (Oct) $8.28 +4c, UKNG (Oct) 369.67p +24.67p, TTF €204.98 +€23.33

Oil price

Yesterday was all about inflation in the US and it was a disappointment coming in at 8.3% against the whisper of 8.1%, markets went into free fall and risk was back on, oil actually finished off the lows and today is up, a combination of inventory news and reports from Opec and the EIA.

Opec trimmed 2022 oil demand but say this year will still exceed 2019 albeit finishing weaker due to lower demand in China thanks to Covid. The IEA however increased demand as they say expensive gas has led to more use of oil in power generation this year, not wrong that.

Zephyr Energy

Zephyr has announced that it has entered into a binding agreement  to acquire a package of oil and gas assets located on and around the Company’s Paradox project, Utah, U.S.

Under the Agreement, Zephyr will acquire 21 miles of natural gas gathering lines, the Powerline Road gas processing plant (the “Plant”, which is not currently in operation), rights of way for additional gathering lines, active permits, five existing wellbores and additional acreage  which is partly contiguous to the Company’s operated White Sands Unit.

The consideration for the Acquisition is US$750,000 and will be satisfied by a payment from Zephyr’s existing cash resources and as the new owner, Zephyr will assume responsibility for all eventual decommissioning and plugging and abandonment  liabilities for the assets acquired (estimated to be approximately US$2.5 million in today’s terms).

Once the Acquisition is completed (which is expected by 7 October 2022), Zephyr will operate approximately 45,000 gross acres in the Paradox Basin, the majority in which the Company holds a 75% or greater working interest.

Overview
The Agreement enables the Company to acquire an asset package which will allow Zephyr to substantially reduce the capital required to build the necessary gas export infrastructure for its forecast gas production from the Paradox project. Given Zephyr’s potential significant gas resource, strong current pricing and increasing demand for U.S. domestic natural gas, the Board is delighted to have secured this opportunity ahead of commencing its further development of the Paradox project.

The assets being acquired under the Agreement include:

• • 21 miles of six-inch gas gathering line, with an estimated replacement cost value of US$8.8 million, which will substantially reduce the capital and costs required to export the Company’s gas production from the WSU. The acquired gathering lines tie directly into the Plant.
    • One of the acquired lines passes immediately alongside the site of the planned State 36-2 well (the first in a series of Paradox wells to be drilled in the upcoming drilling programme).
    • Additional rights of way for future pipelines are also included in the Agreement.
  • The Plant, while not currently in operation, is well suited for brownfield redevelopment and contains useable pre-existing infrastructure and related permits. This Plant is ideally located at the head of a 16-inch gas export pipeline recently purchased by Dominion Energy (“Dominion”), and can also act as a supply base for other WSU operations. The Plant has an estimated replacement cost value of US$1.8 million.
  • 1,160 acres which comprises the final leasehold acreage parcel under Zephyr’s existing 3D seismic, giving Zephyr a complete and contiguous 20,000 acres in the WSU with 3D coverage.  Zephyr estimates that this portion of acquired acreage will contribute:
    • 2 gross drilling locations with 2C contingent resources from the Cane Creek reservoir of 1.25 million barrels of oil equivalent with a net present value at a ten per cent. discount rate (“NPV-10”) of approximately US$17 million.
  • 4,320 additional acres, in locations near to the WSU, which are not covered by Zephyr’s pre-existing 3D seismic data but with resource upside potential in a success case.
  • Five existing vertical wells, four of which were planned for P&A by the existing owner, all which are expected to have re-use potential under Zephyr’s ownership:
    • The Federal 28-11 well, currently shut in, has near-term workover potential and is expected to have an initial estimated proved developed not producing (“PDNP”) reserve value of US$0.4 million once the well’s gas export is online.
    • Two wells with notable prior observations of hydrocarbons which may have additional work over or sidetrack potential.
    • Remaining wellbores which have re-use potential as future salt water disposal and water supply wells, which could substantially reduce future operating and completion costs (subject to State approval).
  • A full well database from the Operator.

The consideration for the Acquisition is US$750,000 which will be satisfied by a payment from Zephyr’s existing cash resources. As the new asset owner, Zephyr will assume responsibility for all eventual decommissioning and P&A liabilities for the assets acquired (estimated to be approximately US$2.5 million in today’s terms).  The Acquisition is expected to complete by 7 October 2022.

Upcoming Investor Presentation
In light of today’s Acquisition and the recent Paradox project acreage acquisition announced on 25 August 2022, and prior to the commencement of its upcoming Paradox drilling programme, the Company intends to present detailed development plans and schedules for the Paradox project at an investor webinar, the date of which will be announced within the next two weeks.

Colin Harrington, Zephyr’s Chief Executive, said: 
“We’ve often compared our Paradox project development to a jigsaw puzzle with a number of requisite pieces to be assembled prior to the commencement of commercial production – and today’s announcement is another substantial piece now in place.  By acquiring this package of surface infrastructure, we are moving rapidly from a programme of value delineation to a tangible development programme which is expected to facilitate cashflows from the project in a more rapid timeframe.

“Beyond the additional resources being acquired, today’s Acquisition provides us with several critical benefits.  Firstly, it allows us to greatly reduce the capital needed to build out the gas infrastructure required to sell produced gas volumes into the market.  Secondly, it completes the acquisition of all key acreage covered by the WSU 3D.  Thirdly, it provides an additional well pad already tied to the pipeline, which in combination with the New Acreage will simplify future development drilling.  Similarly, the gas plant, while currently not in use, has excellent potential for reintroduction to service and can potentially act as a WSU supply base.

“The acquired wellbores provide us with multiple re-use options over the short to medium term.  Along with the wells comes a proprietary well database from the Cane Creek and overlying reservoirs (including wells with notable hydrocarbon shows and prior production).  Wellbores that do not become work over candidates have potential as water supply and/or salt water disposal wells, which can substantially reduce our future operating and completion costs as the development progresses.

“I would like to take this opportunity to thank our counterparty in this transaction, as I believe we have jointly created a win-win situation for both parties through the Agreement.  We are now able to accelerate our Paradox project development without incurring significant upfront cash costs, and we plan to be proactive managers of the acquired assets in order to best bring them back into service.  Our aim, as responsible stewards of capital and of the environment around us, is to minimise surface and environmental disruption to the greatest extent possible, and making best use of the existing brownfield infrastructure across our leaseholding is a key way to achieve this objective.

“Following the significant recent additions to both our land and infrastructure positions, we plan, in the coming month, to give Shareholders a comprehensive update on our forthcoming drilling.  It’s an exciting time for the Company, filled with short-term operational activity and long-term strategic potential.”

This is yet more proof that the management at Zephyr is constantly trying to add value to the portfolio and in this particular case also brings forward the company to being a significant developer. 

Behind the scenes the company is getting its ducks in a row ahead of the drilling programme which is imminent. The acquisition of existing gathering lines, ROW’s and the gas plant as well as attractive acreage with near term workover potential is amazing and will ‘significantly reduce near term and long term infrastructure costs of the development of the Paradox’. 

It’s not often that you get a win/win situation like this, the seller didn’t have the wherewithal to develop so the package has been bought for a song, some $750/- plus decommissioning liabilities of $2.5m. For example the plant itself  is ideally located at the head of a 16-inch gas export pipeline recently purchased by Dominion Energy, and can also act as a supply base for other WSU operations. The Plant has an estimated replacement cost value of US$1.8 million.

I have gone on a great deal about the management at Zephyr and they have in a pretty short space of time not only started the Paradox Basin as a potentially substantial development which I think a big independent or even a  major would be proud of, but have bulked out the portfolio with non-operated cash generating assets to pay for the exploration efficiently and without significant further recourse to shareholders. 

This deal continues that process and again adds value to shareholders, a value that is building up substantially inside the company which deals like this help with but will be proven when the drilling campaign gets fully underway quite soon. There is a considerable risk in not owning Zephyr which I believe has massive upside. 

Chariot

Chariot has announced its unaudited interim results for the six-month period ended 30 June 2022.

• Significant gas discovery at the Anchois-2 well offshore Morocco
• Material increase in gas resources within a basin scale opportunity
• Rissana Offshore exploration licence awarded in Morocco
• Two new renewable energy projects in development in South Africa and Zambia
• Pre-Feasibility Study (‘PFS’) completed on Project Nour in Mauritania confirming world class green hydrogen potential
• Partnership signed with Total Eren to co-develop Project Nour
• Oversubscribed Placing and Open Offer raised gross US$29.5m

Highlights during and post period

Transitional Gas: Anchois Gas Development Project 

• Successful drilling campaign completed safely and on budget in January 2022.
• The Anchois-2 well reported a significant gas discovery, with

o 150m net pay confirmed across seven reservoirs

o confirmation of consistent and excellent quality dry gas composition across all reservoirs, which should enable a conventional and common development.

• Independent assessment confirmed a significant upgrade in gas resources – increased to 1.4 Tcf in total remaining recoverable (2C plus 2U) at the Anchois Project.
• Societe Generale appointed as financial advisor to lead the project financing.
• Front end engineering design awarded to Schlumberger and Subsea7
• Agreement with ONHYM to tie-in to the Maghreb-Europe Gas Pipeline 

Material Upside Potential

• Anchois-2 drilling success directly de-risked a material portfolio of prospects within the Lixus licence area.
• Rissana Offshore Licence signed in February 2022 capturing gas play extensions from the Lixus licence and prospects from our legacy Mohammedia licence area.
• Early assessment of areas covered by 3D seismic, estimates a total 2U prospective resource in Rissana of over 7Tcf.
• Transitional Power: Renewable Energy for Mining Projects
• Partnership with Total Eren extended from January 2022 with Chariot having the right to invest up to 49% into the co-developed mining projects.

Two projects signed during the period and in development:

• 40MW solar PV project with Tharisa Plc to provide power to its chrome and PGM operations in South Africa.
• Partnership with First Quantum Minerals to advance the development of a 430 MW solar and wind power project for its copper mining operations in Zambia – one of the largest renewable private sector energy projects in Africa.

Building up a pipeline of African mining power projects and looking to collaborate on other renewable transactions across the continent.

Green Hydrogen – Project Nour

• Pre-Feasibility Study confirmed Mauritania is exceptionally well-placed for green hydrogen production due to its solar and wind resources.
• Project Nour could produce some of the cheapest green hydrogen in the world.
• 50%/50% Partnership agreement signed with Total Eren to co-develop the project, progressing the in-depth feasibility study and offtake options.
• Wide ranging potential benefits for domestic, infrastructure and energy industries within Mauritania.
• MoU signed with the Port of Rotterdam International, a global energy hub and Europe’s largest seaport which represents a first step towards establishing supply chains.
• Ongoing initiatives to expand the portfolio and evaluate further green hydrogen opportunities.

Corporate

• Well capitalised business – further reinforced following a successful fundraise in June 2022.
• Cash position as at 30 June 2022 – $23.4million with no debt with minimal licence commitments.

Adonis Pouroulis, CEO of Chariot commented: 
“It is a pleasure to report on our activities in the first half of 2022, as we delivered significant progress across all areas of our business. It has been a busy time but our focus remains on securing and developing large-scale, scalable, first-mover positions in projects that can diversify the energy mix, potentially reduce carbon emissions, support greener industrial development and facilitate access to affordable, accessible energy for all. In delivering this strategy, we are looking to play a material role in the energy transition whilst creating value and generating a wide range of positive impacts for all stakeholders. As we advance our three pillar strategy across our gas, power and hydrogen businesses, we are building a unique position within the transitional energy space and look forward to updating all our stakeholders on the next phases of our journey.”

These are interim results and as such are historical data but it is worth looking at just quite how much Chariot has managed to get done not only in this six month period but in the post period as well. The shares have taken a breather since the 25p high but are surely going to be worth way more than this when Morocco and the Total Eren JV start to kick in.

Serica Energy

Serica has provided the following update on the North Eigg exploration well.

Drilling operations on the North Eigg exploration well have encountered delays and, following a recent equipment failure and the required mobilisation of a replacement (further details below), operations are now expected to take some six weeks longer to complete than the original schedule.

Operations had been progressing successfully despite some drilling delays in the top-hole sections. During recent preparations for drilling the third section of the well there was a failure of a vital piece of rig equipment during routine pre-job testing. A replacement has been sourced and planning is underway to transport this to the drilling rig.

This will have no impact on the ultimate geological outcome of the well and it is expected that all well costs will benefit from the Investment Allowances available under the recently introduced Energy Profits Levy.

Serica’s net well cost after tax is anticipated to increase by approx. £3 million as a result of the delays and it is now expected that results from the well will be available in December 2022.

Mitch Flegg, Chief Executive of Serica Energy, commented:
“This high-impact exploration well is the latest in a series of capital investment projects undertaken by Serica with the objective of increasing our production in an environmentally sensitive manner. This programme is designed to help increase the UK’s security of supply and reduce its reliance on imports.

The technical delays encountered on this project are extremely frustrating but do not impact either the chance of success or the significant prospective volumes of this exploration prospect.”

Clearly an operational delay for Serica which they have had to put up with in the last year or two but should remind people that offshore drilling is a technically demanding, expensive and risky business, it is by no means a given that any well will come in, consider that when demanding a Looney tax.

Pharos Energy

Pharos has announced its interim results for the six months ended 30 June 2022. An analyst conference call will take place at 11.00 BST today.

Corporate Highlights                                                                                                                                                        

• Signature of the Third Amendment to the El Fayum Concession Agreement in January 2022, increasing Contractor’s share of revenue from c.42% to c.50%
• Completion of farm-out transaction and transfer of operatorship of Egyptian assets to IPR in March 2022, delivering Pharos a 45% carry over its remaining interest
• Reshaping of Board structure and composition from 9 to 6 Board members
• Initiation of share buyback programme in July 2022, of which $1.6m has now been used
• Commitment to achieve Net Zero GHG emissions from all our assets by no later than 2050 announced today
• Establishment of an Emissions Management Fund, under which we will set aside $0.25 for each barrel sold at an oil price above $75/bbl to support emissions management projects

Operational Highlights

• Group working interest production 7,962 boepd net (1H 2021: 9,147 boepd) in line with full year guidance

Vietnam

• Production 5,861 boepd net (1H 2021: 5,429 boepd net)
• Drilling of first of two TGT development wells due to commence
• Work on submission of TGT & CNV licence extension requests progressing within the JOCs
• Work ongoing to progress well planning and to secure a partner before drilling the commitment well on Block 125 in 2023

Egypt

• Production 2,101 bopd* (1H 2021: 3,718 bopd)
• Development activities continues in El Fayum, targeting recovery of c.17 Mbbl 2P
• Four wells on production in the period
• Drilling rig secured on long-term contract
• North Beni Suef (NBS) first exploration commitment well planned for Q4 2022  

Financial Highlights

• Group revenue $129.6m** prior to hedging losses of $17.3m (1H 2021: $72.9m** prior to hedging losses of $13.7m)
• Net profit of $54.3m (1H 2021: $6.4m profit), including non-cash impairment reversal after tax of $49.2m (1H 2021: impairment reversal after tax $19.4m)
• Cash generated from operations $57.0m1 (1H 2021: $18.2m)1
• Operating cash flow $27.6m4  (1H 2021: 0.1m)
• Cash operating costs $15.82/bbl2 (1H 2021: $14.74/bbl)2 
• Cash balances as at 30 June 2022 of $47.5m (30 June 2021: $28.4m)
• Forecast cash capex for the full year c.$29m of which $14.9m had been incurred by 30 June 2022
• Net debt as at 30 June 2022 of $37.9m2,3 (30 June 2021: $32.9m)2
• Net debt to EBITDAX of 0.51x 2 (1H 2021: 1.26x) 2

* The farm-out transaction and transfer of operatorship of Pharos’ Egyptian assets to IPR completed on 21 March 2022. Working interest production for Egypt is therefore reported as 100% through to completion and 45% thereafter

** Egyptian revenues are given post government take including corporate taxes

1. Stated after realised hedging loss of $17.3m (1H 2021:  loss of $13.7m)
2. See Non-IFRS measures at page 32
3. Includes RBL and National Bank of Egypt working capital drawdown
4. Operating cash flow = Net cash from operating activities, as set out in the Cash Flow Statement

Outlook

• 2022 full year Group working interest production guidance remains unchanged at 6,350 – 7,800 boepd net
• Request for an extension to the NBS exploration period has been submitted to EGPC
• Net Zero commitment on all assets by 2050, detailed roadmap coming in 2023

Vietnam

• 2022 production guidance range unchanged at 5,000 – 6,000 boepd net
• Three well drilling programme, including  two development wells at TGT and one development well at CNV, is on track to commence with the rig on location at TGT
• Work ongoing to progress well planning, with discussions ongoing to secure a partner ahead of drilling the commitment well on Block 125 in 2023
• Recommending recommencement of regular dividend payments starting in 2023, subject to shareholder approval at AGM 2023, returning no less than 10% of Operating Cash Flow (OCF)

Egypt

• 2022 production guidance range unchanged at 1,350 – 1,800 bopd (equivalent to gross production of 3,000 – 4,000 bopd)
• Rig secured on a long-term contract due to start in mid-October 2022, focusing on ramping up activities in El Fayum from developed resource base
• Progressing work on conventional and unconventional exploration prospects to further enhance the value of our acreage
• NBS commitment well due to be drilled in Q4 2022

Jann Brown, Chief Executive Officer, commented:
“Our results for this half year underscore the cash generation potential of our portfolio of assets, with operating cash flow of $27.6m achieved. In Vietnam, further development drilling on both TGT and CNV is due to commence imminently, with the rig on location and preparing to spud. In Egypt, a rig on long-term contract has been secured and is due to arrive in Q4 to continue the development drilling programme. These activities are set to add to production levels and cash flow in H2 and beyond.

We continue to focus our efforts on driving efficiencies, controlling costs and making judicious investments to maximise the value of our portfolio. The share buyback programme, which we announced in July, continues as part of the Company’s broader strategy to deliver value to our shareholders and is expected to run for a further four to six months.

Pharos is now in a materially improved financial position, has an accelerating programme in Egypt and significant growth potential in Vietnam. Together, these put us in a strong position and I am pleased to be able to reward shareholder patience with the announcement of a return to a regular dividend, based on operating cash flow, with the first payment set for 2023. With our strengthened balance sheet, a portfolio of cash generative assets with substantial upside in both near term developments and exploration potential plus a commitment to capital discipline, we are well placed to create sustainable shareholder value.”

Pharos is getting itself into the strong position that they have envisioned over the last year or so. The streamlining across the board and the farm-out in Egypt have made the company one which has the scope and substantial growth from the excellent assets in Vietnam and the cash flow from Egypt.

The strength of the cash flow, along with diligent management has meant that shareholder returns are now front and centre, the buy-back has been a success and shareholders now have a dividend or two to look forward to. 

Jann Brown and the team have done very well to make Pharos into a very successful E&P play and accordingly shareholders are being rewarded, something I expect to continue.

Reabold Resources- And the winner is…

Reabold has provided the following update on the conditional sale of its investee company, Corallian Energy Limited, further to its announcement of 4 May 2022.

Key highlights for Reabold shareholders:

• Total gross cash consideration for Corallian and its Victory licence of £32 million to an oil and gas major; with Reabold’s share of net proceeds being c.£12.7 million
• Corallian has notified its shareholders that Corallian has received a conditional offer of £3.20/Corallian share, with the proceeds to be staged as outlined below
• Reabold holds 3,769,487 shares in Corallian
• Reabold will hold a further 195,416 Corallian shares post conversion of Reabold’s Convertible Loan Notes  which will occur prior to completion of the sale and will be sold on the same terms and simultaneously with the currently issued Corallian shares
• Victory asset sale valuation represents significant uplift on Reabold’s total investment of £7.5 million in Corallian since late 2017; remaining North Sea licences currently owned by Corallian will be acquired by Reabold 
• Net proceeds received will provide Reabold with improved financial flexibility
• Excellent opportunities remain to fund, progress, and monetise Reabold’s existing oil & gas assets including:
• West Newton drilling of first development well, planned for H1 2023 to materially de-risk the project at modest cost, as part of a phased investment programme
• North Sea licences to be acquired from Corallian for £250,000, which have prospects located near existing oil and gas infrastructure
• Market dynamics: industry conditions and the UK’s focus on energy security very supportive of asset development opportunities

Stephen Williams, Co-CEO of Reabold, commented:
“The Board is delighted with the value uplift and improved financial position this transaction brings to Reabold. We will continue in our mission to identify, fund, and monetise low-risk, under-valued, strategically important oil & gas assets where their development benefits from being near existing infrastructure. We also recognise our role of improving the UK’s energy security, by unlocking the potential of currently under appreciated assets.

With the enhanced capital resources this transaction brings, the Board will continue its strong oversight of the company’s capital allocation policy. There remains tremendous potential to drive further value for shareholders through recycling the Corallian proceeds across the portfolio, initially focussed on West Newton’s first development well in 2023.”

To be honest I would not blame Stephen Williams for just saying WTF…

The facts and figures in some deals lead me to think that an ensuing share price might go up or down, the market knows more than all of us about valuing shares and it has the last laugh. But this reaction today, of marking down Reabold some 22% as I write has really foxed me. 

I have followed Reabold since inception and whilst sometimes they have been fairly optimistic about deals they have done and been disappointed this one takes the biscuit. The company was set up to identify, fund and monetise assets of which Corallian has been a perfect example.

Whichever way you cut it Reabold picked the asset up for next to nothing and sold it for bundles, a perfect example of the company strategy and yet they have been rewarded with faff all, a quite unbelievable situation. I’m sure if I am wrong I will be told in no uncertain manner, maybe it’s technical…

The company are now well financed and carrying on with the exciting development at West Newton which I have admired for many years and for now the company is more than cashed up for. Success there would be a deserved victory for Reabold and proof of concept, the model they have delivered here for Corallian and elsewhere in the portfolio, recycle capital and exit projects to others more able to fund and develop them. 

Finally they should be lauded for the vision, the cojones, the stickability. Above all they havent whinged, much, with so few operators in the West of Shetland the sale process could have gone wrong, no bids at all might have been received but this sale is a good one and they deserve to have come out of it better. 

Helium One

Helium One Global has provided an update on progress at its Rukwa (100%) project area in Tanzania including details of its planned Phase II drilling campaign.

Summary

• Letter of intent signed with Baker Hughes to provide integrated services to Rukwa Phase II drilling campaign;
• Target spud date of January / February 2023 – subject to successful completion of rig audit and contract agreement;
• Baker Hughes has provided a low-cost solution by mobilising equipment already active in Southern Africa;
• Rig audit continues to demonstrate value by identifying and resolving engine component wear issues prior to mobilisation to Rukwa; and
• Licence renewal process commenced including relinquishment of non-prospective licence area totalling 1,548 km2 saving $309,600 per annum

David Minchin, Chief Executive Officer, commented:
“The focus of our attention in August has been to advance the Phase II drilling campaign at our Rukwa Helium Project both efficiently and effectively, therefore we are delighted to be able to announce milestone partnerships and a target timeline to drilling commencing in January / February 2023.

“Our partnership with Baker Hughes, a world leader in the delivery of integrated well services, ensures we have the best equipment on site to evaluate our Phase II drilling at Rukwa.  Mobilising equipment currently in operation in Southern Africa allows us to deliver a cost-effective solution to overcoming the scarcity of downhole tools experienced globally.

“Delivery of our exploration programme commencing in January / February is dependent on concluding contract negotiations and completion of the rig audit conducted by ADC on our preferred rig in Kenya.  The audit is progressing well, and we are pleased that issues that are being identified are in the yard where they can be easily fixed, rather than out in the field where rig problems are exponentially more difficult to resolve.

“Continued shortages in the global helium market have seen record prices in contract and spot pricing at $400/Mcf and $1,000/Mcf respectively.  With demand from end users clearly demonstrating the requirement for a new source of high-grade primary helium, Helium One remains committed to delivering a successful Phase II drilling campaign at Tai, where robust closure at multiple stratigraphic levels and multiple subsurface helium shows identified in 2021 drilling gives us the best opportunity to make an economic discovery that unlocks the potential of the Rukwa helium province.”

From a high of 15.5p back in January Helium One has fallen back to 6p after today’s sharp fall after this announcement. It is clear that whilst the end market for Helium is still very high, indeed a tempting carrot for explorers finding the stuff is less easy.

Now with Baker Hughes on board the company are confident that the spud date of early next year might take place, in the meantime shareholders will wait with excitement…

KeyFacts Energy Industry Directory: Malcy's Blog