Market Update: 23 May 2023
Africa Oil Corp (TSX:AOI) & Tullow Oil PLC (LSE:TLW) - AOC withdraws from Kenya
Southern Energy Corporation (CVE: SOU) - Consolidates Gwinville position
Gulf Keystone Petroleum Limited (LSE:GKP) - Suspends final $25m dividend
Energy News
Brent Oil US$75.9/bbl vs US$75.6/bbl yesterday
WTI Oil US$72.0/bbl vs US$71.7/bbl yesterday
Henry Hub Gas US$2.40/mmBtu vs US$2.55/mmBtu yesterday
UK NBP Futures 66p/therm vs 65p/therm yesterday
TTF Dutch Futures €29/MWh vs €29/MWh yesterday
- Crude oil remains rangebound in the face of market uncertainty despite improving fundamentals from constrained OPEC+ supply and a recovering demand outlook in Asia.
- European energy prices are unchanged with Gazprom reporting a stable supply of 41.2mcm/d (~1.5bcf/d) via the Sudzha gas pumping station in Ukraine.
- Chevron announced the all-share $6.3bn acquisition of PDC Energy (PDCE US) that adds unconventional oil-weighted US onshore assets that are expected to deliver higher returns in lower carbon intensity basins.
Company News
Africa Oil Corp (TSX:AOI) SEK21.9, Market Cap SEK5.3bn: Withdraws from Kenya
- AOC announced the submission of withdrawal notices on its licence interests (25% WI) in the South Lokichar Basin in Kenya and will transfer all rights and obligations under the PSCs to the operator Tullow Oil (TLW LN).
- The carrying value of the Kenya intangible exploration assets was written down to $58.6m at YE22, and the Company intends to further impair this value to zero.
- AOC commented that the decision to exit the Kenya concessions reflects its strategy to focus on production and high potential exploration opportunities, including the Orange Basin portfolio.
- Tullow's working interest in the licences will increase from 50% to 100%, following the further withdrawal of TotalEnergies (25% WI), and it estimates net 2023 capex guidance for Kenya will increase from $10m to ~$15m.
This should come as no surprise to investors following the announcement by TotalEnergies in 4Q22 that it had initiated a procedure to withdraw from these licenses and AOC’s material YE22 write-down of the assets. Tullow farmed-in to AOC’s Kenyan licences in 2010 following exploration success in Uganda, and together the partners have discovered an estimated c.750mb of oil resource in the South Lokichar basin. The partial sale by AOC of a 25% interest in the licences to Maersk Oil (subsequently acquired by Tota) provided much of the funding to build out the current portfolio, whose cash flowing production assets in Nigeria have already paid back on its investment and should continue to underpin sustainable shareholder distributions for some time yet (~13% yield in 2022). AOC share catalysts may come from ongoing activity across its Orange basin acreage, including appraisal drilling on the Venus discovery (~17% WI) offshore Namibia and participation in the farm-out process to secure a new partner for Block 3B/4B (~23.5% WI) offshore South Africa, and the Company is also considering a potential rationalisation to its portfolio holdings.
Southern Energy Corporation (CVE: SOU) 23.1p, Market Cap £32m: Consolidates Gwinville position
- Southern announced the acquisition of the remaining producing acreage in the Gwinville Field (97% WI) in Mississippi not already owned by the Company for a cash purchase price of $3.2m.
- The acquisition adds c.400boe/d (99% natural gas) of high working interest production at less than 8% projected annual decline, and is expected to increase well inventory in Gwinville by as much as 20%.
- Southern plans to integrate these operations to achieve substantial synergies and cost savings that are expected to drive a very quick return of capital even at current natural gas pricing.
Natural gas producers in the US have been under pressure following the collapse of gas prices in the last 12M, which is also reflected in the lower number of active rigs drilling for gas. After sensibly deciding to pause the investment programme and not bring all of the wells on at their peak production rates during a time of depressed pricing, Southern has instead deployed part of its cash resources to consolidating the Company’s acreage position in the Gwinville Field. The transaction makes sense purely from projected realised operational synergies, even before we include the potential upside from higher pricing or redevelopment opportunities in the Selma Chalk formation. The market agrees (+15%).
Gulf Keystone Petroleum Limited (LSE:GKP) 127p, Market Cap £283m: Suspends final $25m dividend
- Gulf Keystone announced that in order to preserve liquidity, the Board has decided to cancel the proposed final 2022 ordinary annual dividend of $25m, which was subject to approval at next month’s AGM.
- The Company said the shut-in of the Iraq-Turkey pipeline on 25 March 2023 has so far resulted in a gross production deferment of c.8kb/d on a FY23 basis, ~16% of the original 46-52kb/d gross production guidance.
- The Company commented that while no official timeline to restart pipeline operations has been publicly announced, it continues to believe that the suspension of exports will be temporary.
The market had hoped that pipeline operations would restart following the announcement from the Kurdistan Regional Government earlier this month that it has reached an agreement with Baghdad on measures to allow the resumption of oil exports through Turkey and that Iraq's State Oil Marketing Organization had officially requested Turkish authorities to allow the Kurdistan Region’s oil exports via the country's Ceyhan port. Alas, whether there is horse trading over the arbitration’s ruling that Turkey still needs to pay $1.4bn to Iraq or the recent election means that there is nobody available to push the button, the pipeline remains shut in. Following the repayment of the outstanding Company debt last year, Gulf Keystone is in good financial shape and has acted sensibly to preserve cash resources by withdrawing the dividend and curtailing the planned capex programme. We await the restart of pipeline exports.
Research
David Mirzai – David.Mirzai@spangel.co.uk – 0203 470 0473
Sales
Richard Parlons – Richard.Parlons@spangel.co.uk - 0203 470 0472
Grant Barker – Grant.Barker@spangel.co.uk – 0203 470 0471
Rob Rees – Rob.Rees@spangel.co.uk - 0203 470 0535
Abigail Wayne – Abigail.Wayne@spangel.co.uk - 0203 470 0534
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Sources of commodity prices
Oil Brent - ICE
Natural Gas - NYMEX
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