WTI $24.01 +65c, Brent $27.15 +12c, Diff -$3.14 -53c, NG $1.65 +5c
Yesterday the White House and the Senate came to an agreement after the usual petty arguments and the $2tn stimulation bill will be passed tonight. This led to a carnival on the Strasse with the markets racing ahead, except for oil which spectacularly missed this rally. Indeed, after the close when the API stats came out showing an unexpected draw in crude and products the price in London this morning fell again.
It may be worth watching the CNBC interview with Chevron CEO Mike Wirth from last night where he announced capex cuts and suspended the buy-back but claimed that the dividend was ‘safe’ and the company ‘resilient’ despite some impact on production. I suspect he is thanking his lucky stars that he is not wearing Anadarko at 50 bucks a share and that Occidental is on its knees as a result of its gratuitous largesse.
In an update yesterday whilst postponing its Capital Markets Day due to the C-19 virus Hurricane slipped in a positive operations review. The OGA is apparently being flexible in its approach to work commitments at this time. With Hurricane stating that the Lancaster EPS is currently producing 20,000 b/d and offering guidance of 18,000 b/d (90% uptime risk) it remains very strong despite the low oil price but has cash operating costs of $17 per barrel at current production levels and oil prices, operating cash flow from the Lancaster EPS will be materially lower than previously forecast for an indeterminate period.
Hurricane has a strong balance sheet, including $164.3 million of unrestricted cash (at 18 March 2020) and is therefore in a strong position to weather this current downturn. Clearly the company are warning that things can always change and reserves the right to change its stance should the situation alter.
An operational update from Echo with regard to its proposed debt restructuring have said that operations have continued uninterrupted and that production is in line with expectations.Between 1/11/19 and 23/3/20 production reached an aggregate 351,797 boe net and since 17/3/20 the company has received $1.3m and a further $360,000 is expected in the next two weeks. With another sales invoice for $610,000 and a cargo of 26,000 barrels due to be loaded in Mid April with 15,000 barrels in storage to underpin this cargo.
VAT changes have impacted positively the situation in one subsidiary and should the other one be similarly impacted it would be better news. A cost reduction programme is underway at both the asset and corporate level and with major suppliers and if, as anticipated, the cost reduction measures now under discussion are all put in place, the Board believes that the Santa Cruz Sur assets would be cash flow positive at prevailing global oil prices.
As regards debt Echo has commenced discussions with the holders of the Company’s unlisted debt instruments and based on the indications of support received to date from those debt holders, the Company currently believes that it will be able to achieve a restructuring of those debts to defer 2020 interest payments.
The Echo CEO, Martin Hull said in the update ‘Echo is proactively managing its assets and cost base with a clear strategy in place to reduce costs and conserve existing cash. If fully implemented, these actions would lead to a sustainable and cash positive business in the current environment and position the Company well for the future’.
Far has announced that with regards to The Gambia, Blocks A2 and A5 where it had planned to drill an exploration well in the second half of this year. This will have to be changed due to the COVID Pandemic and Far will be temporarily suspend drilling plans. The project is currently at an early stage and at a good hold-point for reactivation at some time in the future according to the company who has plenty of time to drill the prospect. Far has correctly concluded that it is ‘prudent to adjust our spending levels in order to protect our balance sheet and ensure sustainability of our business based on our current understanding of market conditions’.
IGas has also provided an update on trading with production guidance in the range 2,250-2,450 b/d Operating costs in sterling terms are also in line. The Company benefits when the dollar is stronger, and at an exchange rate of $1.2:£1, we expect operating costs to average c.$27.5/boe for the year.
The company has an important hedging policy, as at 1 March 2020, the Group had hedged a total of 340,000 bbls for the remainder of 2020 at an average rate of $53.77/bbl. We have also hedged $9m into sterling at an average rate of $1.17:£1.
IGas has cash of £8.1m with net debt of £5.2m and have made similar capex cuts to other companies. IGas comments ‘given the fall in oil prices we have reviewed our capital expenditure programme for the year and reduced it principally to maintenance capex, abandonment and capital for projects already in execution which in aggregate is anticipated to be c.£6m in 2020’.
I recently visited iog and spent the morning with the team, it was a good opportunity to catch up with a group that have managed to get through the difficulties presented in recent years and are now own a meaningful ‘Core Project’ in the UK’s Southern North Sea (SNS). The team that iog has got together is high quality and has ‘relevant experience in the Southern Gas Basin’. Within the Core Project are 6 shallow water gas fields with gross 421 Bcfe of gas and peak annual production of 140 MMcfe/d as well as a number of incremental appraisal opportunities within currently held acreage. The shallow water point is important, wells can be drilled with smaller, lower cost jack-up rigs and platforms will be small and unmanned with all operations managed by a pre-existing onshore control centre.
Over the last few years the company has built up a portfolio including ownership, at very little cost, of the Thames pipeline, into which further assets can be tied. Some Phase 1 subsea connections are currently scheduled to be laid in summer and autumn 2020. In addition the company owns the onshore Thames Reception Facilities at the Bacton Terminal which, after some planning and engineering work (with Worley preparing FEED studies), are undergoing refurbishment and upgrade. Commercial terms have been agreed for downstream processing, i.e. gas conditioning & condensate stabilisation at the terminal.
iog has identified two Phases of development, expected to run until end 2023 followed by ‘incremental projects’ which will include some from the existing portfolio plus other low-cost additions, including possibly from the 32nd Round submissions made in November 2019.
Phase 1 includes a 5 development well programme (Elgood, Southwark-1, Blythe and Southwark-2 and -3) for which an established Well Management Company has been selected, will be accessing 82 Bcfe of net 2P reserves and with FID taken in October 2019 the company expect first gas in July 2021. As mentioned above, key Phase 1 workstreams include platform design and fabrication, which has kicked off, as well as the extra pipeline installation and well permitting. I am also led to believe that the company has already started buying necessary long lead kit items such as two subsea wellhead trees and associated equipment to be ready to get going. With rig and services tendering now in full swing, the company feels well positioned to achieve savings on budgeted drilling costs.
FID for Phase 2, which encompasses 74 Bcfe (Net 2P) and 55 Bcfe (Net 2C) at the Goddard, Nailsworth and Elland fields is targeted for Q3 2021, with 7-8 development wells planned. As for appraisal assets iog has listed further upside in Harvey, Redwell, Abbeydale and the Goddard flanks.
The Harvey-Redwell Area makes an interesting analysis and maybe not as originally thought by the market. Sure, the 48/24b-6 appraisal well came in slightly disappointing and with CalEnergy not taking up their original option it has been seen as uncommercial. Indeed, while discussions continue with the partners, further technical and modelling work and commercial evaluation could mean that the ‘Harvey-Redwell Area’ as it is now called may be better together, as they say. In fact, with Woodforde now being deemed to be part of Redwell and a fresh set of eyes on both Harvey and Redwell licences (still iog 100%) with estimated mid-case recoverable gas of 40 bcf and 100 bcf respectively, plus the advantageous position close to the Thames pipeline I would bet that we will hear much more from here.
iog are coming at this now from a strong position, with development carry from the farm-out to CalEnergy, part of Berkshire Hathaway Energy, who have taken 50% of the core project with a £40m upfront payment plus £125m of development carries. iog added to that the €100m Bond issue and so are now fully funded with exciting prospects and attractive economics of the SNS leading to very swift and material cash flow in the not too distant future that will deliver strong returns to shareholders. Indeed, all the existing, fully funded work is forecast to deliver total net pre-tax cash flows projected to exceed £500m.
And it’s going to be green, the carbon intensity of the company is expected to be 0.2kg CO2/boe compared to a UK North Sea 2018 average of 21kg CO2/boe and accordingly will be a leader in profitable, low cost engineering with a model that includes a low carbon footprint. In future investors and regulators are going to request if not demand such minimal carbon emissions, an advantage that iog are already starting from.
That value creation model and management strategy is what starts to make iog standout from a good deal of the peer group. The concentration on gas, in shallow, near and deliverable form and at a competitive price with a substantial existing portfolio of assets including appraisal upside to work on is economically very sound. The company also plans a progressive distribution policy consisting of ‘a sustainable and progressive dividend policy in combination with share buy-backs once cashflow is available’.
With its Core Project gas hub via the Vulcan Satellites, Blythe and Goddard assets the possibilities of additions to the portfolio via future asset rounds or even acquisitions in an area that could and should become a very ‘hot’ postcode iog is set very fair indeed. Expect the EIA probably next month subject to recent virus based delays, to be closely followed by the FDP approval, after which further detail will be revealed on contractors.
If the view is that the SNS does become a desirable postcode, iog are well placed to capitalise on its asset base with other ‘non-owned’ assets nearby and a number of discoveries lying within the tie-back range of the Thames pipeline becoming attractive prey, indeed they will have a serious value advantage up their sleeve.
All in all iog looks like a most interesting gas play in this particularly difficult time for investors, the model looks good, econometrics sound and payback likely to be swift. Having been dragged down to 11p and a market cap of just £55m the shares look extraordinarily cheap.