Oil & Gas Daily Flow
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Market Update: Tuesday 30 March 2021
Union Jack Oil* (AIM:UJO): Rathlin applies to vary the West Newton B Wellsite permit
Sound Energy* (AIM:SOU): Bond restructuring proposal to be discussed this month
Pharos Energy (LON:PHAR): Agreement reached with EGPC sees improvement in breakeven price in Egypt
Energy Prices
Brent Oil US$64.6/bbl vs US$64.3/bbl yesterday
WTI Oil US$61.0/bbl vs US$60.4/bbl yesterday
Natural Gas US$2.67/mmbtu vs US$2.56/mmbtu yesterday
Oil Price News
- The closure of the Suez Canal led to a moderate price rally last week, which came after a significant decline in oil prices triggered by new and stringent lockdowns in Europe
- The impact of the Suez Canal blockage on oil markets has been marginal due to the low volumes of crude oil passing through the canal (less than 5% of global supply).
- Now the shipping channel has been unblocked, the markets have priced in a short delay as more than 400 ships remain stuck, waiting to pass the waterway
- The total amount of damage remains to be seen, but we expect oil tankers not to change their shipping routes as this is likely to increase costs and risks
- The incident, on the other hand, may lead to increased investment in the capacity expansion of the SUMED pipeline, which currently stands at around 2.5MMbopd, running from the Ain Sokhna terminal in the Suez Gulf to offshore Sidi Kerir in Alexandria on the Mediterranean Sea
- OPEC+ is scheduled to hold a meeting this week to decide on its production policy in May
- While multiple factors may impact the group's decision, the markets already priced in an expected rollover of current cuts through May
- Platts data for February 2021 concluded that current global oil demand stands at c.92MMbopd while global supply stands at 91MMbopd, of which some 25.7MMbopd are produced by OPEC.
- Given the uncertainty about the global demand recovery, OPEC+ is expected to continue to roll over its current cuts through May
- Yet, if OPEC+ decides to roll over current cuts, the question remains whether Russia, and perhaps Kazakhstan will continue to be allowed to increase production to pre-agreed levels, given the expected rise in demand in May
- Russia is set to increase its production by 125,000bopd in April from 9.18MMbopd in February
- The group is also expected to emphasise compliance levels especially for countries that failed to meet their output quota in recent months such as Iraq and Nigeria
Gas Price News
- Natural Gas prices moved higher in early trading today as the supply chain disruption of the Ever Green generated LNG supply disruptions
- The weather is expected to be much warmer than normal throughout the US Midwest
- If it were not March and early April, this weather would generate significant cooling demand and potentially draws during the injection season
- US demand continues to decline as the heating season comes to a close
- Natural gas in storage was 1,746Bcf as of Friday 19 March, according to the EIA. This represents a net decrease of 36Bcf from the previous week
- Expectations were for a 10Bcf draw according to survey provider Estimize
- Stocks were 263Bcf less than last year at this time and 78Bcf below the five-year average of 1,824Bcf
- At 1,746Bcf, total working gas is within the five-year historical range
- According to the National Oceanic Atmospheric Administration, the weather is expected to be warmer than normal in the US and Europe over the next 8-14 days which should boost demand
Company News
Union Jack Oil* (AIM:UJO): Rathlin applies to vary the West Newton B Wellsite permit
Share Price: 36p, Market Cap: £38m
STRONG BUY – TP: 176p
- Union Jack a further update in respect of the future planned test programmes at West Newton.
- The Company holds a 16.665% economic interest in PEDL183, located within the Western sector of the Southern Permian Basin, onshore UK, North of the river Humber.
- PEDL183 contains the WNA-1, WNA-2 and WNB-1Z discoveries.
- The Operator of PEDL183, Rathlin Energy, has applied to vary the West Newton B Wellsite permit and has received a draft of the varied permit from the Environmental Agency (EA) that will accommodate completion, well clean-up and EWT operations.
- This permit includes the WNB-1Z discovery well and any additional wells planned for the West Newton B site.
- An EA permit is already in place at the West Newton A site, that includes further clean-up and EWT operations on the WNA-2 well.
- The first phase of the evaluation programme on the WNB-1Z discovery well is planned to commence in April 2021 and will initially be comprised of a customised CHLP including a cement bond log, a Weatherford Raptor evaluation tool to log the Kirkham Abbey formation and a VSP.
- The Raptor tool is a wireline logging device that provides a quantification and advanced analysis of oil, gas and water saturations and potential fluid contacts in a cased wellbore.
- This cased hole logging activity will be followed by a VSP survey that will provide a high-resolution calibration of the existing 3D seismic data and is considered to be a more accurate method of calibrating previously interpreted formation tops and previously calculated time-estimated formation depths.
- Following completion of the CHLP and VSP survey, the processing and interpretation of the data acquired is expected to take approximately two weeks and will help inform the completion, well clean-up and EWT operations on the Kirkham Abbey formation for the WNB-1Z well.
- Data gathered from the completion and EWT programme will be incorporated with the existing information to produce a new Competent Person’s Report (CPR).
- Discussions regarding the appointment of a global consultancy to produce a CPR on West Newton are at an advanced stage.
- The JV expects to be in a position to announce this appointment in the near future.
Our take: Another important milestone reached by Union Jack and its partners following the recent successful drilling results at West Newton. The Company and its partners will now focus on two Extended Well Test’s (EWT) on both the WNB1Z and WNA-2 appraisal wells. With regards to an updated CPR, we would also not be surprised to see a material in uplift volumetrics given the highly successful drilling reports, notwithstanding the thicker structure and contiguous nature of the Kirkham Abbey formation between the A and B sites, but also the elevated mudgas concentrations observed. In addition, the Joint Venture is considering a 3D seismic programme over other structures which have been highlighted within the licence area especially with the Ellerby and Spring Hill Prospects being on-trend with West Newton. As such, the short to medium term will focus on maturing this play further to commercialisation, in addition to proving up analogue fields across the project area. We highlight that Union Jack remains in a well-funded, debt free position, with Wressle (UJO 40% working interest) now onstream. Indeed, the acquisitions of material stakes in its core assets (Wressle, Biscathorpe), underpinned by continued success with the drill-bit suggests that Union Jack has the potential to transition from a junior E&P Company into a self-sustaining mid-tier hydrocarbon producer. On this basis, we reiterate our STRONG BUY rating and 176p/share TP.
*SP Angel acts as Nominated Adviser and Broker to Union Jack Oil
Sound Energy* (AIM:SOU): Bond restructuring proposal to be discussed this month
Share Price: 1.8p, Market Cap: £24m
- Sound has published a Consent Solicitation Memorandum containing details of its proposal in respect of a restructuring of the Company's Luxembourg listed €28.8m 5.0% senior secured notes due 2021.
- In addition, the Company has convened a meeting of the holders of the notes to consider the Proposal on Wednesday 14 April 2021.
- In terms of the proposal, the Company is seeking the consent of the noteholders to amend the maturity date of the notes from 21 June 2021 to 21 December 2027, and partially amortize the outstanding principal amount of the notes, at a rate of 5% every six months, commencing on 21 December 2023.
- In addition, Sound is seeking to convert c.€3.5m of the notes, pro rata across noteholders, into a total of 141m new ordinary shares in the Company, issued at a conversion price of 2.125p/share, half of these conversion shares to be subject to three month lock-in and half to a six month lock-in.
- The proposal also includes the amendment of the interest rate payment structure that the notes from 5% per annum to 2% cash paid per annum and 3% deferred interest per annum to be paid at redemption.
- In addition to the Company's existing redemption rights, the proposal provides Sound the right, at any time until 21 December 2024, to redeem the Notes in full for 70% of the principal value then outstanding together with any cash interest accrued and 100% of the deferred interest then accrued at the date of redemption.
- As part of the Proposal, the Company is also proposing to issue to the noteholders c.100m warrants to subscribe for new ordinary shares in the Company at an exercise price of 2.75p/share.
- The Warrants will be exercisable from the date of issuance until 21 December 2027.
- The Warrants will be listed and admitted for trading on the Luxembourg Stock Exchange.
Our take: In light of Sound’s renewed strategy, it makes perfect sense to restructure the Company’s capital structure to coincide with first cash flows from Tendrara. Sound proposes to commercialise its existing discoveries at Tendrara through a phased approach. Phase I will see the Company tap into the existing and growing Moroccan industrial gas market, supplying an annual contractual quantity of 100Mcm/y of gas (c.4Bcf/y) over a 10-year period at a rate of 13MMscf/d. Phase II will see Sound develop the remaining discovered resources via additional wells, a CPF and a gas export pipeline to monetise gas via the domestic gas to power market. As such, the Company has the potential to become a material Moroccan gas producer as early as next year.
*SP Angel acts as Broker to Sound Energy
Pharos Energy (LON:PHAR): Agreement reached with EGPC sees improvement in breakeven price in Egypt
Share Price: 22.5p, Market Cap: £100.4m
- Pharos has received provisional approval from the Egyptian General Petroleum Corporation's (EGPC) Main Board to an amendment of the fiscal terms of its El Fayum Concession, which is now subject to the approval of the Egyptian Government.
- Under the new terms, the Cost Recovery Petroleum percentage (i.e. the share of gross revenues that is available for the Contractor to recover its costs) will be increased from 30% to 40%, allowing Pharos a faster recovery of all its past and future investments.
- In return, Pharos has agreed to waive its rights to recover a portion of the past costs pool (US$115m) and reduce its share of Excess Cost Recovery Petroleum from 15% to 7.5%.
- Elsewhere, work for phase 1b water flood programme in El Fayum has commenced, utilising the funds raised in the equity placing earlier this year.
Our take: The improved cost recovery terms mean past and future investments in El Fayum can be recovered due to an increase in Pharos' total share of gross revenues. Together these new fiscal terms mean an improvement of up to US$5.7/bbl in the breakeven price. The Company’s robust financial position, strong production base, and recovering commodity price environment has given Pharos a stable platform to bring forward its deferred investment programme. The drilling campaign at TGT, Vietnam, will restart this year, which we expect to add material reserves and production to this important play for Pharos including enhanced oil recovery over time. Egyptian production remains in line with guidance and a 40% upgrade in 2P reserves underlines the long-term potential of these fields in our view.
Research – Oil & Gas
Sam Wahab - 0203 470 0473 / 0784 385 5037
sam.wahab@spangel.co.uk
Sales
Richard Parlons – 020 3470 0472
Abigail Wayne – 020 3470 0534
Rob Rees – 020 3470 0535
Grant Barker – 020 3470 0471
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Sources of commodity prices
Oil Brent, WTI - ICE
Natural Gas - NYMEX
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Recommendations are based on a 12-month time horizon as follows:
Buy - Expected return >15%
Hold - Expected return range -15% to +15%
Sell - Expected return < 15%