Britain’s North Sea may have seen the last of its giant discoveries, but there is still a lot of oil there especially if you know where to look.
The team behind recent AIM-listing i3 Energy (LON:I3E) reckon they do, exactly.
A clue is in the name.
i3 is a reference to this being the third oil company the team have set up in the North Sea/UK Continental Shelf.
Back for a third time
Ithaca, the first, has just been taken over for £1bn by Delek. Iona, the second, was a casualty when the oil price stumbled, but in i3 Neill Carson, chief executive, believes, he has found a winning formula for the now mature oil province.
i3 owns the Liberator field, a small asset in the Moray Firth that lies on a proven oil rich formation close to infrastructure and a number of already producing fields.
It is exactly the profile i3 wants says Carson, who has worked in the North Sea for more than 30 years, and one that the company targeted for a year when it became clear that its then owner Dana Petroleum had bigger fish to fry.
Carson also sees more small fields being released as the majors struggle with huge decommissioning costs associated with mature fields.
Liberator the focus
For small North Sea experts such as i3 that offers a major opportunity, he believes, though for now the focus is on getting Liberator into production as quickly as possible.
An estimated recoverable 10mln barrels of oil is in situ and possibly another 5mln to be extracted, which at a production rate of 7,000 barrel per day gives a life of 7-12 years.
Recovery costs are estimated at sub-US$20 net per barrel and with Brent crude currently selling for just over US$50 per barrel, there is a good margin to be had even in these difficult times for oil groups.
Indeed, Carson estimates there is US$300mln worth of value in Liberator at current prices.
The plan is to drill one well and hook it up to the existing floating production system nearby. A second well will follow once production is established.
The wells will cost US$25mln each and though not a large amount for an offshore field, finding the money has so far proved challenging.
Financing options
When it originally listed on AIM in July, the intention was for a US$50mln placing but it raised no money due to market conditions in the float and is now exploring other funding alternatives available to the project.
“During this downturn, the company has appreciated the support received from supply chain contractors willing to accommodate financing structures that accelerate development and are beneficial to all parties”.
Other options include finding a partner for a farm-in deal. i3 owns 100% of Liberator and is keen to remain the operator, but that stake gives it plenty of leeway to arrange some form of cost/carry/equity swap/royalty deal.
Equity, too, remains a possibility, but i3 has had a bumpy ride since it listed at 55p and a market value of £8mln at 30p currently suggests the company may focus on alternative funding avenues.
Carson, though, is upbeat and has pencilled in early 2018 as the start date for drilling and first production.
That is a tight schedule but he can take some encouragement that a number of UKCS/North Sea–based groups have raised loan finance money recently – Hurricane Energy for one – or in the case of Premier Oil restructured its outstanding debts.
North Sea opportunities
And once Liberator is up and producing, Carson gives the impression the subsequent speed of development will be swift.
There is plenty of North Sea experience to tap into.
Like Carson, finance director Graham Heath is ex-Iona, but the board also contains three other oil and North Sea/global oil veterans in David Knox, Richard Ames and Majid Shafiq.
Opportunities are identified with ‘rifle-shot precision’ he adds and five other potential deposits with profiles similar to Liberator are already in the cross-hairs.
That should chime with the Oil and Gas Authority, the UK industry overseer, which is keen for ways to extract all of the value it can from the North Sea.
It is encouraging companies such as i3 to collaborate with infrastructure owners to tap fields considered too small by the majors.
Tax incentive
Tax is also levied in a way that encourages small producers to have two or three fields in different stages of development, says Heath, with i3 keenly eyeing the upcoming North Sea licensing round.
Undoubtedly, production assets are not valued as highly as exploration potential by investors, but i3 looks an intriguing proposition once the money bit is sorted and Liberator gets going. Both events that might spark a share price re-rating.
Heath believes that: “A US$30mln cash injection should release a US$150mln corporate valuation,” he told Proactive.