WTI (June) $73.16 +$1.82, Brent (July) $77.01 +$1.71, Diff -$3.85 -1c
USNG (May) $2.23 +10c, UKNG (June) 85.0p +1.0p, TTF (June) €36.55 -€0.324

Oil price

A real roller coaster last week as Central Bank Governors wagged their fingers at the public and raised rates. When the inflation rates are falling then things will have to change and markets tell you that in the US its over for rises and prayers are being said for a soft landing. In the EU where prayers are long gone as to any chance to keep rates down they will rise again and the Euro remains strong.

Arguments thus rage about commodities but this weakness can only be a short term problem, as China picks up then so will the oil price but in the meantime we have to watch the comedy of Sleepy Joe  meeting Republicans in the White House later as the debt ceiling problems gets worse.

With the rig count showing a fall in overall rigs of 7 units and of 3 in oil US drillers are hardly falling over themselves to spin the bit as output hasnt risen lately. And with a gallon of Exxon’s finest rushing you only $3.533 slightly down in recent weeks the inventory stats will be exciting with the start of the

Diversified Energy Company

Diversified has announced it is trading in line with expectations and provided the following operations and trading update for the quarter ended 31 March 2023.

Delivering Reliable Results

• Recorded average 1Q23 production of 139 Mboepd (833 MMcfepd)
• Exit rate of 145 Mboepd (872 MMcfepd)
• Includes 15% liquids; Up 30% since entering Central Region
• Net income of ~$400 million inclusive of a ~$365 million gain on tax-effected, non-cash unsettled derivative fair value adjustments
• Achieved 1Q23 Adjusted EBITDA of ~$150 million(a)
• Realised 54% Cash Margin(b) benefiting from lower expenses
• Annualized Free Cash Flow Yield(c) of ~37% (1Q23 of ~9%)
• Total Unit Cash Expense(e) of $10.46/Boe ($1.74/Mcfe); ~6% improvement compared to 4Q22
• 2.3x Net Debt / Adjusted EBITDA leverage ratio(f) and ~$110 million of liquidity(g)

Executing Strategic Objectives

• Declared 1Q23 interim dividend of 4.375 cents per share, consistent with 4Q22; up 3% vs. 1Q22
• Completed Tanos II asset acquisition
• Maintained favourable natural gas hedge position; 2023 average floor pricing 35% above strip for remainder of 2023(d)
• Completed ~$6 million in non-core undeveloped acreage sales across the Company’s operating footprint

Creating Value Through Stewardship

• Issued 2022 Sustainability Report detailing emissions reductions, safety wins and community investment
• Supported energy transition through surface acreage transaction allowing solar field development
• Tanos assets recently acquired achieved project Canary Gold Rating
• Completed pneumatic device conversion on 22 pads through March 2023
• Next LVL Energy completed 56 well retirements through March 2023, on track for 2023 targets
• Includes 26 Diversified completions and 30 third-party completions

Rusty Hutson, Jr., CEO of Diversified, commented:
“Our team performed exceptionally well during the first quarter, once again delivering record production as we optimise our low-decline assets and add the complementary Tanos assets. Concurrently and despite the challenging commodity price environment, we reduced per-unit expenses and increased our cash margins to approximately 54% thanks to our disciplined hedging strategy and greater liquids exposure. Having responsibly hedged over 85% in 2023, approximately 80% in 2024 and approximately  70% in 2025 of our natural gas production, we continue to opportunistically add to our hedge portfolio where the price curve is higher.

Consistent with our strategy, we continued our consolidation efforts through another accretive acquisition in our Central Region, which also contributed to our undeveloped acreage position. We continue to advance our initiatives to realize value from these assets through outright sales, advantageous joint ventures, or other partnership constructs that will provide a catalyst to unlock upside to our net asset value and drive the opportunity for organic, no-cost production growth.

We remain focused on generating free cash flow to provide dividends and service our amortising debt while evaluating accretive growth opportunities that provide enhanced scale and synergies. We have built a sizable and resilient Company, and believe our intrinsic value per share significantly exceeds our current share price, offering a compelling value proposition for our current and future shareholders.“

Yet again DEC deliver a first rate quarterly update with record production and reduced costs which boosted margins, a truly incredible performance under the current industry conditions. The cash margins, now at a stunning 54% were achieved partly due to hedging and also the greater liquids exposure. 

The hedging policy which achieved this, hedged over 85% in 2023, approximately 80% in 2024 and approximately  70% in 2025 of natural gas production, and DEC continue to ‘opportunistically add to our hedge portfolio where the price curve is higher’ which is highly satisfactory. 

The DEC process continues, the most recent acquisition has, as is always the case, settled in very well and I expect more of the same if not even more and indeed if the CEO’s comments above are to be taken at face value, and I would, there may be more, diverse ways of value enhancement, something DEC has proved to be expert at in the past. 

With the increased 1Q dividend the shares remain amongst the best payer’s in the sector and with its yield of 15% as I have said time and again they represent on a capital and total return basis pretty much the best total value in the sector. 

Operations and Finance Update

Production and Asset Integration
The Company recorded exit rate production in March 2023 of 145 Mboepd (872 MMcfepd) and delivered 1Q23 average net daily production of 139 Mboepd (833 MMcfepd), both reflecting the partial impact of the Tanos II acquisition. The Company continues to integrate these assets into its Smarter Asset Management programmes, and expects to fully complete this work within 2Q23. 

Margin and Total Cash Expenses per Unit
Diversified’s robust hedge portfolio significantly protects the Company’s revenues from the global commodity macro deterioration that began in late 2022 and continues into 2023. Additionally, the Company’s vertical integration strategy provides greater control over its expenses to preserve high cash margins. 

Cash Margins(b) of 54% (56% unhedged) reflect the benefit of the Company’s hedge optimisation efforts, lower commodity-price linked expenses and contribution from the recently acquired high-margin Tanos II assets. Price-linked operating expenses drove meaningful reductions in unit production taxes, midstream expense, certain third-party gathering and transportation costs.

Adding production during the quarter without additional administrative requirements from Tanos II effectively held relatively flat Base Lease Operating Expense per unit and reduced Adj. General and Administrative expenses(f) per unit during the period.

1 1Q23 excludes $(0.28)/Boe ($(0.05)/Mcfe) and 4Q22 excludes $(0.34)/Boe ($(0.06)/Mcfe) of expenses attributable to Next LVL Energy

Results of Hedging and Current Financial Derivatives Portfolio

Diversified’s use of hedges to minimize commodity price risk and match stable production with stable revenues underpinned the Company’s average 1Q23 hedge floor price of $3.79/Mcf, 4% higher than the average settled price for NYMEX Henry Hub During the quarter(d). Diversified’s hedging strategy continues to advantageously position the Company for the balance of the year with remaining 2023 average natural gas hedge floors of $3.79/Mcf currently situated at a ~35% premium to current strip pricing(d) and a ~55% premium to the $2.48/Mcf active contract price(d).

Having proactively established its 2023 and a majority of its 2024 hedge portfolio, Diversified is focused on adding hedges to 2025 and beyond where forward natural gas prices remain strong. The table below represents the Company’s full-year hedge positions at 01 May 2023:

Environmental Update

Emissions Reductions Activity
During the quarter, Diversified completed the Company’s previously announced deployment of handheld emissions devices in the Central Region and has performed more than 4,000 emissions inspections to date in the region, with initial no-leak rates of 90% of sites surveyed consistent with the Company’s Appalachian portfolio.

Upstream and midstream emissions detection activities in the Appalachian region continue to progress, with upstream emissions testing via handheld devices yielding a consistent no-leak rate of <95% and aerial testing over midstream assets to date having covered more than 1,000 miles of pipelines. As previously announced, Diversified expanded pneumatic device replacement during the quarter, with 22 well sites successfully converted to electric or solar devices.

Asset Retirement Progress
Through Diversified’s wholly owned asset retirement subsidiary Next LVL Energy, the Company has safely retired 56 wells, of which 26 were operated by Diversified and 30 were owned or operated by third-party companies or state plugging programmes. Next LVL Energy’s ability to provide full-scope asset retirement and well services continues to benefit the Company’s asset retirement goals and capabilities achieved through scale and efficiencies as one of the largest asset retirement service providers in the Appalachian region.

Diversified expects to retire 200+ operated wells in 2023 including the 43 operated wells (including 26 by Next LVL Energy) retired year-to-date.

Solar Field Development
During the past year, the Company has been in discussions with several large solar project developers in the United States. These projects involve using surface acres owned by the Company as part of the land used to house solar panels and equipment for renewable power development. These acreage positions have primarily been located in Texas and Southern Appalachia to date, with some parcels located near the Barnett operating area. Diversified continues to have ongoing discussions with a number of solar project developers across its operational areas to realize value for acreage that would otherwise not be in any near-term development plans, anticipating additional partnership agreements to be consummated in the future.

San Leon Energy

San Leon, notes the announcement made on 8 May 2023 by Decklar Resources Inc. in Canada.  San Leon has a 11% shareholding in Decklar Petroleum Limited, the local subsidiary of Decklar operating in Nigeria, and has also made a US$5.5 million loan to DPL, via 10% per annum unsecured subordinated loan notes

San Leon continues to explore a potential sale of its non-core investments in DPL although the completion remains subject to the purchaser finalising its own funding arrangements, further details of which were most recently announced by San Leon on 24 March 2023.

Part of the text of Decklar’s announcement is set out below:

• “Decklar Resources Inc. and its co-venturer Millenium Oil & Gas Company Limited  are pleased to announce that trucking of crude oil from the Oza Oil Field to the Edo Refinery and Petrochemicals Company Limited (“ERPC”) has continued and total deliveries have now exceeded a total of 30,000 barrels of crude oil  in 2023 and thus completed deliveries to satisfy the 30,000 bbls crude sale agreement.
• Trucking of crude oil has also continued to the Duport Midstream Company Limited refinery in Edo State, with over 7,500 bbls delivered to date.

Calgary, Alberta – Decklar Resources Inc. (TSX-V: DKL) (OTCQX: DKLRF) (FSE: A1U1) (the “Company” or “Decklar”) and its co-venturer Millenium are pleased to provide updates regarding crude oil delivery operations at the Oza Oil Field in Nigeria.

Trucking and Sale of Crude Oil to ERPC’s Edo Refinery
Trucking of crude oil from the Oza Oil Field to the ERPC facility in Edo State, Nigeria has reached a cumulative volume of over 41,000 bbls, with 10,000 bbls delivered in 2022 under the initial sale and purchase agreement and over 31,000 bbls delivered so far in 2023. Deliveries under the 30,000 bbls contract have now been completed and invoiced, and deliveries will continue under the new 200,000 bbls contract. The terms of the 200,000 bbls agreement include an invoicing and payment cycle that is triggered as each 5,000 bbls batch is delivered and offloaded at the Edo refinery.

Delivery of Crude Oil to DMCL’s Refinery
In late March, delivery of crude oil commenced from the Oza Oil Field to DMCL and over 7,500 bbls have been delivered to date. Under the sale and purchase agreement with DMCL, Decklar and Millenium initially delivered 5,000 bbls to the Duport refinery in March and early April, followed by an additional 2,500 bbls in the last half of April. Deliveries of an estimated 5,000 bbls per month will continue going forward, and DMCL has agreed to purchase up to 100,000 bbls over the next 12 months. The agreement with DMCL has added a new customer for the sale of crude oil from the Oza Oil Field and gives Decklar and Millenium an expanded base to deliver and sell additional crude oil volume.”

With Decklar selling significantly more crude to the Edo refinery as well as the DMCL which adds the ability to sell further volumes this is clearly good news for the company and of course for SLE who not only have a stake in Decklar but also a US$5.5 million loan to DPL, via 10% per annum unsecured subordinated loan notes.

This will have enhanced the value of Decklar and also ensured that the likelihood of the debt being repaid and thus earning San Leon more for their investment in the long term. I still believe that a satisfactory resolution of this will result in a very profitable exit and a distribution to SLE shareholders. 

Reabold Resources

Reabold has announced that it has entered into a conditional subscription and option agreement  with LNEnergy Limited and a conditional shareholder option agreement with certain existing shareholders of LNEnergy. Pursuant to the terms of the Agreements, Reabold will initially acquire an interest of 3.1% of LNEnergy for cash consideration of £250,000, and receive options to acquire, at its sole discretion, further shares in LNEnergy which would result in Reabold holding a 25.0% shareholding in LNEnergy for aggregate cash and equity consideration of £3.8 million.

LNEnergy’s primary asset is an option over a 90% interest in the Colle Santo gas field, onshore Italy in the Abruzzo region. With 65Bcf of 2P reserves, as estimated by RPS as of 30 September 2022, this is a highly material undeveloped onshore gas resource, particularly in the context of onshore Western Europe, and subject to the necessary approvals and permits, is development ready with no additional drilling required. First gas is targeted for early 2025. This project is aligned with Reabold’s strategy to help to progress high quality pre-cash flow projects that can deliver material returns to shareholders.

Additional Information on the Agreements and LNEnergy

Under the terms of the Subscription Agreement, Reabold has initially subscribed for 32 new LNEnergy shares (representing 3.1% of LNEnergy’s enlarged share capital) for an aggregate consideration of £250,000 (the “Initial Subscription”), to be satisfied through existing cash resources. In addition, Reabold will receive an option to acquire a further 36 new LNEnergy shares (representing 3.3% of LNEnergy’s enlarged share capital at such time) for an aggregate cash consideration of £500,000 (the “First Option”) and a second option to acquire a further 127 new LNEnergy shares (representing 10.5% of LNEnergy’s enlarged share capital at such time) for an aggregate cash consideration of £1,800,000 (the “Second Option”), each of which would be satisfied through existing cash resources in the event that they are exercised.

In conjunction with the Subscription Agreement, Reabold has entered into the Shareholder Option Agreement, whereby Reabold will receive an option to acquire 108 existing LNEnergy shares (representing 10.0% of LNEnergy’s enlarged share capital at such time) from certain LNEnergy shareholders for an aggregate consideration of £1,500,000, payable through the issue of new ordinary shares in the capital of the Company (the “Shareholder Option”), which must be exercised simultaneously with the First Option in order to enable the First Option to be exercised.

Under the terms of the Agreements, which are inter-conditional, Reabold is only committed to the Initial Subscription, whereas the First Option, Shareholder Option and Second Option are all exercisable at the Company’s sole discretion. Should they be exercised, the First Option, Shareholder Option and Second Option can only be exercised in full. The First Option and Shareholder Option will expire on 31 May 2023 and the Second Option will expire on 30 November 2023.

LNEnergy was incorporated on 29 September 2021 and has not yet published accounts. LNEnergy’s management accounts to 31 March 2023 stated net assets of US$503,839 and a loss for the year ended 31 December 2022 of US$597,185.

Readers will know what I think about investments in Italy and how much grief and delay that they bring not to mention management time and capital requirements. Whoever thought this was a good idea has a different perception of value add to my own and as for the time scale, its adagio….

SDX Energy

SDX has announced the appointment of William McAvock as Chief Financial Officer with immediate effect. As previously announced, Daan Hanssen, the interim CFO, will be leaving the Company at the end of May.

Mr McAvock, an FCCA, has over 15 years’ experience as CFO or Financial Controller of multiple listed natural resources companies.

Jay Bhattacherjee the Executive Chairman of SDX said:
“We warmly welcome William to SDX, he brings terrific experience of the sector and helping companies grow and create value. As he is starting immediately, it will help to facilitate a comprehensive handover from Daan”. 

“I and my Board colleagues want to put on record once again our thanks to Daan, who made a substantial contribution to the business during his time with us”.

I wouldn’t normally make a comment on a CFO appointment but with Jay being the Chairman and the new strategy being put in place piece by piece, this one is important for the shareholders to get to grips with. He will need to work long and hard to turn round SDX and will be an important part of the new team.

Echo Energy

Echo has announced the execution of a binding Term Sheet for a transaction, subject inter alia to shareholder approval, designed to provide much needed funding for the Company through the sale of 65% of the Company’s 70% of the current Working Interest in Santa Cruz Sur to Selva Maria Oil S.A. and Interoil Exploration and Production ASA (the “Buyers”) for a cash consideration of up to £1.725M, an award of an option to purchase a producing Columbian portfolio and the issue of equity in Echo Energy PLC at 0.065 pence per share (a more than 100% premium to the closing price on 5 May).  This transaction would enable the Company to retain a much smaller interest in Santa Cruz Sur, whilst also seeing the Company’s liability for the previously announced significant in-country creditors and other liabilities reduced significantly. In addition the transaction would see the Buyer providing in country licence financial guarantees and provides a potentially attractive entry point into Columbia.

The Proposed Transaction
Pursuant to the term sheet and subject to contract, Echo will sell 65% per cent of its current 70% Working interest in the Santa Cruz Sur assets to Selva Maria Oil SA and Interoil Exploration & Production ASA. On Completion the Company Echo therefore will retain a 5% working interest in the assets, will have an option to buy another 5% back and will have an indirect exposure through equity in the Operator.

Total consideration for the sale is up to £1.725M of which:

Consideration of £825,000 with:

• An upfront payment of £75,000 on execution of transaction documents, with the balance of £750,000 due on completion once shareholder approval has been obtained.
• Payment in kind of £400,000 via transfer of Interoil shares upon completion, providing upside exposure to the Santa Cruz asset via an equity position in the Operator
• Additional contingent payment of £400,000 should production from the assets rise to 4,000 boepd (gross).
• Further contingent payment of £100,000 should production from the assets rise to 6,000 boepd (gross)

Furthermore the Buyers will provide a financial guarantee to cover Echo’s remaining 5% interest which is a critical step to enabling the securing of the licence extension and was not something Echo could easily achieve on its own.

Echo will also retain an option to repurchase a 5% interest in the asset for a consideration of £100,000 over a 6 month period, providing optionality in the event licence extension or other value catalysts are achieved

Additionally the transaction will provide the Company with the option to acquire an interest in Interoil’s Colombian assets (for a consideration and on terms to be agreed in future) after drilling and testing of an exploration well on the Maná Licence. The Company can recover twice the cost of that well from associated production.

Further to the above, Selva Maria Oil SA and Interoil Exploration & Production ASA have agreed to subscribe to approximately 115.38 million shares at a price of 0.065 pence per share (raising £75,000).  This represents a more than 100% premium to the closing share price on 5 May, the last trading day prior to announcement. Such an issue of equity would take place following completion and is likely to be subject to a capital reorganisation (likely requiring shareholder approval) and meeting other regulatory obligations.

Benefits of Transaction to Echo

This transaction fundamentally:

• Addresses the Company’s near-term funding challenges by providing near term funding, enabling the Company to walk away from the significant in-country creditors which had build up during the COVID-19 period and providing access to funding for the Santa Cruz assets.
• Provides continued exposure (both directly through the retained 5%, the contingent payments, the further 5% option and the indirect holding in the Operator) to a well funded Santa Cruz portfolio, likely with a licence extension supported by the guarantee.
• Provides the company  a new platform from which to move forward with an option on a strong Columbian portfolio with its corresponding lower risk jurisdiction and a clean balance sheet whilst still receiving cash flow from its 5% position in the producing assets of Santa Cruz Sur.

Given the Company’s large creditor position which originated from the COVID-19 period where the asset was sub-economic, 100%+ per annum inflation in Argentina and Argentine currency exchange controls, which have prevented funds being withdrawn from the country without significant penalties, the raising of additional equity for an Argentine business has been challenging. Having continued to explore all means of raising required near term funding, the Directors therefore see this alternative, which addresses the Company’s near-term funding challenge whilst providing continued exposure to Santa Cruz Sur, both through the retained 5% and the equity position in the Operator, and also a pathway to revenue generating assets in Columbia, as highly attractive at this juncture.

Transaction Subject to Shareholder Agreement
The transaction requires additional execution of a Sales & Purchase Agreement and a financial guarantee provided by the buyers for the benefit of Echo for the National Secretary of Energy & the Province of Santa Cruz. In addition the proposed option remains subject to agreement between the parties and completion will then require shareholder approval at an Extraordinary Shareholders’ Meeting of the Company to be held within 25 calendar days from execution of documents by all parties.

Vision For the Future
This transaction puts the Company on a much more financially stable trajectory with the transfer of liabilities associated with the Company’s current working interest in the assets to the buyers. A decision has been made to significantly reduce the Company’s corporate level cost base.

The Buyers will provide a financial guarantee for Company sufficient to meet domestic regulatory requirements. This is expected to help secure a 10-year licence extension for the Santa Cruz Sur assets as the new majority parties can fund the asset requirements to increase production. The Company will continue to have exposure to production upside through the contingent payments, and moving forward will continue to receive its 5% share of production revenue plus has the option to repurchase a further 5% interest at a price of £100,000.

The option to enter Colombia provides an opportunity to rebuild the E&P portfolio in a new territory that does not suffer the macro inflationary and economic factors that Argentina does. It is a much more business friendly jurisdiction with a vibrant small-medium cap E&P sector – an exciting growth opportunity.

Revenue Receipts
The Company confirms that it has received some of, but not all of, the expected c. ARS$ 135 million (c.£0.5m) revenue in Argentina around the end of April. The Company continues to expect that the remaining revenue will be paid to the company and is working with the operator and suppliers to accelerate its payment. The signing of the binding term sheet demonstrating a pathway to a stronger financial footing is considered an important step in this process. Prior to the receipt of this revenue or the completion of the proposed transaction the financial situation at the company remains challenging. Current cash balances in the UK bank accounts are below  £50,000.

Production from the Company’s assets in Argentina remains stable. Production over the period from 1 January 2023 to 05 May 2023 was an aggregate of 148,503 boe net to Echo, including 23,104 bbls of oil and condensate and 752 MMscf of gas. Average total daily production during the same period net to Echo was 1,198 boepd, with 6.07 MMscf/d gas and 186 bopd liquid.

Martin Hull, Chief Executive Officer of Echo Energy, commented:
‘This is a transformational moment for the Company as we look to put our recent challenges behind us and create a new, stronger and more financially robust platform from which to take the Company forward. Not only does it immediately improve our balance sheet, it also brings optionality with the Colombian opportunity, as well as giving us continuing revenues, with additional upside should the Buyers of the asset interest be able to deliver the investment and production growth that our financial limitations have prevented us from doing. I am excited about the future and the opportunities that lie before us and look forward to progressing the transaction in the coming weeks and updating shareholders on our progress.’

This deal appears to make a great deal of sense and the market has concurred, ‘putting recent challenges behind us’ as the CEO says is a nice way of kitchen sinking the assets, at least better for someone else to run and own. 

As to Columbia I am a renowned fan but this is early days, in the meantime it’s time to ‘rejoice’……

KeyFacts Energy Industry Directory: Malcy's Blog