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Marrakesh Oil & Gas Summit blog

This was meant to go out yesterday with a wrap up today, unfortunately primarily due to technical difficulties at the hotel it has become a big all in one analysis of the week, apologies.

Oil price

Oil fell again yesterday, all sorts of reasons but there is a growing feeling that there may be a humanitarian pause rather than full cease fire to allow more aid into Gaza. 

The other worry was the confusion over the inventory stats, with the API the previous day reporting a decent draw across the board and better than the whisper but yesterday the EIA, normally considered to be more accurate measure showed a build of 1.371m barrels of crude and added 0.156m b’s of gasoline but a draw of 1.686m was appropriate for the time of year. 

Then there was the economic news, on the bad side the EU is clearly a basket case and the ECB, whilst maintaining rates suggested that things look so bad that they can’t even offer any forward guidance…

And hurricane Otis is on the move, so far having hit Mexico quite badly we will see where it goes from here. 

Sound Energy

Sound on Wednesday 25th confirmed the extension of both the ONEE (Office National de l’Electricité et de l’Eau Potable) Gas Sales Agreement and the Attijariwafa bank funding offer until 31st December 2023.

Further to announcement of 28th June regarding the conditioned financing offer by Attijariwafa bank, the Company confirms that it is in discussions with ONEE under the auspices of the Ministry of Energy to conclude the amendments to the GSA to the lender’s satisfaction, in order to complete the necessary conditions precedent to the Conditional Offer.

Commenting, Graham Lyon (Executive Chairman) said:
“Various elements within the GSA are being amended to meet the debt funders criteria and to meet international standards. As such, Sound Energy, ONHYM, ONEE and Attijariwafa bank are engaged under the auspices of the Ministry of Energy to conclude a revised GSA by year end.”

The above statement which I allude to below, shows that all the parties are working together to ensure as fast and clean conclusion to the process as is possible and is very encouraging. 

In Wednesday’s opening day of the Marrakesh Oil & Gas Summit, Sound Energy COO, Mohammed Seghiri, participated in the exploration panel session and described the very large prospect inventory around the Tendrara concession. In the afternoon’s production and development session, in collaboration with Ital fluids he presented the ongoing microLNG development at Tendrara and showed a 3D design video visualisation of the project walking through the plant.  This was supplemented by visuals of the actual fabricated key elements of the project, I have to say that whilst I am not often surprised by the scale of these engineering masterpieces the project looks highly impressive in its scale.

Also in attendance was Graham Lyon, Executive Chairman who commented to the blog that unlocking exploration is enhanced when the cycle time from discovery to production can be reduced. Sound has shown that micro LNG is one way to access the  market in short order and that their arrangements with Afriquia Gaz allows them reproduce this mode of delivery to reduce cycle times from exploration discovery to production. Lyon also stressed that getting phase 2 pipeline infrastructure in place for the concession development under commercial, regulatory and financeable conditions would further unlock basin exploration and offer similarly good development opportunities for any future discovery. This pipeline spur (albeit 120km) can provide a ready access to the GME pipeline and all the various markets it serves.

Sound’s Wednesday  announcement, that all parties are working to ensure that the gas sales agreement with the state power generator meets standards to allow local and potential international bank financing, whilst taking time, is good news that the government recognises how such infrastructure can transform local energy supply. In both the sessions in which they were represented, Sound showed that, along with Italfluid, that there is a genuine case for Morocco’s first Micro-LNG project as well as the pipeline gas evacuation route and that both will  play an important role in Morocco’s energy mix.

Lyon said that ONHYM had brought together many excellent panellists and topics and that the conference has not only  shown the importance of developing Morocco’s own resource but also Morocco’s role as energy infrastructure enabler. 

Chariot

With so much going on in Morocco and as a sponsor of the Summit it was not surprising that Chariot was well represented this week. The keynote presentation: Morocco’s Unique position in Africa as an emerging hydrocarbon province was given by Duncan Wallace, Chariot’s Technical Director.

In addition Pierre Raillard, Chariot’s Head of Gas business and Morocco Country Director, gave an address entitled ‘Building a sustainable gas value chain in West Africa’.

Clearly the Anchois Development Project has been the key to recent excitement at Chariot as it will have the ability to deliver substantial quantities of gas primarily into the Moroccan domestic market with significant upside. This is because whilst there are obvious export opportunities, the country are committed to the long term plan to move the needs of the country away from coal and to gas as a transition fuel for power generation.

Chariot are planning to supply Morocco’s key Atlantic industrial zones and they have a partnership with Vivo Energy in terms of energy distribution and of course this will hopefully be added to when the Loukos Project gets underway. This project has been put together alongside Anchois as it’s onshore location should mean that wells can be drilled more quickly and get to production sooner, it is very true that it will involve exploration wells but Duncan Wallace said to me today that ‘there seems no reason why they shouldn’t work, after comparing all the similar geological and geophysical similarities the prospects have with our success at Anchois and taking into account the offset wells which demonstrate reservoir and gas presence’

It would be wrong not to mention Eni who are drilling the Cinnamon-1 offshore exploration well and of course whilst likely to be targeting oil in the Jurassic, would on any success have an immediate effect on local industry in such areas as service providers. 

Chariot were also highly complimentary about the relationship with ONHYM who have been not only giving help to upstream but also to those in midstream which will be important for Chariot as it highlights the infrastructure opportunities presented. 

Genel Energy

Genel were also well represented in Marrakesh, Gavin Elliot, Exploration geologist gave a case study entitled  ‘New data, new plays and new ideas in a proven petroleum province; Lagzira, offshore Morocco. At the following panel discussion, his colleague Mike Hohbein, Asset Manager Africa, Genel spoke on the ‘Particularities of Moroccan subsurface and the opportunities for collaboration with international partners on research and development of new exploration technologies’. 

Genel has highly prospective offshore acreage and is committed to farming-out some of its project, attending the Summit and with excellent presentations would have clearly benefited from being here, they have undoubtedly drummed up further interest in front of a very large, sophisticated international audience.  

Hunting

Hunting has today announced a further major subsea order and also issues a Q3 2023 trading update.

Highlights

• $59 million order for titanium stress joints received in October 2023.
• Group EBITDA of $75 million, with the result in Q3 2023 similar to Q2; and 2023 full year guidance remaining unchanged at $96-100 million.
• Total cash and bank / (borrowings)1 of $(68) million at quarter end. Year-end position now anticipated to be broadly zero.
• $511 million sales order book as at 30 September 2023.
• Launch of the Hunting 2030 Strategy.
• Opening of the Company’s joint venture threading facility in Nashik, India.
• Robust demand across most product lines.
• Outlook continues to be positive, driven by international activity.

Jim Johnson, Chief Executive of Hunting, commented:
“We are delighted to have received another major order for Hunting’s titanium stress joints. The technology is gaining further acceptance for application to offshore production vessels and we are pleased to be supporting clients with technology which delivers safer and faster cash flows for them.

“The performance of the Group has been encouraging in the period driven by strong international demand for oil and gas, underpinned by an increasing global focus on energy security and continued economic growth. Each of Hunting’s product groups continues to execute on its strategy of growth, as we outlined at our Capital Markets Day.

“Our diverse product platform plays to the long-term investment themes of the industry, including strong growth in offshore work and international activity levels growing at a robust rate.

“We are also pleased to note that commodity prices are showing resilience. This strength will continue to deliver commitments to new drilling and completion activity as we enter 2024 and positions the Group strongly going forward.”

This is undoubtedly a good update from Hunting and the further major subsea order for $59m for titanium stress joints is good but it’s in this month and won’t show until next year. Along with the major order came a Q3 trading update which stated that Q3 EBITDA will be similar to Q2 so business remains good but full year guidance of $96-100m wasn’t changed so the shares drifted, probably a buying opportunity if the M&A by Exxon and Chevron recently expresses market confidence is anything to go by.

The company state that demand is ‘robust’ across most product lines and the outlook is positive, Hunting is way too cheap, take another look at the Capital Markets Day briefing documents. 

Major Subsea Order
The Company is pleased to announce that in October 2023 it received a further large order for its titanium stress joints for a client operating in South America. In line with the Hunting 2030 Strategy, the Group has continued to pursue growth opportunities in the offshore segment of the global energy market, with today’s announcement confirming the continued success of Hunting’s stress joint technology for application to Floating, Production, Storage and Offloading facilities. The $59 million order will be completed over the next 28 months with revenue being recognised over this timescale. With this new order, the Group’s total sales order book has increased from the position reported at quarter end.

Q3 Trading Update
Hunting’s trading performance during Q3 2023 has continued its positive momentum, as international drilling activity continues to drive demand for its major product lines. Activity in South America, the Middle East and Asia Pacific markets continues to be high, offsetting some softness seen within the North American onshore market. Year-to-date EBITDA of $75 million reflects a near doubling compared to the same period in 2022, as the focus on energy security and global economic growth increases. Hunting’s EBITDA result in Q3 2023 is similar to Q2 and well ahead of Q1 2023 respectively, demonstrating the broad-based strength of the Group’s diverse product portfolio. Group EBITDA margin has also exceeded 11% in the quarter, with pricing and demand remaining firm.

The Group’s balance sheet remains strong, with net assets as at 30 September 2023 of $865 million. Working capital increased by $28 million over the quarter as investment to meet secured orders continued, resulting in total cash and bank / (borrowings)1 of $(68) million as at 30 September 2023.

Management believes that cash generation will accelerate in the balance of the year and going into 2024, with a cash and bank / (borrowings)1 position at year-end now anticipated to be broadly zero, due largely to new orders received in the period, coupled with order completions and payment timings.

The 2023 interim dividend of 5.0 cents per share will be paid on Friday 27 October 2023, which will absorb $8 million. Capital expenditure for the full year is also now anticipated to be c.$35 million.

In summary, the Board remains comfortable with current EBITDA expectations of $96-100 million as sales momentum and profitability are sustained.

Product Line Overview
The Group’s global OCTG, Premium Connections and Accessories businesses have reported a strong performance in the year-to-date. Well completion activity in South America has delivered robust growth in the year, as activity in Guyana and Brazil remain strong. In Asia Pacific, tender activity in China, India and the Middle East is also reporting good momentum.

Hunting’s Perforating Systems business has reported headwinds during the past two trading quarters due to the reducing North American onshore rig count; however, EBITDA results remain broadly similar to 2022 as margins remain solid due to the prevailing product mix in the year-to-date.

Within the Advanced Manufacturing product group, the Dearborn business has reported strengthening results in the year, with pricing and margins increasing. Non-oil and gas sales continue to increase.

The Subsea Technologies product lines have reported strong results during the quarter, with demand for hydraulic valves and couplings delivering record results within the Stafford business, supported by ongoing activity in the Spring business as orders for titanium stress joints continue. New orders for Flow Access Modules within the Enpro Subsea business have also accelerated in the quarter.

Other Manufacturing, which includes well intervention, well testing and trenchless products also report good results. 

Segmental Overview
The Hunting Titan operating segment has reported flat results in the year-to-date, compared to the prior period. This result demonstrates the strength of the segment’s product offering and its steady pricing and margins, despite the reduced US onshore rig count. International sales continue to improve, in line with its strategy to grow its presence in South America, the Middle East and Asia Pacific.

The North America operating segment has delivered very strong results, driven mostly by the OCTG and Advanced Manufacturing businesses. As noted above, activity in South America has been extremely strong in the year given the drilling success in Guyana and the long-term development commitments made by major operators in the period.

As noted above, the Group’s Subsea Technologies businesses have also reported strong increases in activity in the period.

The EMEA operating segment continues to complete work for Tubacex for Brazil, supported by growing momentum in the Middle East.

Hunting’s Asia Pacific operating segment also reports strong tender activity in the period, and will benefit from the new threading facility in Nashik, India, which opened in September.

Hunting 2030 Strategy / Capital Markets Day
At the Capital Markets Day in September 2023, Hunting’s management set out its strategy for growth to 2030. The Group plans to deliver c.$2 billion of sales per annum by the end of decade, at EBITDA margins in excess of 15%.

Key areas of opportunity include growth of its OCTG businesses, driven by strong international oil and gas demand and the high-growth energy transition markets of geothermal and carbon capture, with an increase seen this quarter for geothermal tenders for delivery in 2024.

Hunting also sees strong growth in its Subsea businesses as offshore investment by the global industry is projected to double throughout the remainder of the decade.

The Group also plans to accelerate its non-oil and gas sales, predominantly through its Advanced Manufacturing businesses, as it targets the high-end markets of aviation, commercial space, defence and medical.

The above strategy is underpinned by a focus on delivering strong free cash flow to the end of the decade and an increasing dividend distribution.

Challenger Energy Group

Challenger Energy has provided the following update in relation to its financing arrangements:

• The Company has secured a short-term bridge loan of £346,500 (the “Bridge Loan”), the proceeds of which will be applied to immediately redeem in full the drawn and unconverted balance of the previously advised convertible loan note funding facility (the “Funding Facility”), and thereafter permanently cancel that Funding Facility.
• In parallel, the holder of currently issued convertible notes under the Funding Facility has issued a conversion notice in relation to a small portion (£55,000) of the notes on issue, which, in accordance with their terms, will convert by agreement into 100 million new ordinary shares of the Company (“New Conversion Shares”).
• The net effect will be that the Company will issue the Conversion Shares, receive £346,500 by way of proceeds from the Bridge Loan, immediately apply those proceeds to fully redeem the remaining balance of convertible notes issued under the Funding Facility, and thereafter permanently cancel the balance of the Funding Facility.

Key terms of the Bridge Loan are:

• a 12% per annum coupon, accruing monthly;
• a maximum term of 6 months, but with a proviso that the Bridge Loan will be repaid earlier from proceeds received by the Company from either (i) completion of the Cory Moruga asset sale transaction in Trinidad, or (ii) completion of a farm-out of its assets in Uruguay; and
• the Bridge Loan is unsecured.
• The Company will issue warrants to the provider of the Bridge Loan, valid for 36 months, which will entitle the holder of the warrants to subscribe for 250 million ordinary shares in the Company, at an exercise of 0.1p per share, being a premium of approximately 100% to the current share price.

Eytan Uliel, Chief Executive Officer, said:
“Eight weeks ago, we secured a convertible note funding facility for up to £3.3 million. As we explained then, our immediate funding requirement was relatively minimal, in that we were seeking to bridge a short period of time until receipt of expected cash inflows. We thus drew only a small portion of that facility, although we saw value in putting a much larger line of funding in place, in case it was needed it in the future.

However, given the progress in seeing those expected cash inflows in the required timeframe, we have moved to refinance and cancel the facility, and replace it with a more “traditional” loan, with attached warrants.

We will thus continue to have the funds needed to bridge us through the current period, although we will no longer have a bigger facility in place to support us beyond that. Today’s transaction will also mean that the item of most concern to our shareholders about the previous convertible facility – the potential for future dilution at unknown value from future conversions and any future facility draw-downs – is removed.”

This is an interesting move by Challenger and notably a change to previous announcements. I managed to have a conversation with CEO Eytan Uliel this morning and he was refreshingly open with me. He thought that the previous raise was good but investors ‘hated it’ so on the basis that they are not too proud to admit to mistakes they decided to ‘bin it and replace it with a conventional facility’. Fair dinkum if you ask me mate….

Admission and Total Voting Rights

• Application will today be made for admission (“Admission”) of the New Conversion Shares to trading on AIM, which are expected to be admitted on or about 2 November 2023, and it is expected that on Admission the New Issue Shares will rank pari passu with the Company’s existing ordinary shares.
• On Admission, the total issued share capital of the Company will consist of 10,494,066,144 Ordinary Shares. The Company does not hold any Ordinary Shares in treasury. Therefore, the total number of voting rights in the Company is 10,494,066,144 and this figure may be used by shareholders in the Company as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change in their interest in, the share capital of the Company under the FCA’s Disclosure Guidance and Transparency Rules.

ReconAfrica

Whilst at the conference I met with Recon Africa for the first time, previously I hadn’t had sufficient good reports to look into the company and to be fair under the old management the bad reputation went ahead of it. Also as it is listed on the TSX Venture Exchange there are few reasons for us to look at it over here.

But Recon 2.0 as they are calling it are making big efforts to straighten up and fly right so to speak and they have put together an impressive management team across the board to go with an interesting portfolio. In Namibia, which is definitely a hot post code at the moment  as well as in Botswana and they now have data to back up their claims, the lack of which was the primary cause of investor discomfort.

I haven’t decided whether or not to cover Recon Africa yet but it is substantial, a market Cap of C$260m and slowly gaining acceptance from the energy community. The jury is out for the moment but it’s certainly on the radar screen…

Conclusions from Marrakesh

This Summit without doubt succeeded in its presumably primary hopes to have a high quality roster of speakers and more importantly a large room, full of interested, senior delegates who without doubt stayed the course from start to finish.

A great deal of credit for this must go to ONHYM who not only fully endorsed the Summit but put their back into making it such a success. A large number of senior ONHYM personnel from the very top down were slated as speakers on all the subject to explain and assist from a technical and political background.

This was a significant achievement and despite some inevitable administrative foul-ups the organisers successfully put together a conference full of interesting people who represented not just Morocco but West Africa and beyond and so they too can be congratulated.

KeyFacts Energy Industry Directory: Malcy's Blog