WTI (Dec) $87.91 +$2.59, Brent (Dec) $95.69 +$2.17, Diff -$7.78 -42c, USNG (Nov) $5.60 -1c, UKNG (Dec) 329.24p +5.24p, TTF (Dec) €131.445 +€2.22

Oil price

Oil was up last week but is still slightly overhung by the combination of Chinese Covid and interest rates, this week the Fed will put another 75 bp’s on.

Will analyse the Opec report tomorrow but its bullish long term for oil and gas…

Diversified Energy Company

Diversified has announced that on 27 October 2022 Diversified and Oaktree Capital Management, L.P. jointly closed an ESG-aligned asset backed securitisation of certain co-owned producing natural gas and oil assets located in Oklahoma. This fourth ESG-aligned financing in 2022 is linked to key performance indicators based on emissions reduction targets. Diversified had previously pledged its portion of the Assets as collateral under the Company’s Sustainability-Linked Loan (“SLL“)(a).   Diversified will use its ABS proceeds to repay all outstanding borrowings under its SLL and for general corporate purposes, resulting in current liquidity of approximately $300 million(b), inclusive of the financing of the ConocoPhillips acquisition announced on 28 July 2022.

Transaction Highlights

Key terms:

• ABS VI note amount of $460 million ($215 million net to Diversified representative of its 51.25% ownership interest in the collateral assets and net of certain fees, discount, and cash interest reserve)
• Fixed coupon of 7.50%
• BBB+ investment-grade rating (Fitch Ratings, Inc.)
• Fully-amortised maturity of September 2031(c)
• Sustainable Fitch provides a Second Party Opinion that the ABS’s KPIs align with the International Capital Markets Association framework for sustainability-linked bond principles(d)

Favourable hedge structure:

• Long-dated natural gas swaps at a weighted average price of $5.09/MMBtu
• Long-dated oil swaps at a weighted average price of $68.71/bbl
• Other long-dated natural gas basis swaps, natural gas liquids swaps and natural gas collars

Rusty Hutson, Jr., CEO of the Company, commented:
“With four successful ABS transactions this year, collectively for more than $1.1 billion at a 5.7% weighted-average interest rate, we continue to demonstrate our access to competitively financing high-quality assets amidst a challenging capital markets backdrop, volatile commodity prices and rising interest rates. We are pleased to see existing investors participate in this financing as we welcome several new investors to our series of successful securitizations. With its fully-amortizing and investment-grade fixed-interest rate structure, the ABS product remains an attractive financing tool that insulates us from higher interest rates, avoids bullet maturities and systematically reduce our borrowings as we align the cash profile of our business with institutions seeking to invest in a long-life cash flow stream backed by high-quality assets.”

As before, DEC has moved smartly to refinance its acquisition activity with an ESG-aligned asset backed securitisation of certain co-owned producing natural gas and oil assets located in Oklahoma. The real plus about these refincings is how they are linked to KPI’s and emissions reduction targets and they tick a huge number of environmental boxes of which the market approves. 

What with the refincings, the buying back of shares, substantial dividends and of course I am sure that there will be more acquisitions in the future Diversified shares offer exceptional both capital and income advantages that few others in the sector can offer. Add to that the strength of the model and a smart, creative and value added approach by the management across the board makes DEC a required holding at these levels. 

Sound Energy

Sound has announced the following project financing update.

Farm-Out Update

The Company announced on 9 August 2022 that it had initiated a formal farm-out process for the Tendrara Production Concession and the surrounding Grand Tendrara and Anoual exploration permits.  The objective of the area-wide farm-out is to seek a co-investing partner in each licence to both fund the expected balance of Phase 2 development costs to first gas of approximately US$60 million net to the Company’s working interest in the Tendrara Production Concession and also to progress an exploration and appraisal drilling programme in the Grand Tendrara and Anoual exploration permit areas.

The Company has received strong interest in the process from a wide range of credible and well-funded parties. Management presentations and data room evaluations are ongoing, and further announcements will be made, as appropriate, in due course.

Phase 2 Development Financing Update – Lead Finance Arranger Mandate

The Company announced on 23 June 2022 that it had entered into an Arrangement and Mandate letter with Attijariwafa bank, a Moroccan multinational bank and one of the leading banks in Morocco, under which the Company mandated the Arranger in relation to the arrangement of project debt financing for the development of Sound Energy’s Tendrara Production Concession.

Pursuant to the Agreement, the Arranger was mandated, and provided with exclusivity by the Company for a period of eight months, to arrange a long-term project senior debt facility with a term of no more than 12 years of up to 2.250 billion Moroccan dirhams (approximately US$206 million using current exchange rates) for the partial financing of the currently estimated approximately US$330 million total Phase 2 development cost (including development wells post-first gas) of the Tendrara Production Concession.

Under the terms of the Mandate, the parties agreed to seek to negotiate binding terms for the Financing within 120 days of entry of the Agreement. Whilst discussions between the parties are progressing well, the Company announces that the parties have entered into an amendment to the Mandate in order to extend the date by which they will seek to negotiate binding terms for the Financing to 15 December 2022. For the avoidance of doubt, the eight-month period of exclusivity provided to the Arranger in order to arrange the Financing remains as per the original Mandate.

Phase 2 Development Gas Sales Agreement

The Company announced on 30 November 2021 that it had entered into a binding gas sale and purchase agreement (the “GSA”) in respect of the Phase 2 development of the Tendrara Production Concession with Morocco’s state-owned power company ONEE (Office National de l’Electricite et de l’Eau potable) for the sale of natural gas from the Tendrara Concession in Eastern Morocco over a 10-year period.

The GSA remains conditional upon, inter alia: (i) all necessary authorisations and permits having been granted for the construction of the Phase 2 gas installations; and (ii) the final investment decision, when taken, by the Tendrara joint venture partners, being approved by the Moroccan Ministries of Transition Energy and Sustainable Development and Economy and Finance;

Pursuant to the terms of the GSA, the Company announced on 9 March 2022 that it had agreed with ONEE a 90-day extension to the period by which the conditions would be required to be satisfied in order for the GSA to become effective. Whilst good progress is being made in order to satisfy the conditions, the Company announces that it has agreed with the parties to the GSA to extend the date by which the conditions should be satisfied to 30 June 2023.

Commenting, Garry Dempster (CFO) said:
“Alongside the Company continuing to make good progress on executing the Tendrara Phase 1 gas development, I am pleased with the progress that the Company is making in advancing project funding for the proposed Tendrara Phase 2 gas development. Strategically, for Sound Energy, its licence partner ONHYM and for Morocco, this is a critical project that will propel the Company’s future growth along with forming a key pillar of Morocco’s energy strategy centred around the energy transition.

There is a complex series of inter-related steps necessary to be advanced and completed in order that the Company and its partner, ONHYM, can take a final investment decision on the development. Consequently, and whilst the Company is making good progress in this regard, I am pleased that we have agreed an extension to the back-stop date of the ONEE GSA to June 2023 to allow us to focus on delivery of the various pre-FID activities, including conclusion of ongoing discussions with EPC contractors to execute development activities.

Furthermore, I am encouraged by the strong level of interest in the ongoing farm-out process, from well-established and notable industry players. This is testimony not just to the increased appetite for investment in well-positioned gas portfolios such as ours but to the quality of the underlying opportunity upon which Sound Energy’s strategy is centred.

We look forward to further positive updates as the various planned milestones are delivered.”

Straightforward stuff here from Sound who appear to be getting on with the jobs in hand. Pushing the backstop back a bit will allow the company to finish all the fiddly bits as the final go ahead nears. 

Also the farm-out appears to be picking up momentum with as CFO Garry Dempster says, well-established and notable industry players making up an impressive list to whittle down. 

Rockhopper Exploration

Rockhopper has provided the following update on its International Centre for Settlement of Investment Disputes (“ICSID”) arbitration with the Republic of Italy. 

As announced on 24 August 2022, the arbitration panel unanimously held that Italy had breached its obligations under the Energy Charter Treaty entitling Rockhopper to compensation of €190 million plus interest at EURIBOR + 4%, compounded annually from 29 January 2016 until time of payment (except the four-month period immediately following the date of the Award).

On 28 October 2022, Italy submitted an application to the ICSID seeking to annul the Award under Article 52 of the ICSID Convention. Italy has also requested a provisional stay of the enforcement of the Award pursuant to Article 52(5) of the ICSID Convention. Rockhopper is consulting with its legal representatives as to what submissions will be required to contest this application.

The third-party funding agreement does not cover any costs arising past the date of the Award (23 August 2022). Having anticipated Italy might attempt to annul the Award, Rockhopper has a non-binding offer in place to fund both fighting the annulment and enforcing the Award if required. The Company will now consider this along with other funding possibilities. A separate success fee of approximately £3 million is due to the Company’s legal representatives on establishing liability and an award requiring Italy to pay over €25 million in damages. This amount is not covered by either funding agreement. Given Italy’s request for annulment, the Company is in productive discussions with its legal representatives as regards to this payment.

Samuel Moody, CEO of Rockhopper Exploration, commented:
“It is disappointing although perhaps not surprising that the Italian government has chosen to pursue an annulment of the Award. Based on legal advice we believe annulment proceedings are likely to take approximately 18 to 24 months, albeit interest will commence accruing again in December 2022. We remain confident in the strength of our case, as was reflected in the unanimous decision underpinning the Award in August, and very much hope and believe the annulment request will be rejected in due course.”

I am also not really surprised at this action from Rome as they try to get out of a judgement duly given against them but whilst the appeal presents a number of uncertainties to the RKH management I understand that original call is rarely overturned. 

To me the key to the upcoming process is how long it will all take to proceed with the appeal, something I expect the Italian Government will wish to be as long as possible but they should be aware that the financial meter is very much still running and this is not some international game of three card brag where the player with the deeper pockets will inevitably win. 

As I see it there are a number of options available to Rockhopper in this matter. As I understand it there is a basic secondary market in the award by which the company could pass over all or part of the ‘win’ in return for an immediate payment, a solution which has some appeal but may be overly punishing. Indeed, sometimes people can ‘part sell’ or insure awards made to them. 

With the settlement being worth some €247m and interest racking up at, say, €20m p.a. then a prolonged settlement of a couple of years would see the final total nearer  €300m, worth waiting for. The Reason I mention this is that sometime next year there will be action on Sea Lion which will involve RKH getting out the cheque book.

So, it seems that there is a delicate balancing act for the company in which it would have to work with its major shareholders in respect of the early stages of finances Sea Lion. If I were them I would probably take the higher risk play by separately funding the early development and play hard ball with the Italian Government and also not to sell the win in the market. The Rockhopper board should not in my view be weak here and whilst I can see why the shares have fallen so much today I think the fall is a buying opportunity not to be missed. 

SDX Energy

SDX has announced the appointment of Jay Bhattacherjee as Non-Executive Chairman of the Company with immediate effect.  

Jay Bhattacherjee holds a B.Sc. in Chemical Engineering with Petroleum Engineering specialty and has over 20 years’ experience both operating and leading public and private companies in the energy and natural resources industries with a significant focus on EMEA, the core operational area for the Company. 

Jay was previously Executive Director and CEO of Aminex plc, the London-listed East African gas company which is delivering on strategic, operational and commercial initiatives he put in place. Jay is currently a director of several private companies in the investment, energy, and defence sectors.

The Company also announces that Catherine Stalker, a Non-Executive Director of the Company, has decided to step down from the Board with immediate effect. 

Jay Bhattacherjee said:
“I am delighted to join the Board of SDX, which I feel is a company that has a strong production base, and  is materially undervalued.

“With a clear mandate to grow from shareholders, its existing gas-weighted production base, expanding cash flows and the commitment to deliver from its discoveries the Company is poised to support the energy markets at a time of great need. 

“I look forward to the challenge to support your company and take it to the next level.” 

Tim Linacre, Interim Chairman of SDX, said:
“I would like to welcome Jay to the Board and look forward to working with him to deliver on a growth platform. He brings with him energy, industry knowledge and a strong track record.

“On behalf of the Board, I want to thank Catherine for her valuable input during her time on the Board and we wish her every success in her other activities.”

Well I never, this is an incredibly positive piece of news for SDX shareholders who to put it bluntly have been fed on a diet of relentless rns gruel for years, from black and white to colour, from glass to diamonds, Jay Bhattacherjee’s appointment will transform whatever the new shareholders decide to do with all their money, I hope…

KeyFacts Energy Industry Directory: Malcy's Blog