WTI (Oct) $88.48 +$1.17, Brent (Nov) $94.10 +93c, Diff -$5.62 -24c, USNG (Oct) $9.11 +83c, UKNG 412.87p +43.2p, TTF €233.0 +€28.02

Oil price

Oil’s good performance yesterday was rather bitty, some gains due to a dispute emerging between Azerbaijan and Armenia which might affect the former’s production, some 600/- b/d.

The inventory stats were mixed, as one might expect at this time of the year, distillates built by 4.219 barrels as refiners started to move away from gasoline to space heating fuel for the autumn. Gasoline drew 1.768m b’s, interesting as the driving season is over, good with 91.6% refinery runs. Finally crude added 2.442m b’s after another draw from the SPR.

Sound Energy

Sound Energy, the transition energy company, yesterday provided an update further to its announcements of 1 June 2021 and 7 September 2022 with respect to its wholly owned dormant affiliate Sound Energy Morocco SARL AU (“SEMS”) and the Moroccan Tax Authority’s decisions regarding purported historical taxable events relating to SEMS.

The Local Taxation Committee has upheld the previously notified assertions of the Moroccan Tax Authority in respect of Moroccan taxes purported to be due pursuant to a tax audit undertaken on SEMS by the Moroccan Tax Administration during 2021 and related to fiscal years 2016 and 2017.

The Local Taxation Committee has, in upholding the Moroccan Tax Authority’s prior decisions, confirmed that certain purported historical intra Group transactions between SEMS and SEME have taxable base values as per the original tax administration claim as previously informed.

The Local Taxation Committee has not presented a full calculation of the amounts it purports to be due on the taxable base amounts it has now upheld. However, Sound Energy estimates taxes on those taxable base amounts, as previously announced on 7 September 2022, would amount to approximately US$ 19.7 million (reduced from the Company’s 1 June 2021 assessed amount of US$ 22.5 million due solely to exchange rate fluctuations).

The Company has 60 days to respond to either accept or challenge the findings of the Local Tax Committee in the Moroccan courts.

The latest decision by the Local Tax Committee in relation to SEMS is in addition to the Moroccan Tax Authorities claims against SEME, the status of which was most recently notified by the Company on 13 July 2022.

Further announcements will be made, as appropriate, in due course.

Commenting, Graham Lyon (Executive Chairman) said:
“The Tax Authority continues to frustrate the Company’s progress in Morocco, detracting its efforts away from satisfying the Moroccan need to provide gas to its power stations. One of the attractive features of Morocco from an industry perspective is its investment promoting fiscal code as laid out with the Hydrocarbon Code. This includes a 10-year exemption from corporation tax for upstream producers, as well as clearly defined import duty and VAT exemptions. With Sound Energy deep into its micro-LNG project development and on the cusp of sanctioning a large pipeline development these distractions are jeopardizing their successful undertaking.”

Sometimes authorities don’t know how to do good for doing badly. As someone who has been involved with companies in Morocco for many years and highly value my relationship for example with the most senior directors of ONHYM even I can’t understand quite how easily groups such as the Tax Authorities can mess it up.

There is no change from the fiscal risk and situation of a year ago and the tax case is now likely to go the  full course through the courts which could take a year or more. All for a dormant  Moroccan company with no assets and no recourse to Sound plc in UK. 

It is also worth noting just how much this will affect this company which is working flat to the boards to get the two Phases of the Tendrara project under way and as CEO Graham Lyon explains is on the cusp of sanctioning a large pipeline development.

I’m sure that the authorities did not have any idea of how much time it is taking dealing with this, nor the massive hit to the market capitalisation when it made this decision, one that negates the advantages in the country’s fiscal code. Taxing exploration assets seems to be at odds with  the governments need to develop indigenous resources.

At best this situation is one of crossed wires at the top of the Moroccan State, it seems that one Government ministry is shooting the foot of the other, yet no one has had the common sense or guts to tell them.  The loser will be the Moroccan state who on the one hand are desperate for gas to keep domestic power generation operational and the other trying to replace the loss of Algerian gas, this petty behaviour will have serious ramifications. 

IGas Energy- It’s a Bye from Bowler…

The Board of IGas announces that it has today appointed Chris Hopkinson, Non-Executive Chairman, to the role of Interim Executive Chairman. Stephen Bowler, CEO, will leave IGas, by mutual consent, with immediate effect.

The Board of IGas recognises the significant contribution that Steve has made over his 10 year tenure at the Company, including charting a course through a period of low oil prices and changing government policies over shale gas, as well as being instrumental in the acquisition of GT Energy, the Company’s geothermal business. 

The Board believes that the Company is entering into a new phase where the technical aspects of managing its assets, and the scope to redirect its portfolio to assist in providing greater energy security in the UK, including its geothermal business, are rapidly becoming more pressing. The recent high oil prices now afford the Company an opportunity to put new emphasis on these matters.  Mr Hopkinson’s technical background and extensive experience in onshore gas operations, with difficult-to-recover reserves and mature assets will be of great assistance in increasing the Company’s momentum in these areas. 

It is the Company’s intention to commence a search for a Chief Executive Officer in due course.

Following these changes, the Board will comprise Chris Hopkinson, Executive Chairman, Frances Ward, Chief Financial Officer, Philip Jackson, Non-executive Director, Kate Coppinger, Independent Non-executive Director.

A search for an additional Non-executive Director is underway, in order to maintain an appropriate balance of independent Non-executive Directors and ensure suitable representation and oversight for the Board committees.

The words ‘with immediate effect’ always strikes terror into the heart of investors and I have to say that I have always had the highest regard for Steve Bowler, indeed you can see the interview that I did with him at the bottom of this piece. Make your own mind up…

The verbiage at the bottom of the board situation says that the changes in the board are underway but it is important to know that the decision to sack the CEO must have been made by just three NED’s not part of today’s additions or those to come?? And whilst the acting CEO has said that Philip Jackson isn’t representing Kerogen Capital with their 27.23%, he is on the board and on the Kerogen website as a Director of IGas, indeed not an independent NED, maybe just advisory.

This reeks of bad timing, bad judgement and has surely been badly handled, best kept away from the interims I would say…Having said that it’s rarely a good time to sack a highly successful, very popular CEO especially when the shares are up some 80% on the year. Interesting that Odey Asset Management chose this time to announce their holding going up to over 7%. 

IGas also announced its unaudited interim results for the six months to 30 June 2022 this morning.

Results Summary

*these are alternative performance measures which are further detailed in the financial review

Corporate & Financial Summary

• Cash balances as at 30 June 2022 were £2.7 million (31 December 2021: £3.3 million) with net debt of £9.7 million (31 December 2021: £12.2 million), a reduction of £2.5 million since year end.
• Operating cash flow before working capital movements and realised hedges in H1 2022 of £16.4 million (H1 2021: £6.4 million).
• £2.8 million of capex incurred during six months to 30 June 2022.  Net cash capex for FY 2022 expected to be £10.2 million, primarily relating to our conventional assets. In addition, we have £1.8 million of cash outflow in 2022 for projects executed towards the end of 2021.
• Successful Reserve Based Lending facility (RBL) redetermination in July (a semi-annual recalculation), confirming US$22.0 million of debt capacity. We had headroom of US$12.0 million (£10.3 million) as at 31 August 2022.
• We are required to hedge our production under the RBL and as at 31 August 2022, we had 70,000 bbls hedged with swaps at an average price of $76.4/bbl and 35,000 bbls hedged with puts at a floor price of $44.7 for 2022. We also have 60,000 bbls hedged with swaps for H1 23 at $95.0/bbl.
• The estimated Energy Profits Levy for the period ended 30 June 2022 is £0.2 million.
• Ring fence tax losses of £263 million.

Operational Summary

• Net production averaged 1,865 boepd in H1 2022 (H1 2021: 2,005 boepd) impacted by equipment failure as a run-on consequence of COVID-19 supply chain issues.
• Full year net production is now forecast to be in the range of c.1,900-1,950 as we resolve the issues in H1 and wells come back on-line. Underlying cash operating costs per boe anticipated to be c.$40.4/boe (based on an exchange rate of £1:$1.24).
• Moratorium on shale lifted in England and Government commits to a review of energy regulation.
• We continue to mature our growth opportunities within the existing conventional assets, including our East Midlands projects at Corringham and Glentworth.
• An application to the  Government’s Green Heat Network Fund (GHNF) for the Stoke-on-Trent geothermal project was made on 26 August 2022.
• Applications for grant funding from the Public Sector Decarbonisation Scheme will be made in partnership with the Carbon Energy Fund to support the development of six geothermal schemes, supplying renewable heat to NHS Trusts.

Commenting today Chris Hopkinson, Interim Executive Chairman, said:
“Commodity prices were exceptionally strong during the period with a resulting positive impact on income and cash generation from the underlying conventional oil and gas assets. This continues to give us financial flexibility, enabling a reduction in our net debt by over £2.5 million and allowing capital to be allocated to sustaining, and in the future, increasing our conventional production as well as to our growth businesses, geothermal and now shale.

We welcomed the Government’s announcement last week on the lifting of the effective moratorium on hydraulic fracturing in England and the review of energy regulation.  However, the accelerated development of this strategic natural resource, which we believe is imperative in helping with the ongoing energy and cost-of-living crisis, can only be achieved through a streamlined regulatory process, something the Government has committed to and we look forward to working constructively with the new administration.

With the submission of grant applications to the Green Heat Network Fund for our pathfinder Stoke-on-Trent geothermal project and the building of a strong pipeline of project opportunities, we are moving the geothermal business forward materially.

With strong commodity prices forecast well into 2023, we expect to continue to be able to support both growth and debt reduction in the business.”

IGas shares have been a cracking performer this year and the latest move up to the 107p level, clearly as a result of the lifting of the moratorium on shale and fraccing, is the highest since 2017. Recently the shares have tipped over, and is now 83p down 8% today. Steve Bowler may look back and see his legacy as being one of considerable success, the new team have plenty to live up to. 

The interims were roughly in line, conventional production missed the whisper due to Covid supply chain issues and is only deferred. Debt was reduced, free cash flow increased and the RBL was successfully redetermined which led to obligatory hedging. 

The company seems to be placing the bets on shale and geothermal which seems reasonable but brings with it applications to, or work with the Green Heat Network Fund, Stoke-on-Trent, the Public Sector Decarbonisation Scheme, the Carbon Energy Fund and NHS Trusts.

This may lead to the company putting many eggs in the geothermal basket and with Government backed organisations which is slightly frightening but IGas remains one of the best plays in shale albeit betting a great deal of the farm on Geothermal. 

Core Finance CEO interview: Stephen Bowler, IGas Energy  

Longboat Energy

Longboat has announced that the Copernicus exploration well in licence PL1017 offshore Norway (Company 10%) was dry and will now be plugged and abandoned.

Exploration well 6608/1-1S operated by PGNiG Upstream Norway AS, was targeting Plio-Pleistocene formations in the Vøring Basin region of the Norwegian Sea. The well was drilled to a total vertical depth of 2,400 metres below sea level. Background gas readings were recorded, but the well failed to encounter any effective reservoir. Analysis of the data collected remains ongoing to understand the observed bright seismic amplitude anomaly and any remaining prospectivity in the area.

The drilling operations were carried out well within the time schedule and below budget.  

Helge Hammer, Chief Executive of Longboat, commented:
“Naturally, we are disappointed that the Copernicus well was not a success but we look forward to continuing our fully-funded, gas-focused exploration programme with the results of the Oswig well expected shortly.”

Nothing much to add, this is disappointing and piles pressure on the Oswig well with results imminent. 

Reabold Resources

Reabold has announced that, further to its announcements of 4 May 2022 and 14 September 2022, it has completed the acquisition of Corallian Energy Limited’s working interest in all the non-Victory (P2596) licences within the Corallian portfolio, being: P2396, P2464, P2493, P2504 and P2605 (all at 100% working interest) and P2478 (36% working interest).

I’m not quite sure what the market wants from Reabold, after a huge, in my view unnecessary shake-out when the Corallian deal was announced they have merely confirmed  what licences they are acquiring in the deal and the shares fall another 14.86% to 0.315p at time of writing. 

Back to the Reabold model this whole transaction proves the concept of buying/acquiring, recycling and exiting projects, in this case they have funded themselves into the bargain and are rewarded with a 35% + fall in the share price, they must be wondering why they started it in the first place…

United Oil & Gas

United Oil & Gas has announced the commencement of drilling at the ASH-4 development well location and an update on the Al Jahraa-14 (“AJ-14”) development well in the Abu Sennan licence, onshore Egypt. United holds a 22% working interest in the licence, which is operated by Kuwait Energy Egypt.

Summary

• The fourth well in the 2022 Abu Sennan programme, ASH-4, has commenced drilling
• ASH-4 is a high impact development well, targeting over 2 mmbbls gross in the prolific Alam El Bueib (“AEB”) reservoir
• On AJ-14, whilst oil has been recovered to surface on testing, consistent flow rates have yet to be established due to near bore-hole formation damage
• The testing programme is continuing in the Abu Roash-C (“ARC”) interval at AJ-14, with well stimulation expected to deliver commercial production rates in line with pre-drill estimates of c. 300 bopd gross

ASH-4 development well
The ASH-4 development well, the fourth well in the 2022 drilling programme at Abu Sennan, has commenced drilling. The well will be drilled as a vertical hole targeting the prolific AEB reservoir. It is expected to take 55 days to drill and complete, and is fully funded from operational cashflow. The well is targeting 2.2 mmbbls gross recoverable oil in what has been to date a highly productive area of the licence. On completion of drilling, ASH-4 is expected to be rapidly brought into production.

The completion of seismic reprocessing earlier in the year has significantly improved the quality of the subsurface imaging over the ASH field resulting in increased in-place volumes on the ASH field (from 17 to 22 mmboe gross according to operator estimates) and optimising the current well location. In addition, it has helped identify a further six additional potential development well locations, which will be considered for future drilling programmes.

AJ-14 well-testing update
The AJ-14 well successfully encountered seven metres of net pay in the primary ARC target in line with the higher end of the pre-drill estimates. Whilst the well recorded indications of hydrocarbon-bearing reservoir in the deeper Abu Roash G (“ARG”) reservoir, due to technical difficulties whilst running the logging tools, a full logging suite was not acquired over this secondary target. Further issues with the borehole were encountered in the deeper section of the well, and the decision was made to complete the well solely in the ARC.

Following the installation of a down-hole pump, oil has been recovered to the surface from the well however consistent flow rates have yet to be established, due to near-borehole formation damage. Well stimulation has previously delivered successful results on a number of Abu Sennan wells with a stimulation programme expected to commence on AJ-14 shortly, subject to final partner approval. As the AJ-14 well encountered good quality reservoir facies in the ARC in the heart of the Al Jahraa field, once the borehole issues have been addressed, commercial flow-rates in line with the pre-drill expectations of c. 300 bopd are expected to be established.

Brian Larkin, CEO commented:
“Our active and fully funded drilling programme in Egypt is continuing with our next development well ASH-4 being spud whilst operations continue on AJ-14 to initiate commercial flow rate there. The ASH-4 development well has the potential to be an important well for United from both a production and reserves perspective as it is targeting one of the most prolific reservoirs in Abu Sennan.  Working with an experienced Operator on a licence that is well understood, we look forward to drilling the ASH-4 development well before completing the 2022 programme with drilling of the ASF-1X exploration well.  

“On AJ-14, we are confident that the stimulation programme, which has delivered positive outcomes on other wells on the field, will result in consistent flow rates in the region of 300 bopd gross and the well being quickly brought into production to generate revenue and additional cashflow.”

ASH-4 is the key well here as it will take a while and be a gamechanger if it were to come in and would give the shares a well deserved lift. The well is targeting 2.2 mmbbls gross recoverable oil in what has been to date a highly productive area of the licence in a potentially exciting reservoir. 

KeyFacts Energy Industry Directory: Malcy's Blog