Market Update: 31 May 2023
Challenger Energy Group PLC (AIM:CEG, OTC:BSHPF) - Farm-out process commences
i3 Energy PLC (AIM:I3E, TSX:ITE, OTC:ITEEF) - New financing facility
Ithaca Energy PLC (LSE:ITH) - Concern over UK policy
Energy News
Brent Oil US$72.8/bbl vs US$75.8/bbl yesterday
WTI Oil US$68.6/bbl vs US$71.6/bbl yesterday
Henry Hub Gas US$2.31/mmBtu vs US$2.37/mmBtu yesterday
UK NBP Futures 58p/therm vs 58p/therm yesterday
TTF Dutch Futures €25/MWh vs €24/MWh yesterday
- Crude oil prices fell on weak Chinese data with the front-month spread deepening into contango, signalling ample supplies of physical crude in the market trading at a discount to longer-dated contracts.
- European energy prices were unchanged with French nuclear reactor operating levels reported as decreasing from 61% to 57% of capacity w/w from 32 available reactors (from 35) out of 56 units.
Company News
Challenger Energy Group PLC (AIM:CEG, OTC:BSHPF) 0.104p, Market Cap £10m: Farm-out process commences
- Challenger announced it has assessed estimated ultimate recoverable resource (EUR) of ~2bnboe across three prospects (Teru Teru, Anapero, Lenteja) on the offshore Uruguay AREA OFF-1 licence (100% WI).
- The Company’s ongoing technical work has also identified additional new leads and prospects, which are anticipated to add to the overall AREA OFF-1 resource and prospect inventory.
- Challenger commented that AVO analysis has identified strong Class II / Class III AVO anomalies for the Teru Teru and Anapero prospects that are present on multiple seismic lines.
- A farm-out process to introduce a strategic partner has now commenced, with the Company noting several unsolicited approaches and strong interest from leading industry participants.
Challenger is hoping to introduce a strategic partner during 2023 that will enable the Company to accelerate value realisation from the AREA OFF-1 licence, by fast-tracking 3D seismic acquisition, potentially via a multi-client acquisition in early 2024. In 2020, when no other parties were ready to commit, Challenger was a first mover into offshore Uruguay, securing its exploration block on an uncontested basis and on highly advantageous work terms. Since then, margin-opening discoveries offshore Namibia by Shell (Graff) and TotalEnergies (Venus) have made it possible to correlate what are now proven, oil producing source rocks directly across into the conjugate margin basins offshore Uruguay and led to the award of adjacent licences to high quality explorers including Shell, APA and YPF (NYSE:YPF). We also expect potential operational catalysts from Challenger’s onshore Trinidad work programme on the existing well stock (recompletions, reactivations, and swabbing) and on upgrading field infrastructure to boost production volumes, as it looks to benefit from unhedged oil production and targets free cash generation from its Trinidadian operations.
i3 Energy PLC (AIM:I3E, TSX:ITE, OTC:ITEEF) 18.2p, Market Cap £218m: New financing facility
- i3 announced the successful settlement of the Company's outstanding £22m senior loan notes and the establishment of a C$100m loan facility with Trafigura, which provides greater financial flexibility and capacity.
- The facility has a three-year term, with interest payable monthly at 9.521% per annum, calculated on the outstanding portion of the loan, which is amortised monthly on a straight-line basis.
- Following redemption of the notes, the balance of the facility will be available for general corporate purposes, acceleration of organic growth and to fund accretive acquisition opportunities.
This is further evidence of the increasing trend for sub-$200m financing facilities to find sophisticated lenders amongst the commodity traders rather than the traditional banking relationships, evidenced by recent debt facilities provided by Trafigura to Afentra, Valeura and Gran Tierra. While the share price has tracked the downward trajectory of Canadian natural gas prices since the Summer, the Company’s operational success from last year’s investment programme has been demonstrated in tangible reserves and production growth. I3’s low-decline assets continue to outperform expectations and the capital efficiency programme this year should support production growth peaking at 26kboe/d in 2H23, ahead of historically stronger winter pricing. Longer term, i3 remains committed to grow the return of capital to shareholders (currently an ~11% cash yield) in line with the underlying profitability of the business.
Ithaca Energy PLC (LSE:ITH) 145p, Market Cap £1.46bn: Concern over UK policy
- Ithaca reported average 1Q23 production up 7% y/y to 75.3kboe/d (67% liquids) generating $644m revenues and $351m operating cash flow, enabling net debt to fall to $900m from $971m at YE22.
- The Company reiterated FY23 production guidance of 68-74kboe/d following a strong operational end to the quarter on Captain and FPF-1, with planned annual maintenance facility shut-downs scheduled for 3Q23.
- Earlier this month, Ithaca entered into an agreement to facilitate the marketing of Shell’s 30% working interest in the undeveloped Cambo oil discovery, with management highlighting ambiguity regarding future UK policy.
Management confirmed during the analyst call that the expanded 35% Energy Profits Levy continues to be a major concern for UK oil and gas producers. Most notably, the levy has reduced the borrowing base for asset reserve based lending (RBL) facilities at the same time as access to pools of capital has been significantly impacted by ESG concerns, which has restricted liquidity and resulted in several partners deciding to minimise UK investment. RBL financing has also been the leading funding component in asset transactions for several years to transfer ownership of under-capitalised non-core assets belonging to the Majors into the portfolios of independent E&Ps focused on reinvesting in the basin and extending the asset life of these assets. Our view continues to be that it will take time for Ithaca with its planned $400m 2023 dividend (21% yield) to differentiate itself from its larger peers, Harbour Energy ($400m or c.18% total shareholder return in 2023) and Var Energi (trading at 19% dividend yield), by articulating and then delivering on its growth pipeline, despite the negative UK media attention surrounding its Cambo and Rosebank development projects, and in hope of seeing changes to the EFL in the short term.
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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