WTI (June) $82.63 -$1.22, Brent (June) $88.40 -$1.10, Diff -$5.77 +12c
USNG (June) $2.03 +11c, UKNG (June)* 68.8p -3.08p, TTF (June)* €28.095 -€0.205
*Denotes May contract expiry

Oil price

After yesterday’s fall the same is happening today, the whisper of a ceasefire is in the air, oil is down just over a dollar.

Deltic Energy

Deltic has provided the following update in relation to its Pensacola Discovery on Licence P2252 in the Southern North Sea in which Deltic holds a 30% interest.

Well Planning and Timing

Following commitment to the appraisal well in December 2023, operational planning for the Pensacola appraisal well has continued to progress according to plan.

In anticipation of drilling the Pensacola appraisal well, long lead items have been ordered, the geophysical site survey over the proposed well location has been completed and the final geotechnical site survey is scheduled to take place in May/June 2024.

The rig contract was entered into in February which secured the Valaris 123 heavy duty jack-up drilling unit to drill both the Selene exploration well and Pensacola appraisal well, with the Pensacola well due to be drilled immediately following completion of Selene operations.

The rig is currently operating in the Central North Sea following which it will move to Selene. Subject to the timing of the completion of Selene, the Pensacola well remains on track to be drilled in Q4 2024.

Farm-out Process

The feedback from Deltic’s Pensacola farm-out process has indicated that the continual tinkering with the Energy Profits Levy and resultant fiscal uncertainty created by the current government, along with recent rhetoric emanating from the Labour Party, have had a severely negative effect on the ability of UK Exploration and Production (E&P) companies to commit to long term investments in the North Sea.  This has resulted in many operators diverting capital away from the UKCS or delaying investment decisions, especially with respect to new large-scale opportunities like Pensacola.

Against this hostile political environment, and despite the Company’s best efforts, Deltic have not yet been able to secure a farm-out partner for Pensacola and although there are a number of live discussions with respect to a way forward on Pensacola, there is a risk that a farm-out may not be secured before the end of May 2024. We remain of the view that Pensacola represents an excellent value-driven opportunity for the right partner and would be willing to engage with any additional potential partners.  

Equity Capital Markets

The recent difficult state of UK equity markets, especially for smaller companies, has been well publicised. This, coupled with the impact of the political and fiscal regime on UK E&P company valuations and investor sentiment means that the Board believes that accessing traditional equity capital, as the Company has successfully done in the past, is unlikely to be a viable option to allow Deltic to meet its 30% share of the Pensacola well (currently estimated to be roughly GBP£15 million net to Deltic).

Alongside its ongoing farm out process, Deltic will continue to consider alternative sources of capital and non-traditional funding structures to mitigate costs and/or secure its equity position in the Pensacola well.  However, there is no guarantee that such capital will be available or available on acceptable terms. It is particularly frustrating for the Company as a recently commissioned Competent Person’s Report by RPS Energy assessed Pensacola as having a 2C NPV10 of approximately USD$200 million net to Deltic, representing a multiple of the Company’s current market capitalisation.

Potential for Licence Withdrawal

If an industry and/or funding solution is not in place by the end of May 2024, being the point  at which Deltic will be required to demonstrate its capacity to fund its share of costs, Deltic will be required to take steps to ensure the Company is not exposed to further expenditure on the Pensacola well if there is no reasonable expectation that the Company will be able to meet those additional liabilities which will be incurred going forward.

In such circumstances, Deltic will be required to withdraw from the Pensacola licence and transfer its interest in Pensacola to the Joint Venture partners.

Graham Swindells, Chief Executive of Deltic Energy, commented:    
“The struggle to find a way forward on a project like Pensacola, which is one of the largest discoveries in the North Sea in recent decades, is a real-world consequence of our political leadership using the nationally important oil and gas industry as a political football at a time when energy security is of paramount importance.  

Given the impact of fiscal and political uncertainty on investment decisions we have seen a shift away from investment in larger standalone projects, like Pensacola, towards more affordable, lower risk opportunities which defer decommissioning or increase infrastructure life such as Selene, and the Company’s Syros prospect in the Central North Sea, where we have seen an enhanced level of interest.    

We look forward to the start of drilling operations on the high impact Selene exploration well, in which Deltic is fully carried for the estimated cost of the success case well, which remains due to spud in July 2024. In the meantime, we will continue to pursue all avenues to progress Pensacola and will update the market in due course.” 

Although there have been a number of warnings from UKCS operators and participants since the EPL was brought in, the Looney tax as I refer to it has not yet in my view potentially taken its toll as badly as Deltic are warning this morning. 

The company has been doing extremely well in the lead up to delivery of its two major assets and the summer was looking exciting with a rig hired to drill back to back wells on Selene and Pensacola. But the ongoing pillage of the oil sector by the current Government as well as the likelihood of a certain Labour administration later in the year has taken the wind out of the sails of  the UK oil & gas industry.

And when politicians of all colours remove all incentive from investing in the UK, for transition energy that will generate necessary domestic power and also be highly attractive in terms of carbon footprint compared to imported hydrocarbons then one has to worry about both fiscal and energy common sense.

So this is a hugely frustrating situation which is threatening the participation of a domestic company in what is the biggest find in the Southern North Sea in over ten years. As I understand it Deltic has been in dialogue with a number of parties of differing nature and whilst none has put up yet, a satisfactory conclusion is not yet out of the question.

So where does this leave Deltic now? The worst case is that in the absence of a partner they will have to put the stake in Pensacola back to the partners as soon as Shell issues the AFE. As the statement says an equity issue is out of the question but a partner of some sort is still possible, just as that date is expected to be around the end of May.

The good news is that all is not lost, investors are right to be cross about politicians who know nothing about what is a significant revenue contributor and less about what it brings to the economy as a whole but before Pensacola is scheduled to drill, the Selene well will spud in late July.

My valuation of Deltic shows that I already had Selene in the valuation for more than Pensacola, it is one important stage further down the line and can deliver sooner than Pensacola, not least due to local infrastructure potentially speeding up development and making it economically attractive should the well succeed. At Selene Deltic are fully carried and will be at a critical phase before long, less so at Pensacola. 

Clearly my current Target Price for Deltic will have to be reduced, I am carrying 200p which is not outwith the market range but probably near the top. But within that there is, as I said more in for Selene which remains unaltered, even if I take out Pensacola entirely or leave just option value then I can still get to something over 100p per share, which when you look at Deltic shares at 20p then there is very decent upside. 

So this is by no means the end of the road, indeed if the political foolishness carries on then ironically the Selene development may be one of the last in the UKCS, it looks to me to be worth a very decent multiple of the current Deltic share price and accordingly with what I consider to be at the very least an option on Pensacola there is still plenty of upside. 

Sintana/Eco Atlantic

Sintana has announced that Chevron Namibia Exploration Limited has executed an agreement effective April 28th that provides for their entry into Petroleum Exploration License 82 (“PEL 82”) with the assumption of an 80% working interest and operatorship.  NAMCOR, the National Petroleum Corporation of Namibia, and Custos Energy will each maintain a 10% carried interest in PEL 82.  Sintana maintains an indirect 49% interest in Custos.

PEL 82 governs blocks 2112B AND 2212A located in the Walvis Basin, offshore Namibia.  PEL 82 is one of the Walvis Basin’s most attractive opportunities.

• Approximately 70% of total block area is covered by existing seismic – over 3,500 km of 2D and 9,500 km2 of 3D data.
• Previous drilling activity on PEL 82 includes the Murombe-1 and Wingat-1 wells.
• Results confirmed the regional extension and presence of the Barremian-Aptian oil-prone source rock (Kudu shale).
• The Murombe-1 penetrated the Baobab sands returning approximately 20% porosity.
• The Wingat-1 well recovered 38-41 degree API oil to surface.

“We are pleased to announce the continuing expansion of our in-country partnership with Chevron through their entry in PEL 82.  This is one of the most advanced and interesting opportunities offshore Namibia outside of the Orange Basin.” said Knowledge Katti, Chairman and Chief Executive Officer of Custos, and a director of Sintana. “We are pleased to see our efforts over the last decade on PEL 82 result in this important step forward adding further to Namibia’s world class offshore opportunity.” he added.

“The expanding partnership with Chevron in Namibia speaks to the quality of our Namibian portfolio.”  said Robert Bose, CEO and Board Member of Sintana.  “The timeliness of our entry and the unmatched nature of our portfolio continue to be demonstrated as Namibia emerges as the world’s next great hydrocarbon province.” he added.

I have written quite a bit about Sintana in recent weeks and months, this dynamic company has been active in the Orange Basin and indeed Robert Bose has popped up as a director and investor in Challenger Energy Group. But it has now joined with Chevron in the Walvis Basin, ironically in a block where Exxon and Galp were involved a while ago. Also it’s Important to note that Bose and his fund (Charlestown Capital Partners) are a significant shareholders in Eco (this is how they first got introduced to Namibia).

But the big winner must be Eco Atlantic who have carefully built up a substantial portfolio in the Walvis Basin and as the long predicted dash for acreage here has finally got underway. The best way of showing it is via this map, where Eco are very strongly represented, their licences are in pale blue and they own 85% of each and are operators. 

Gil Holzman, CEO of Eco Atlantic said to me that ‘this is a farm-out basin opener and as we knew and expected everyone will now rush to the Walvis Basin, after Chevron showed has signed up for this block. We are the largest acreage holder in the Basin and expected intensified exploration activity going forward’.

Sound Energy

Sound Energy, the transition energy company, is pleased, further to the update provided by the Company on 22 December 2022 and to continued constructive discussions with Morocco’s L’Office National des Hydrocarbures et des Mines, to provide a further update regarding amendments to its exploration permits at Anoual, and entry into the optional Complementary Period under the exploration permits at Anoual. 

The Anoual exploration permits cover 8,873 square kilometres in Eastern Morocco.

The Amendments and entry into the Complementary Period remain subject to Moroccan Energy and Finance Ministerial approval.

Anoual Exploration Permits

The Company is also pleased to report that ONHYM has now agreed on a 18-month extension to the initial period of the Anoual Exploration Permits to 8 July 2024. 

Subject to Ministerial approval, the length of the Anoual Initial Period will now be 6 years and 10 months, commencing on or about 8 September 2017 and ending on or about 7 July 2024. The work programme commitments for the Initial Period, details of which are provided below, will also be amended.

In addition, subject to Ministerial approval, to the extension to the Initial Period, ONHYM has also approved the merging of the optional First Complementary and the Second Complementary Periods under the Anoual Exploration Permits into a single Complementary Period consisting of 3 years and 8 months to or about 7 March 2028 (the “Anoual Complementary Period”).

As a result, the Anoual Exploration Permits now have a total duration of 10 years and 6 months and the remaining work commitments under the Anoual Exploration Permits, as revised, will be as follows:

Initial Period of 6 years and 10 months from or about 8 September 2017:

• The acquisition of FTG-aerogradiometry and 600 kilometres of 2D seismic. This requirement has historically been fulfilled by the Company.
• Geological and Geophysical Studies. This requirement has historically been fulfilled by the Company.

The Company has therefore fully satisfied the work commitments under the Initial Period of the Anoual Exploration Permits and the Company confirms it has submitted an application to enter the Anoual Complementary Period commencing on or about 7 July 2024.

The work commitment under the Anoual Complementary Period, of a further 3 years and 8 months to conclude on or about 7 March 2028 will require:

• a firm commitment to the drilling of one exploration well with a Triassic objective and the option, at the discretion of the Company, as the operator of the Anoual Exploration Permits, of the acquisition of 150 square kilometres of 3D seismic if the firm commitment exploration well is positive and drilling of one further exploration well with a Triassic objective.

The Company plans to fulfil the firm commitment for the Anoual Complementary Period with the drilling of the M5 exploration well detailed in the Company’s announcement of 9 August 2022.

John Argent, Sound Energy’s VP Geoscience, commented:
“We are pleased to have secured these improved and extended terms across our Anoual exploration permits and progress into the next phase of exploration across these permits.  We thank our partner ONHYM for their continued support during the constructive discussions we have had and, as partners, we await the necessary Ministerial approvals to conclude such that we can progress with our exploration activities.  The Company looks forward to updating stakeholders on our drilling plans to unlock the compelling potential of this basin leveraging the gas infrastructure we are developing at the TE-5 Horst.”

This looks pretty handy and along with my old friends’ support at ONHYM it looks like the Ministerial approval will be just around the corner.  

KeyFacts Energy Industry Directory: Malcy's Blog