WTI $37.05 -$1.67, Brent $39.27 -$1.66, Diff -$2.22 +1c, NG $2.44 -9c

Oil price

Friday was a bad day for oil as the virus numbers rose again with lockdowns in major cities around the globe and of course with the President hospitalised there was some uncertainty. This morning the EU boss is self-isolating as well and indeed President Trump seems to be recovering.

Either way the fact that the opinion poll in the US yesterday giving Joe Biden a 14 point lead must make it an election that is his to lose have steadied markets although it is no gimme that a Democrat victory with its high taxation policy would be good for markets.

With August data showing the expected Opec+ increase in production and Libya continuing the process of upping its output, prices must be under a bit of pressure for the time being. Add to that the US rig count rose by 5 units overall last week to 266 and by 6 units to 189 in the oil sector. With the possibility within a month of an administration that is vocally anti-oil and that means fraccing, new leases and pipelines off limits,  not to mention a potential release of sanctions against Venezuela and Iran who knows where US domestic oil might be by Christmas…

Diversified Gas & Oil

DGO has signed a definitive participation agreement with funds managed by Oaktree Capital Management to ‘jointly identify and fund future PDP acquisition opportunities’. This agreement ‘enhances DGO’s access to capital in an opportunity-rich acquisition market and positions both parties for continued success when other market participants lack the capital or management teams to transact’.

Yet again DGO are leading the market by opening up channels to be able to take advantage of the apparently many opportunities in the M&A market and along with other funding they now have created the perfect business model. The deal provides DGO with up to $1 billion in aggregate over three years for mutually agreed upon PDP acquisitions, with transaction valuations greater than $250 million and whilst both parties provide equal portions of any deals completed, Oaktree will provide DGO a 5.0% upfront promote of its funded working interest (2.5% incremental) at the time of an acquisition.

After this initial promote their is also a reversion promote that means that DGO’s ownership will increase to 59.625% and that DGO has the right of first offer to acquire Oaktree’s interest when Oaktree decides to divest. DGO and Oaktree each have the right to participate in a sale by the other party with a third party upon comparable terms.

There is plenty to like about in this deal, OCM gets to partner with a company that has an excellent track record in sourcing and completing highly accretive deals but also having DGO to run the process with its own admin speciality. In addition this scales up DGO’s M&A hand without the need for so much reliance on its own balance sheet keeping that very strong and thus increasing efficiencies and further flexibility in acquisition policy.

Commenting on the Agreement, CEO, Rusty Hutson, Jr. said:
“We are excited to partner with Oaktree, a well-respected and well-funded firm. We continuously evaluate various PDP asset packages and anticipate more coming to market over the near term as the prolonged lower commodity price environment and capital market conditions create an environment poised for consolidation. This Agreement uniquely positions DGO and Oaktree to capture long-term value for our respective shareholders, including opportunities of a greater size than we otherwise might have approached on a stand-alone basis. Additionally, having paid and declared over $165 million in dividends since our 2017 IPO, including last week’s quarterly dividend totalling nearly $25 million, this Agreement enhances visibility into DGO’s future opportunities to sustain production and cash flow through the acquisition of producing assets, underpinning our commitment to create tangible returns for shareholders through the dividend.”

IOG

Further to its 11 September 2020 announcement in relation to a possible all-share offer for Deltic Energy plc, IOG has confirmed it does not intend to make an offer under Rule 2.7 of the City Code on Takeovers and Mergers to acquire Deltic. This is due to ‘the absence of Deltic Board engagement both on an initial approach made on 26 August (which was rejected on 2 September) as well as on a second approach made on 25 September on improved terms which was rejected on 2 October’.

For those of you with a feeling of Deja Vue this is the second bid for Deltic (that we know about) in recent months and summarily dismissed, not that this is wrong but it must leave Deltic shareholders feeling somewhat out in the cold. I only say this because I’m sure that the raison d’etre from IOG on this occasion was to not only build a full cycle gas company that might have benefited both should, a share for share offer could well have been a highly efficient way of doing it if only for efficiency of the merged entity.

As it is IOG have quite rightly walked away, whilst the benefit of what would have been substantial G&A costs savings there were plenty of other advantages they had clearly identified. IOG would have brought a lot to this party, a good portfolio of high quality acreage, a pipeline and significant expertise not to mention an up and running development team taking their own Core Project to FID.

With two wells that they have farmed-down to Shell, Deltic are clearly in a good position, as seen by bids for the company recently but it should be borne in mind that IOG will likely have first gas before Deltic spin the drill bit. As such it seems that it is IOG who are acting from a position of strength in that they don’t have to feel the need to do this deal and indeed just because Shell is Deltec’s partner it is not risk-free.

As with many M&A transactions the industrial logic would have been compelling, costs would have been cut and in a share offer it should have been as they say, better together. The very fact that IOG have an upcoming runway filled with project news, developments, exploration and of course first gas, might well have been something that Deltic shareholders might have liked, as it is they remain with a long haul to drilling time, lets hope for them that they can be sure of Shell….

Chariot Oil & Gas

Chariot has appointed Pierre Raillard as Morocco Country Director. He joins from highly rated Orca Energy Group with an impressive African CV including at the Songo Songo gas field which is analogous to the Anchois gas development.

Adonis Pouroulis, Acting CEO, commented:
 “On behalf of everyone at Chariot, I am very pleased to welcome Pierre Raillard as Morocco Country Director.  His considerable experience in driving forward, and helping to create value from natural gas projects across the African continent makes him extremely well qualified to help us advance the Lixus licence in Morocco.  We are pleased to further strengthen the leadership team and look forward to his contribution at this exciting time for Chariot and all of our stakeholders.”

Union Jack/Reabold Resources

The companies announce that the onshore West Newton B-1 well, the WNB-1 has been spudded. The objectives are to evaluate the extent of hydrocarbon accumulations in the Kirkham Abbey formation by the WNA-1 well in June 2019. it will also test the the reservoir properties of the deeper Cadeby formation which if hydrocarbon bearing could add significantly to the value of the West Newton field.

In November 2019, the Operator provided updated hydrocarbon initially in-place volumetric estimates in respect of the Kirkham Abbey formation post drilling of the WNA-2 well: 

Base Case:      
- Liquids: 146.4 million barrels (“mmbbl”) of oil initially in-place (“OIIP”); 
- Gas: 211.5 bcf of gas initially in-place (“GIIP”) 

Upside Case:   
- Liquids: 283 mmbbl OIIP 
- Gas: 265.9 bcf GIIP

These volumes do not include prospective resources in the Cadeby formation from which the West Newton A-1 well recovered oil saturated core and the WNA-2 well encountered oil shows. The Cadeby is expected to have better reservoir development at the WNB-1 location.

The borehole will be drilled to a depth of approximately 2,000 metres using a Drillmec HH 220 drilling rig.  Drilling will continue 24 hours a day, seven days a week, with completion expected to take six to ten weeks. Once completed, the drilling rig will be demobilised from the site over a period of approximately one week.

Predator Oil & Gas

An operational update from PRD today including news of contract discussions in Trinidad where the Exclusivity Period under the HOA for CO2 gas sales with Massy Gas Products has been extended to 31st March 2022. Approvals to return AT-5X to production; to commission the new CO2 EOR production facilities, provided by the Company; and to continuously inject C02 at AT13 are progressing satisfactorily and a further update will be given in due course.

The company also confirms that it is not entering into the SPA to acquire FRAM but also notes that ‘only this specific aspect of the WPA has lapsed, all other conditions of the WPA remain in full force and effect’. As part of this the company has decided that owning a conventional oil field is incompatible with its focus of addressing climate change through sequestrating CO2 and exploring for and developing gas assets.

‘Extension of exclusivity over Trinidad’s entire surplus liquid CO2 supply and the successful execution of Trinidad and Tobago’s first large scale CO2 EOR project for many years are compatible with the Company’s strategy of developing and offering a flexible CO2 EOR services business in Trinidad to other operators. This is achievable without the onerous burden of licence liabilities’.

In Morocco an independent third party technical update on the new MOU-4 Prospect has been completed. It confirms that the MOU-4 prospect is seismic amplitude-supported and covers an area of 38 km². The MOU-4 Prospect is located 6 kilometres from the MOU-1 drill site and offers the opportunity for additional drilling whilst the rig is mobilised on the MOU-1 site. The primary gas target is prognosed to occur at 1475 metres TVD KB.

SLR Consulting will complete a CPR on the new MOU-4 prospect and the results will be provided to shareholders. In Morocco COVID-19 restrictions are still in place, Predator is ‘drill ready’ based on operational planning and a March site visit and bids for well services have been received.

In Ireland, a preliminary FEED study has been authorised and will address the onshore gas transmission network upgrades required to accommodate gas from a new entrant to the gas transmission grid at the scoping volumes of up to 300 mm cfgpd that are potentially to be delivered from the offshore Floating Storage and Regasification Unit vessel. “First Gas” is projected for Q1/Q2 2024, subject to receipt of all regulatory and government consents.

Paul Griffiths, Chief Executive of Predator, commented:
“We are pleased to be continuing to make operation progress on all fronts despite the obvious constraints that COVID-19 impose, particularly in an onshore operating environment embedded within local communities. We have prudently taken steps to ensure we focus personnel and cash resources during COVID-19 on maturing our businesses and developing credible additional opportunities for them in order to strengthen the ability to generate potential, project-backed,  M & A value. Acquiring an asset such as FRAM would have been non-sensical in this context. It would have potentially diverted valuable resources away from Morocco, which remains the greatest potential risk/reward prize in the Company’s portfolio and is an absolute priority for the Company to drill as early as COVID-19 restrictions allow.”

Zephyr Energy- No contradicting the Paradox…

Excellent news from Zephyr this morning as it announces that a dual-purpose is to be spudded on the Paradox project before the year-end and with $2m of funding from the US Department of Energy and owned and operated by Zephyr. The company has been working with the Utah University EGI and the UGS as well as other Utah partners as previously announced.

The EGI will sanction and fund $2m towards the well and Zephyr will fund $1m as the well should have significant benefits of re-use. They will drill to TVD of 9,850′ and the data recovered will be processed to enable future drilling. The big advantage here is that the company will have the option to re-utilise the well bore thus significantly reducing costs of a future horizontal appraisal well from c,$6m to c.$3m as well as minimising the overall environmental impact and surface operating footprint.

In order to cover the funding requirement for its portion of the vertical well drilling commitment, Zephyr has entered into a non-binding Letter of Intent for a US$1 million debt facility with Booner Capital LLC, a US-based family office focused on real estate and energy development investments.

‘As calculated in accordance with the Company’s Competent Persons Report prepared for the Company by Gaffney Cline & Associates in June 2018, the current leasehold position is estimated to hold the following:

• Net 2C contingent recoverable resources of approximately 9.9 million barrels of oil equivalent (“mmboe”); and
• Net present value of approximately US$50 million, using a flat oil price of US$45 per barrel and a ten percent discount rate (“NPV10”).
• Both estimates above are solely from the Cane Creek reservoir.
• Zephyr also believes that significant upside exists from 5 additional zones thought to be productive; and
• Data secured from the vertical stratigraphic well will help the Company to further define this upside potential’.

This shows just how valuable this is potentially for Zephyr and as they say, compared to current market cap (£1m!!)

Colin Harrington, Zephyr’s Chief Executive Officer, said:
“The signing of the Agreement to drill a vertical well on our Paradox project is a watershed moment for the Company. With drilling expected to commence by the end of this year, the proposed well will de-risk the project and will help us fast-track the development necessary to finally unlock its underlying value.

“Just as importantly, by transforming a pure research well into one with potential future re-use, the EGI and Zephyr have collaborated to create a win for all sides – one in which Zephyr is delighted to participate as both Operator and investor.  By utilising US$2 million of non-dilutive funding and creating re-use potential from what would otherwise result in an abandoned well, we continue to execute upon our mission to be responsible stewards of our investors’ capital and responsible stewards of the environment in which we work.

“The data from the vertical stratigraphic well will provide invaluable geological information which can help optimise future development efforts.  It will also provide new insights into the stacked potential that overlies the primary Cane Creek reservoir, which could conceivably increase prospective resource estimates.  Moreover, the potential to re-use the vertical wellbore will result in significant cost reductions and enhanced economics on a future horizontal lateral project.

“We also believe that the geological data obtained from the initial vertical well – especially when combined with the reduced costs for a future horizontal appraisal well – will be highly beneficial to funding and farm-in discussions for our Paradox holdings.

As I said when I wrote about Zephyr recently this is an opportunity to get in at the bottom of something that really could be something big. The management, led by Colin Harrington really have produced a rabbit from a hat here, something that former Rose shareholders will thank them for. That they are being majority funded for a dual-use well which they will own and operate is a majestic solution to the Paradox.

Also it won’t be long before it all starts, before the year end probably and also has been chosen on one of the company’s most favoured locations. The $1m they put into the original well is capped as they will stop the well at a total cost of $3m. When you add in that the horizontal well will effectively be a half price $3m the well economics just got a whole lot better…

If the well comes in then as the numbers above show, the upside is potentially phenomenal with the $50m of Paradox NPV at $45 oil and that is just the Cane Creek reservoir. The company has both de-risked and fast-tracked the development, worthy of many cheers should it be a success.

KeyFacts Energy Industry Directory: Malcy's Blog