Last night Savannah posted an update, here is my brief take on it. Today Q2 results and operating update from PetroTal plus more news from Predator.

Savannah Energy

On 12 December 2022, Savannah announced that it had entered into a sale and purchase agreement with PETRONAS International Corporation Limited (“PETRONAS”) to acquire its entire oil and gas business in South Sudan (the “PETRONAS Assets”). Despite the substantial efforts of all parties since that time, it has not been possible to complete the proposed transaction on the envisioned terms and the original sale and purchase agreement is terminated. PETRONAS has announced today that it has served notice to unilaterally withdraw from its interests in the relevant exploration & production sharing agreements.

However, Savannah remains in active discussions with the relevant parties around an alternative potential transaction in relation to an acquisition of the PETRONAS Assets. Such alternative potential transaction, should it be concluded, (or a reversion to the original transaction), would still constitute a reverse takeover transaction pursuant to AIM Rule 14 and, accordingly would be subject to, inter alia, shareholder approval. Trading in the Company’s ordinary shares will therefore remain suspended from trading on AIM pending publication of an AIM Admission Document setting out, inter alia, details of the proposed alternative transaction, or confirmation is provided that the proposed alternative transaction is not proceeding.

A further update on progress, and associated matters, is expected to be made in early September.

This seems to be a somewhat woolly announcement which comes as no surprise given the environment SAVE are operating in, but beneath the investment bank-ese nature of the language the background appears to be ameliorative rather than flaky. It would suggest that there is still a deal to be done but the finesse part of the deal may have given way to a slightly more direct way of negotiating. 

Andrew Knott and his team have spent a great deal of time in-country and as I understand it work is still going on, nothing that much has changed but an announcement had to be made due to current circumstances, I think that come September there may be something to sign up to. 

PetroTal Corp

PetroTal has reported its operating and financial results for the three and six months ended June 30, 2024.

Selected financial and operational information is outlined below and should be read in conjunction with the Company’s unaudited consolidated financial statements and management’s discussion and analysis (“MD&A”) for the three and six months ended June 30, 2024, which are available on SEDAR+ at www.sedarplus.ca and on the Company’s website at www.PetroTal‐Corp.com. All amounts herein are in United States dollars unless otherwise stated.

Selected Q2 2024 Highlights

• Average Q2 2024 production and sales of 18,290 and 18,050 barrels (“bbls”) of oil per day (“bopd”), respectively, which included a brief river blockade;
• Generated Q2 2024 EBITDA(1) and free funds flow(1) of $69.5 million ($42.31/bbl) and $36.3 million ($22.11/bbl), respectively;
• Exited Q2 2024 in a strong cash position with $95.9 million in total cash ($84.1 million unrestricted), with over $93.2 million in current receivables due subsequent to June 30, 2024;
• In early May 2024, PetroTal signed an acquisition agreement to acquire a 100% working interest in Peru’s Block 131, including the producing Los Angeles field for a purchase price of $5 million, subject to closing adjustments and with an effective date of January 1, 2024;
• Successfully drilled two new oil wells in the quarter. Well 19H has averaged over 6,860 bopd over its initial 30 days, placing it in the Company’s top five initial rate wells and achieving payout in approximately 40 days;
• Delivered strong operating cost metrics with lifting and variable transportation costs under $8.00/bbl in the quarter, slightly higher than Q1 2024, and generating a near 78% net operating income margin in the quarter;
• Capital expenditures (“Capex”) totaled $38.9 million in Q2 2024 and were focused on drilling wells 18H and 19H;
• Completed all regulatory approvals for the Company’s Oleoducto de Crudos Pesados Oil Pipeline (“OCP”) route to market in Ecuador, onto which oil loading into barges was subsequently commenced in mid July 2024.  Actual final sale of the pilot oil is expected in October 2024;
• Delivered strong Q2 2024 net income of $35.4 million ($0.04/share); and,
• Paid total dividends of $0.015/share and repurchased 1.2 million common shares in Q2 2024, representing approximately $15 million of total capital returned to shareholders (approximately 3% of June 30, 2024, market capitalization).

(1)  Non-GAAP (defined below) measure that does not have any standardized meaning prescribed by GAAP and therefore may not be comparable with the calculation of similar measures presented by other entities. 

Manuel Pablo Zuniga-Pflucker, President and Chief Executive Officer, commented:
“Our Q2 2024 operating and financial results were robust and Q3 and Q4 are now underpinned by strong drilling results this quarter.  The 19H well was initially producing in excess of 8,000 bopd despite being designed with a shorter horizontal section compared to previous drills and has now averaged over 6,800 bopd over the last 30 days.

In addition, we are extremely excited about our formal route activation through the OCP.  Having completed all the regulatory approvals, the Company is now in a position to further diversify its oil sales routes and to allow for offtake optionality during the dry season. Activating additional routes to market is a priority for the Company and we look forward to sending further updates in the fall of 2024.

We are expecting to close the Block 131 acquisition later this year becoming the Company’s first diversified production stream with the expectation of significantly increasing its light oil production profile in 2025.”

At first glance it looks as if PetroTal have yet again delivered an excellent set of results with strong EBITDA, free cash flows, strong balance sheet along with good operational results. These include a top five new well which produced 6,860 b/d and pays back in 40 days and a new exit route through Ecuador opened giving yet further flexibility in export opportunities.

With Block 131 signed up and other exploration chances in the portfolio there is plenty of upside and the shareholder returns are up with the best in the business. The company paid out dividends of $0.015/share and bought back 1.2m shares making a total amount of returns to shareholders of some $15m. The shares are still outstandingly cheap and it is surely only a matter of time before a rerating occurs. More after this afternoon’s board presentation. 

Selected Financial Highlights

The table below summarizes PetroTal’s comparative financial position.

1. Approximately 89% of Q2 2024 sales were through the Brazilian route vs 87% in Q1 2024.
2. Royalties at year to date June 30, 2024 and March 31, 2024 include the impact of the 2.5% community social trust.
3. Non-GAAP (defined below) measure that does not have any standardized meaning prescribed by GAAP and therefore may not be comparable with the calculation of similar measures presented by other entities. See “Selected Financial Measures” section.
4. Net operating income represents revenues less royalties, operating expenses, and direct transportation.
5. Adjusted EBITDA is net operating income less general and administrative (“G&A”) and plus/minus realized derivative impacts.
6. Market capitalization for Q2, 2024, Q1 2024 and Q2 2023, assume share prices of $0.53, $0.56, and $0.45 respectively on the last trading day of the quarter.
7. Free funds flow is defined as adjusted EBITDA less capital expenditures. See “Selected Financial Measures” section.
8. Includes restricted cash balances.
9. Net Surplus (Debt) = Total cash + all trade and net VAT receivables + short and long term net derivative balances – total current liabilities – long term debt – non current lease liabilities – net deferred tax – other long term obligations.

Q2 2024 Financial Variance Summary

Q2 2024 Financial Variance Commentary

• Near-flat sales volume compared to prior quarter with six months ended sales volumes up 17% from Q2 2023;
• Higher lifting costs in the quarter, driven by higher contracted service and erosion control opex allocations compared to previous quarter.  Higher diluent costs in the quarter due to higher transportation costs of diluent;
• Capital spending increased by 28% to $38.9 million in the quarter from the prior quarter of $30.2 million due to increased drilling activity;
• Strong Q2 2024 production and favorable oil pricing generated free funds flow per barrel in the quarter of approximately $22.1/bbl compared to $24.9/bbl in Q4 2023;
• Liquidity increased 13% in Q2 2024 compared to Q1 2024, with total cash increasing by approximately $11 million to $96 million despite transferring nearly $12 million of restricted cash to the social trust fund; and,
• PetroTal maintained a strong balance sheet in Q2 2024 with no long term bank debt and a net surplus(1,4) of $50 million, and inclusive of a $65 million net deferred tax liability.

1. See “Selected Financial Measures”.
2. Net operating income represents revenues less royalties, operating expenses, and direct transportation.
3. Free funds flow is defined as adjusted EBITDA less capital expenditures.
4. Net Surplus (Debt) = Total cash + all trade and net VAT receivables + short and long term net derivative balances – total current liabilities – long term debt – non current lease liabilities – net deferred tax – other long term obligations.

Additional Financial and Operating Updates in, and subsequent to June 30, 2024

Operations Update
Corporate production averaged 20,034 bopd in July 2024, with contributions from the 19H and 18H wells, which averaged 5,167 and 2,278 bopd, respectively. Dry river season indicators are at the moment at lower levels than 2023.  Notwithstanding, production and sales constraints from August through October 2024 are kept as originally budgeted thanks to the increased barge fleet size.  Q3 2024 production guidance is reiterated at approximately 13,000 bopd.

With expected low river conditions in Q3 and early Q4, the Company is reaffirming production guidance of 16,500 to 17,500 bopd for 2024.  Assuming a full year 2024 Brent price of $82/bbl, full year 2024 EBITDA is now expected to be in the range of $200 to $240 million. Previous 2024 EBITDA guidance was $200 million.

PetroTal completed drilling 5WD on July 22, 2024, the Company’s fourth water disposal well with injectivity tests at approximately 50,000 barrels of water per day (“bwpd”).  The 5WD well is already online at a total cost of $10.7 million and below its budget of $12.7 million.  Once the three high pressure pumps and the additional 50,000 barrels of water tank are fully tied in, the total field water disposal capacity will reach an estimated 170,000 bwpd by year end from the current 110,000 bwpd.

Drilling commenced on Well 20H on July 26, 2024 with an estimated cost of $13.7 million.  Well completion and first production are estimated by late Q3 2024.

In order to minimize rig standby fees and maximize production thanks to the increased water handling capacity heading into the next wet season, PetroTal is accelerating capex. Following the completion of the 20H well, PetroTal will drill and complete wells 21H, 22H and 23H at Bretana by the end of Q1 2025. As a result, total estimated 2024 capital spend is now expected to fall within a range of $150 to $175 million, from a range of $150 to $160 million previously.

ONP Update
On July 17, 2024 the Company was notified that approximately 322,000 barrels of Northern Peruvian Pipeline (“ONP”) oil located in section II of the line was successfully pumped to the Bayovar port for tender and eventual sale.  When the tender process is completed by Petroperu, it will trigger a true up payment to PetroTal if the realized price for those barrels is greater than the oil’s cost base.  The average cost base of the Company’s 2.2 million barrels of oil in the ONP is approximately $72.5/bbl Brent.  Including the recent oil movement, as of the end of July, there are approximately 1.88 million barrels remaining in the ONP. 

Cepsa Acquisition Update
Since the signing of the acquisition agreement in early May 2024, PetroTal’s integration team has been progressing on the necessary regulatory approvals required to close the acquisition.  The first milestone was achieved in late June 2024 with an approval from Perupetro.  Approval into supreme decree is still estimated in Q4 2024. The Block 131 assets have been producing between 800 and 1,000 bopd and generating positive EBITDA per month since the transaction effective date of January 1, 2024. It is the Company’s intention to optimize production starting next year.

JP Morgan Line of Credit
In May 2024, PetroTal was able to secure a $20 million line of credit with JP Morgan to further enhance short term liquidity.  The line of credit is for 120 days at market variable interest rates with payment due in full at the end of the term.  Including the previously announced $20 million line of credit with Banco de Credito del Peru, the Company has approximately $40 million of undrawn short term credit capacity.

Share Buyback Plan Update
PetroTal’s updated liquidity strategy prioritises dividend sustainability, potential Block 131 development, and erosion control working capital requirements.  In Q2 2024, the Company set additional constraints on the share buyback program that better align daily buyback execution with lower share prices.  As a result, a decreased volume of buybacks was realized in Q2 2024 compared to previous quarters.  The Company will continue to monitor buyback levels.

Q3 2024 dividend declaration
A cash dividend of USD$0.015 per common share has been declared to be paid in Q3 2024.  This approximately represents a 12% annualized yield based on the current share price and includes the recurring USD$0.015 per common share amount, without the liquidity sweep this quarter due to anticipated heavier cash requirements over the next two quarters.  The total dividend of USD$0.015 per common share will be paid according to the following timetable:

• Record date: August 30, 2024
• Payment date: September 13, 2024

The dividend is an eligible dividend for the purposes of the Income Tax Act (Canada) and investors should note that the excess liquidity sweep portion of all future dividends may be subject to fluctuations up or down in accordance with the Company’s return of capital policy.  Shareholders outside of Canada should contact their respective brokers or registrar agents for the appropriate tax election forms regarding this dividend.

Director Resignation

Effective August 8, 2024, Dr. Roger Tucker has resigned as a Company director so he can focus on leading the growth of Africa Oil. Dr. Tucker has been a board member since the end of 2019 when the Company started its successful horizontal well drilling campaign and has made many other significant technical contributions to our success at Bretana. PetroTal would like to thank Dr. Tucker for his contributions to the company and wishes him well in his future endeavors.

Predator Oil & Gas

Predator has announced an update on MOU-5 drilling plans.           

Highlights

• MOU-5 well planning re-commenced upon ratification of entry into First Extension Period
• High impact Jurassic well targeting gas-to-power in Morocco in a success case
• Updated Independent Technical Report: net P50 Prospective Resources of 5.916 TCF
• Review of the possibility of helium potential to be evaluated by MOU-5 and MOU-4 rigless well testing

MOU-5

Targeting potential Jurassic gas for the Moroccan gas-to-power market.

Operational planning for the MOU-5 well has been impacted, as for rigless well testing, by a requirement to enter the First Extension Period, with the necessary statutory approvals under the form of (i) a  Ministerial Order executed by the Ministry of Energy granting the entry into the First Extension Period.

The Company has been taking steps to delay  the mobilisation logistics for final equipment requirements and services to avoid incurring any significant costs whilst waiting on regulatory documentation.

There was a new requirement to move the MOU-5 well surface location 277 metres to the northwest to avoid an irrigation system and water well used by local olive tree farms.

As a result a new deviated well had to be programmed with a small amount of additional well inventory that was required to be imported and which would require customs clearance documentation.

The new location is also located in an area just east of the Moulouya River floodplain belonging to the public hydraulic domain of Oued Moulouya, Saka District, Guercif Province. A licence valid until 6 April 2025 has subsequently been granted to the Company to temporarily occupy the site for MOU-5 well operations.

An updated Independent Technical Report by Scorpion Geoscience Limited for the Jurassic MOU-5 structure gives net P50 upside Prospective Resources for gas of 5.916 TCF to the Company, with a conservative risking of 12% versus the Company’s internal upside Chance of Success of 50%.

The MOU-5 drilling objectives remain as announced on 6 June 2024.

Operational planning has now re-commenced, with the regulatory process concluded, to complete the MOU-5 drilling programme this year at the earliest opportunity.

MOU-5 and MOU-4 well rigless testing to evaluate helium presence potential

Background to helium potential – MOU-3 gas sample
The gas sample analysed at 1395 metres MD KB in the Moulouya Fan in MOU-3, unlike any other shallower gas sample collected whilst drilling, showed evidence for the presence of helium. MOU-3 was drilled closed to significant faults extending down into basement rocks.

The Company will be undertaking a more detailed independent review of the potential for helium over the coming months, which will incorporate results from the MOU-4 rigless testing programme. Multispectral satellite spectroscopy analysis will also be undertaken over the Guercif licence area.

Based on the available data, the Company has decided to include a test for helium in the MOU-4 rigless testing programme and for a potential testing programme for MOU-5 if the well results are positive for gas. Testing operations will be coordinated to take place immediately after drilling  of the MOU-5 well, before the rig is demobilised to another location, in order to make cost-effective use of an on-site pressure-volume-temperature (“PVT””) laboratory to provide more accurate screening for the presence of potential helium gas.

Paul Griffiths, Executive Chairman of Predator, commented:
“Whilst MOU-5 is focussed on finding potential gas resources of a sufficient size to service the gas-to-power market in Morocco, the evaluation of the potential for helium presence would be an added value to the area development. Recent helium discoveries and newsflow is leading to a better understanding of how and where helium deposits might be generated. It is likely that this has been over-looked in the past where the focus has been on developing hydrocarbon potential in areas which potentially are also helium domains. We are cautious but excited regarding the potential for helium in Guercif. The Moulouya Fan and the carbonate reservoirs that may be encountered in MOU-5 have the ability to hold large volumes of gas and have effective seals.”

Interesting to note that Paul Griffiths and team now feel that helium may well be deposited in areas hitherto not explored which if true would not only offer huge potential but also open up all sorts of existing natural gas discoveries for helium all over the hydrocarbon world. Watch this space as they say…

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