WTI (Mar) $78.87 +97c, Brent (Apr) $85.46 +96c*, Diff -$6.59 -41c, USNG (Mar) $2.68 u/c**, UKNG (Mar) 149.0p -0.58p, TTF (Mar) €56.63 -€2.02
*Brent March expired yesterday, **USNG Feb expired yesterday.

Oil price- Today a guest on interest rates…

With all the meetings this week and the concentration on interest rates I have received permission to publish a fantastic piece by Marcus Ashworth, leading bond commentator at Bloomberg.

Bank of England Should Hike Rates One Last Time: Marcus Ashworth

(Bloomberg Opinion) — 50-and-done has a nice ring to it. The Bank of England should live up to market expectations and raise its official interest rate by 50 basis points to 4% on Thursday. But then it should take a breather while assessing the economic impact of the 15-month hiking cycle that’s lifted borrowing costs from near zero.

The BOE was the first major central bank both to increase rates and to start reducing its quantitative-easing stimulus. It was also the first mover in actively selling its QE bond holdings back into the secondary market. The UK should blaze a trail again by calling time on further action after tightening at 10 consecutive meetings — but combine its a pause-for-now message with one final half-point increment to show it’s not going soft on inflation.

It’s going to be a tricky decision, with the nine-member Monetary Policy Committee is as divided as it ever has been. The last three MPC meetings have had three-way voting splits. Some policymakers have highlighted the risk of under-doing tightening, which may result in the bank being forced into a second wave of hikes, while others are more fearful about triggering an unnecessarily sharp economic contraction.

A pause, after this next hike, could serve to bring the differing views of the MPC closer. Two members voted for no change at the last meeting, though the majority swung behind a half-point hike. Another voted for a 75 basis-point move. Money markets price in only about an 80% chance of a move to 4% this week, and traders are even starting to look for rate cuts by the end of the year. That won’t please the MPC, which has had the reverse problem up to now of trying to rein in wild expectations for much higher interest rates; the futures market currently anticipates a peak of 4.4% in June, down from bets for 6.25% that were being laid in September. So the outlying risk is for just a quarter-point move Thursday that keeps the hiking cycle alive.

It helps that the Federal Reserve is also contemplating how much further it can realistically raise interest rates, and is likely to restrict itself to a 25 basis-point hike this week. Though the European Central Bank is being forced into sounding hawkish about repeated half-point moves, that’s largely because it was so late to act in the first place. The Bank of Canada has laid the groundwork for less central bank activism, with its 25 basis-point move last week combining with guidance that it will pause for now. It emphasized a bias to tighten; expect that to become the template for many central banks before too long. The Norwegian and Australian central banks have also slowed down the pace of tightening.

This week’s BOE meeting also includes the bank’s quarterly review. There has been precious little growth in the UK for much of the past year, but the bank’s expectations that a recession started late last year may now be corrected to show a modicum of growth. Whisper it, but we might see a shift to a glass half-full view from the UK central bank; any revisions to unemployment and wage forecasts will probably give the most pertinent insights into what comes next for monetary policy.

Consumer prices soared by 11.1% in October, but slowed to an annual pace of 10.5% in December. That is not enough progress for the MPC to feel enough has been done, especially with private sector wages rising at an annual 7.2% pace. Nonetheless, BOE Chief Economist Huw Pill has highlighted that the BOE expects inflation to fall swiftly in the second half of his year; while Governor Andrew Bailey said recently he’s hopeful that a corner has been turned.

The MPC will have an eye on the upcoming budget from Chancellor of the Exchequer Jeremy Hunt due on March 15. The most important variable is what the government does with relief on household energy bills; if it renews the current cap after April, that would shave about 2.2 percentage points off inflation, according to Bloomberg Senior UK Economist Dan Hanson. The reduction in consumer prices will be halved if bills are allowed to rise by as much as the government has recently suggested it’s considering.

After 10 consecutive rate hikes, this interest-rate raising cycle is close to achieving its objective. There ought to be no psychological barrier in pausing to assess how pervasive effective the sharpest tightening of financial conditions for decades is proving to be. Central banks know there is a lag of many months until the effect of any monetary policy change. Furthermore, reducing the stockpile of bonds accumulated during QE is a step into the unknown in how liquidity throughout the financial system will react. Time for UK policymakers to circle the wagons at 4%.

PetroTal Corp

PetroTal has announced the results of its 2022 year-end reserve evaluation by Netherland, Sewell & Associates, Inc. for the Bretana oil field, operated 100% by PetroTal.  All currency amounts are in United States dollars and comparisons refer to December 31, 2021.

Highlights:

• Increases to Net Present Value (discounted at 10% (“NPV-10”)) after tax, per share values to US$0.90/share (CAD$1.23/share), US$1.75/share (CAD$2.29/share), and US$2.86/share (CAD$3.47/share) for 1P, 2P, and 3P categories, respectively;

Significant increases in all reserve categories:

• Proved (“1P”) reserves increased by 21% to 45.4 million barrels.  NPV-10, after tax is $0.8 billion ($17.27/bbl);
• Proved plus Probable (“2P”) reserves increased by 24% to 96.7 million barrels.  NPV-10, after tax is $1.5 billion ($15.60/bbl); and,
• Proved plus Probable plus Possible (“3P”) reserves increased by 14% to 168 million barrels.  NPV-10, after tax is $2.5 billion ($14.69/bbl).

Strong results for various key year-end 2022 reserve-based metrics:

• 2022 reserves life index for 1P and 2P reserves, are approximately 10 and 22 years, respectively, using a much higher assumed production run rate of 12,200 barrels of oil per day (“bopd”) compared to approximately 7,300 bopd in the prior year; 
• Robust 2021 production reserves replacement ratios of 179% and 418% for 1P and 2P reserves, respectively;
• Original Oil in Place (“OOIP”):  Increases of 33%, 14%, and 2% to 329, 445, and 632 million barrels, respectively, for the 1P, 2P and 3P cases;
• Increased 1P, 2P and 3P total booked well counts in 2022 by 4, 7, and 7 wells to 21, 29, and 36 wells, respectively; and,
• 2P recovery factor continued to increase in 2022 to 24% (from 22% at year-end 2021) even after the 2P OOIP increased by 14%.
• 2022 Proved Developed Producing (“PDP”) reserves increased 49% to 24.1 million barrels, representing 53% of 1P reserves, reflecting an attractive ratio of base production to low risk drilling proved undeveloped (“PUD”) targets; and,
• 2P Future Development Capital (“FDC”) increased 40% to $404 million from year-end 2021 reflecting an additional 7 wells booked at year-end 2022 and associated water disposal capacity and facilities needed to accommodate higher anticipated flush and run rate production volumes.

Manuel Pablo Zuniga-Pflucker, President and Chief Executive Officer, commented:
“Bretana’s reserves have grown tremendously since 2017.  Our drilling success combined with the field’s strong natural aquifer support that allow for recovery factors beyond 30% has underpinned a world class oil operation that is expected to deliver immense free cash flow for the next 20 years.  The field’s initial 2017 2P estimated ultimate recovery was 37.5 million barrels which we have now almost tripled to 108.2 million barrels.  The PetroTal team is committed to increasing value for all stakeholders from the oil field’s ultimate oil recovery enhancement.  Noteworthy that our PDP after tax NPV-10 valuation is similar to our current market capitalization.  We see significant upside with respect to PUD, Probable, and Possible reserve values that are not reflected in our current market valuation”.

This is a quite phenomenal reserve evaluation and it is difficult to know quite where to start in terms of assessment. I guess that the 46% increase in 2P reserves value to $1.75, £1.39 is good enough and with 2P estimated ultimate recovery of over 108m barrels that strengthens my valuation case. 

But with strong 1P and 2P reserves replacement ratios of 179% and 418%, respectively and a 24% increase in 2P reserves to 96.7 million barrels and a 21% increase in 1P Reserves to 45.4 million barrels it is copper bottomed. 

And if that wasn’t enough then NSAI give them an added 7 2P well locations, a 32% increase and thus extending the 2P reserve life to 22 years, this is an incredible number and can be compared more than favourably with anyone I can think of in the sector. Finally the 2P after tax NPV-10 value has increased 48% since year end 2021 to more than $1.5 billion putting most valuations I know of totally in the shade. 

I have carried a Target Price for PTAL of 150p for some time now and have never wobbled about its ability to deliver, right now that number looks conservative… Financially it is very sound, we heard last week that it will pay off the debt in a months time, plans to pay a dividend and is also considering buy-backs into the bargain. 

The biggest risk is that the incredible reserve life index of 22 years, combined with the cash flow and nearby exploration prospects turns them into a bid target, if that happens you can forget my 150p TP….

2022 Year-end Reserves Summary

The summary below sets forth PetroTal’s reserves as at December 31, 2022, as presented in the reserves report prepared by NSAI, an independent qualified reserves evaluator.  The figures in the following tables have been prepared in accordance with the standards contained in the most recent publication of the Canadian Oil and Gas Evaluation Handbook (the “COGEH”) and the reserve definitions contained in National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”). In addition to the summary information disclosed in this announcement, more detailed information will be included in PetroTal’s annual information form for the year ended December 31, 2022 (the “AIF”) to be filed on SEDAR (www.sedar.com) and posted on PetroTal’s website (www.petrotal-corp.com) in March 2023.

Six Year Crude Oil Price Forecast – NSAI Report

The oil price projections used by NSAI are based upon an average of December 31, 2022 and 2021 forecasts of Brent Crude futures prices prepared by three qualified reserves evaluators: GLJ Petroleum Consultants Ltd., McDaniel & Associates Consultants Ltd. and Sproule Associates Limited.  The six year average for the NSAI Report reflects an average Brent oil price of $82.79, which as at the time of this press release, is approximately $4/bbl lower than current market Brent prices.

Year-End Crude Oil Reserves (million barrels)

Represents gross and net barrels since PetroTal has a 100% working interest and a 100% net revenue interest in these properties.  Royalties are paid from sales proceeds.

Year-End Net Present Value at 10% – Before Tax ($ millions)        

Year-End Net Present Value at 10% – After Tax ($ millions)       

Forecast Revenues and Costs(1-5) ($ millions)

1. Royalties include the 2.5% social fund for all years.
2. FDC includes abandonment.
3. Net Revenue is defined as revenue less royalties less operating costs less FDC.
4. B-tax and A-tax refer to before and after tax.
5. Discounted values are discounted at 10%.

Year-End Reserves Value per Share – After tax

Represents NPV-10 (after tax) divided by the number of common shares issued as of December 31 of each respective year and excludes other balance sheet items at the relevant date.  Canadian and GBP share prices are converted at the respective year end foreign exchange conversion rates.  Common share issued at December 31, 2022 total 862.2 million shares and at December 31, 2021 total 828.2 million shares. 

Reserve Life Index(1-3)

1. 2022 values based on 2022 year-end reserves divided by average 2022 production of approximately 12,200 bopd.
2. The license for Block 95 expires in 2041.
3. 2021 values based on 2021 year-end reserves divided by annualized Q1 2021 production of approximately 7,331 bopd.

Future Development Costs

The following information sets forth development and abandonment costs deducted in the estimation of PetroTal’s future net revenue attributable to the reserve categories noted below:

The future development and abandonment costs are estimates of the future capital expenditures required to convert the corresponding reserves to PDP reserves.  Future development per barrel is determined using the future development capital divided by the 1P, 2P, or 3P reserves, less cumulative PDP.

2021 Year-End Gross Reserves Reconciliation (million barrels)

Zephyr Energy

Zephyr has announced that application has been made to the London Stock Exchange for 13,483,095 new ordinary shares of 0.1 pence each in the Company to be admitted to trading on AIM.

The issue of the new Ordinary Shares is the first tranche of the consideration for the acquisition of the remaining 25 per cent working interest across the White Sands Unit in the Paradox Basin, Utah, U.S. as announced on 21 December 2022. It is expected that Admission will occur on or around 10 February 2023 whereupon the Paradox Acquisition is expected to complete.

The second and final tranche of the acquisition consideration is payable by the issue of 26,966,189 ordinary shares of 0.1p each in the Company to the vendor upon Zephyr’s final investment decision with respect to the contract award to a primary contractor to commence construction activities to make the Powerline Road gas processing plant operational.

The new Ordinary Shares will be subject to a lock-up period which will expire at the earlier of the date that first gas from the State 36-2 LNW-CC well is sold via the Dominion Energy 16-inch gas export pipeline or 15 December 2023. 

This is just a notice that the first tranche has been settled on the previously announced deal. It adds 0.56mmboe of 2P reserves and 7.16mmboe of 2C resources and is clearly of significant value to Zephyr. 

Arrow Exploration

Arrow has provided an operations update including its 2023 capital budget, and changes in total voting rights

Operations Update

Drilling Rig Arrives at Rio Cravo Este Multiwell Pad
The contracted 1,500 HP drilling rig has arrived at the multiwell pad at Rio Cravo Este (RCE). Arrow is poised to spud the first of three low risk infill wells, RCE-3, within the next five days. These wells are expected to take 12 days to drill and a further 10 days to bring on-stream. Arrow expects RCE-4 and RCE-5 will be drilled immediately following RCE-3. As previously reported, these infill wells have similar productivity potential to RCE-2 and RCS-1 which are currently producing 850 BOPD net combined, well above forecasted rates.

The Company is planning to drill two additional wells into the Gacheta Sandstone reservoir in the fault bounded RCE structure. RCE-2 tested rates exceeding 700 BOPD gross from the Gacheta Sandstone. Dedicated Gacheta wells would likely spud in Q4 2023 after three Carrizales Norte (CN) wells have been completed.

Carrizales Norte Operations
Arrow continues construction of the road, pad and cellars for the three planned CN wells. The road and pad are expected to be complete in mid-February and the wells are expected to be drilled immediately following RCE-5 and the mobilization of the rig to the new pad. 

3D Seismic Project, Tapir Block
As previously reported, Arrow has commenced the 134 square kilometer 3D seismic project on the Tapir block.  The 3D seismic project is scheduled to be completed in Q1 2023.

Workover Program
Arrow is continuing to recomplete existing wells that display additional production upside in unperforated zones. This program has been successful in both the RCE field and the Oso Pardo Field. The Company is also considering additional perforations on RCS-1 once RCE-3, RCE-4 and RCE-5 are completed and on production.

Current Production and Cash Balance
Average January Corporate production was approximately 1,800 boe/d.  Short term outages due to weather at Ombu and Pepper impacted production rates.

At December 31, 2022 Arrow’s cash balance was approximately US$13 million.

2023 Capital Budget

The approved 2023 capital budget for Arrow totals US$32 million and is to be financed from current cash reserves and operating cash flow.  The capital program includes the following:

–      134 km² 3D seismic program
–      10 well drilling program including1:

o  3 C7 wells at RCE, each expected to add initial 300-500 bbls/d net to Arrow
o  3 wells at CN, each expected to add initial 300-500 bbls/d net to Arrow
o  2 Gacheta wells at RCE, each expected to add initial 200-400 bbls/d net to Arrow
o  2 wells at Oso Pardo, each expected to add initial 300-500 bbls/d net to Arrow

–      Infrastructure including:

o  Road and pad at CN
o  Water disposal well conversion at RCE

Here we go then as Arrow get underway with a series of wells and seismic to kick the new year into action. The rig has arrived on site at the Rio Cravo Este (RCE) and will spud within days, each well will take around 12 days to drill and if successful will come onstream after 10 days, so three wells drilled. 

The company plan to target the Gacheta sandstone reservoir later in the year, dedicated Gacheta wells would likely spud in Q4 2023 after three Carrizales Norte (CN) wells have been completed. This is because the CN pad is being completed and will use the rig after the RCE-5 well is completed.

Meanwhile, seismic on the Tapir block is underway and should be completed in Q1 2023. Finally, sundry wells will receive  additional perforations such as RCS-1 once RCE-3, RCE-4 and RCE-5 are completed and on production.

Arrow are financially strong and independent, cash of $13m at year end and the approved 2023 capital budget for Arrow totals US$32 million and is to be financed from current cash reserves and operating cash flow which is very encouraging.  

Arrow joined the bucket list formally at Christmas and I am convinced that it will not disappoint. It has a fantastic management team and with a substantial well programme and a seismic survey about to complete makes Arrow a very busy company. At 18p the shares have doubled since I first listed them as likely to outperform and with my current Target price of 50p likely to be conservative once the company’s targets are met which I’m sure they will be, that TP should rise through the year. 

Savannah Energy

Further to the Company’s announcements of 7 June 2022 and 9 December 2022, Savannah Energy PLC, the British independent energy company focused around the delivery of Projects that Matter, is pleased to announce the appointment of Sylvie Rucar as an independent Non-Executive Director to the Board with immediate effect.

Sylvie is a seasoned professional in finance, with significant expertise across multinational businesses both in an executive management and a non-executive capacity as board member and audit committee chairwoman.

She was formerly CFO of PSA Group (the CAC 40 automotive company now known as Stellantis), Deputy CFO of Société Générale (the CAC 40 bank), a Non-Executive Director of CFAO S.A.S. (the €5.8bn revenue African-focused automotive and pharma retail company) and a senior advisor to leading global professional services firm, AlixPartners. She is presently a Non-Executive Director of Alstom S.A. (the CAC 40 railway and services equipment company) and Avril Gestion S.A.S. (the €6.2bn revenue private vegetable oil and protein company). Sylvie also serves as Treasurer of Les Amis De Bassiata et des Enfants du Niger (a Niger focused education charity).

Andrew Knott, CEO of Savannah Energy, said:
“We are delighted to welcome Sylvie to the Board. Sylvie’s extensive financial background combined with her broad multinational and African experience will be invaluable to the Company as we continue to increase our presence across the continent and develop our portfolio of hydrocarbon and renewable energy projects.”

Readers know that I don’t always comment on NED appointments but here Andrew Knott has again come good with a highly experienced African expert to advise the board. 

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