Deltic Energy PLC (AIM:DELT) is in a rare and enviable position as a small-cap explorer, partnered in an active project with an industry major like Shell PLC (LSE:SHEL, NYSE:SHEL).
A drawback, when you’re a company like Deltic in a project led by a company like Shell, is that one can’t be as boisterous in one’s communication strategies as one otherwise might.
In such partnerships, statements tend to arrive in a different tone than if a gaggle of AIM executives were steering the ship.
So, it’s unsurprising that this morning’s announcement was understated, but nonetheless strong.
The AIM-quoted explorer’s statement revealed without much fanfare that Shell had reported that gas has been encountered and it recommended to the joint venture that a full well testing programme be undertaken.
The word ‘discovery’ was notably absent in the statement and there wasn’t so much as a hint of an estimation regarding the possible quantum of the ‘encounter’ nor any speculation about the potential scope of the project now that gas is confirmed.
It simply noted that testing will now take place, lasting around 30 days, and further announcements will follow.
In the statement, Graham Swindells, Deltic chief executive, told investors that the company is “very pleased to have encountered hydrocarbons” – and looking at the explorer’s share price who can blame them.
A 52% spike in immediate response to Wednesday’s revelation tells its own story, though at 2.98p per share it values the AIM-listed firm at just shy of £37mln which leaves plenty more opportunity for upside should the test results prove positive.
For context, Deltic holds a 30% interest in the well and it is testing a target that was estimated prior to drilling at around 309bn cubic feet of gas – which given today’s somewhat-cooled-but-still-extremely-high-by-historic-standards gas prices would be a very valuable asset.
Over the past decade UK gas prices have mostly ranged between £30 and £70 per therm, though they have not been lower than £130 since the start of Russia’s war in Ukraine and peaked as high as £637mln.
Time to get all the sensible caveats in
Firstly and most obviously, a gas field can’t be built overnight and any prediction of short, medium and even long-term prices are inherently uncertain.
Today’s price is plainly not the one to use in future multi-year forecasts of the project’s economics.
If the well test is a success, Deltic will potentially gain a substantial new resources and commensurate market valuation in the event of a successful discovery, but, owning nearly a third of the project will also likely have some potentially expensive commitment to keep up - it may also have to keep pace with a very cash-rich energy company that is likely tacit of the ticking-down clock for its ability to operate any new hydrocarbon ventures.
More wells likely follow and that’s before any of the engineering and construction capex involved in developing offshore discoveries.
Nevertheless, at this stage these are pretty mean hairs to split.
In the meantime, there seems plenty for the Deltic team to act excited and shout about even if they do have to celebrate whilst we can’t see them.