We have heard little from Sea Dragon Energy (CVE:SDX), the TSX-Venture-quoted junior, for the past year or so.
This is partly deliberate. The company has kept its head down while it reorganised and consolidated, reshuffling its portfolio and battling against the negative impact of a falling oil price.
Paul Welch, Sea Dragon’s chief executive (CEO), told Proactive Investors: “The past few months has seen a significant review of Sea Dragon’s activities, with a continued focus on improving the efficiency of the business.”
Welch will be familiar to many investors in the oil and gas sector from his time leading AIM explorer Chariot Oil & Gas, which raised substantial sums to drill high risk wildcats off the coast of Namibia. That proved disappointing and the company moved on to Mauritania and Morocco. Welch moved on but said he had kept his shares.
Welch joined the Northern Africa-focused Sea Dragon in the aftermath of the Arab Spring which started at the beginning of 2011.
He felt that despite the unrest of the period Egypt offered good opportunities to acquire assets at distressed prices.
As Egypt settled down in 2012 Sea Dragon started to build up its position.
In 2013, it acquired the Shukheir Marine producing concession in a deal that valued the proven and probable (2P) reserves at less than US$1 a barrel.
This asset added to the company’s producing base in what it calls the Gulf of Suez Fairway.
Sea Dragon’s cornerstone asset in this area is a 10% interest in the Vegas-operated North West Gemsa concession.
This will be familiar to oil and gas sector investors as Circle Oil has a 40% stake. There are four fields here, including Al Amir South East and Shebab.
The company also had a 50% interest in the Kom Ombo Block 2 in southern Egypt.
Dana Gas was the operator here but this was found to be a little outside the company’s comfort zone in terms of costs and it was let go.
Towards the end of 2013 post-Arab Spring, Sea Dragon was awarded 100% of the South Disouq block in the Nile Delta region.
At the time it was thought there could be 1.5trn cubic feet of gas and the asset was touted as a potential company-maker.
Also, towards the end of 2013 the company was able to announce that output had almost doubled from 1,000 barrels of oil per day (bopd) to 2,000 bopd.
During 2014, the company acquired another asset, again in the Gulf of Suez Fairway, when it farmed into the South Ramadan block.
It gained a 13% stake here, with Egyptian state-owned General Petroleum Company (GPC) holding 50% and privately owned Pico taking 37%.|
Although the block was non-producing, the company identified a prospective area on the licence covered by vintage three dimensional (3D) seismic data that needed to be re-processed, and started to reprocess it for a work programme this year.
With these four assets in place the good times continued to roll for Sea Dragon for a while.
But with Shukheir Marine under-performing, NW Gemsa plateauing as fewer new wells were drilled than in previous years, and the oil price collapsing, output and revenues were hit.
The company exited 2014 with production down to 1,476 barrels of oil equivalent per day (boepd). Net revenues at US$19.9mln were US$9.5mln lower than in 2013.
There was a net loss of US$9mln compared to US$7.7mln for 2013 and there was US$10mln of debt.
By the end of March 2015 the picture started to look different.
The top line trend was not much changed but the reorganisation and consolidations had begun to have an effect on costs.
The first quarter 2015 financial operating results statement said the company had reviewed the cost, profitability and future prospectivity of the Shukheir Marine concession and relinquished it, effective January 31, 2015.
Sea Dragon also managed to farm-out 45% of the South Disouq concession to a US private company called IPR.
This resulted in the receipt of US$1.9mln in past costs and US$6mln in replacement guarantees by the farminee.
Output average daily sales volumes for the quarter were 993 boepd including 881 boepd from NW Gemsa and 112 boepd from Shukheir Marine.
Net revenues at US$2.6mln were down 35% due to a 22% drop in volumes and a 52% fall in realised prices.
This fall, however, was offset by a 60% drop in operating costs (opex), improving realised opex to US$8.40/boe.
The net-back on revenues of US$1.9mln for the quarter (US$20.90/boe) was an improvement of 35% in US dollar terms and 72% in US$/boe terms.
So, what is the investment case here? Sea Dragon expects output to rise to 1,000 boepd this year but on a much reduced cost base and net-back situation as befits the harsher oil price climate, although the oil price does seem to have stabilised at US$60 a barrel, which is now comfortable for the company’s operations.
Moreover, the farm-out of South Disouq has meant that debt has gone down from US$10mln to US$2.8mln and will fall further to US$2mln in June.
There is US$3mln in the bank and overall there is an expectation that there will be cuts of 25% of costs at NW Gemsa.
Finally with the farm-out of South Disouq, there is the possibility of a well on the concession in 2016. This could be significant.
As I said, there is a thought to be a lot of gas in South Disouq.
Welch reckons that there could be 600bn cubic feet (bcf) net to Sea Dragon’s 55% interest.
Welch says: “What a lot of people do not realise is Egypt was an exporter of gas in 2013 but in 2014 it became a net importer.”
Egypt has always tightly controlled gas pricing, not always to the great advantage of producers. “Prices have been held steady at US$2.65 a thousand cubic feet (mcf).
But with the need to import gas the Egyptian authorities are becoming more competitive and are liberalising the pricing regime.
Welch says the authorities are negotiating third party deals with, depending on who you are and where you are, prices from US$3.45/ mcf to US$4.75/mcf.
“The exciting thing for us is we can now negotiate third party deals independently of the government, and get prices ranging from US$4.75/mcf to US$7.15/mcf”.
These would be considered good, firm prices even in some high cost European countries.
“If you ask me”, Welch says “I do think South Disouq could be company-making”.
We shall see. At C$0.3 (£0.15) the shares are just above their 52 low of C$0.2.