Market Update: Wednesday 29 September 2021
IOG PLC (AIM:IOG) (IOG LN): Blythe well 48/23a-H1 flows at c.46MMscf/d
Lansdowne Oil & Gas (AIM:LOGP)* (LON:LOGP): Interim results, global commodity pricing increases value at Barryroe
Mosman Oil & Gas* (LON:MSMN): Mosman prepares to spud Winters-2 well, East Texas
PetroTal (LON:PTAL): Drilling commenced at the BN-9H (9H) development well, Bretana producing >15,000bopd
TransGlobe Energy (LON:TGL): Strong production base capitalising on robust commodity pricing
Victoria Oil & Gas (LON:VOG): Settlement reached with RSM
Zephyr Energy (LON:ZPHR): Zephyr commences 100% carbon neutral operations
Energy Prices
Brent Oil US$77.7/bbl vs US$80.3/bbl yesterday
WTI Oil US$73.8/bbl vs US$76.3/bbl yesterday
Natural Gas US$5.80/mmbtu vs US$6.19/mmbtu yesterday
Oil Price News
Oil prices have fallen back in early trading today after reaching three-year highs yesterday morning as the American Petroleum Institute (API) reported a surprise build in crude oil inventories of 4.127MMbbls for the week ending 24 September
The build runs contrary to market expectations who had estimated a draw of 2.33MMbbls for the week
In the previous week, the API reported a draw in oil inventories of 6.108MMbbls, a larger loss than the 2.400MMbbl draw the market had predicted
Oil prices fell leading up to the data release, despite weekly reports of falling US crude oil inventories and market sentiment that is eyeing a tighter market ahead, especially on the back of the natural gas crunch in Europe that is assumed will spill over into other countries
Oil inventories in the US have drawn down nearly 73MMbbls so far this year, according to API data, well below pre-pandemic levels
The EIA's latest data suggests that crude oil inventories in the US are now 8% under the five-year average for this time of year, at 414MMbbls
US oil production had been down more than a 1MMbopd over the last couple of weeks, but crude production ticked up for week ending 17 September to 10.6MMbopd, with more than 84% of Gulf of Mexico oil producers finally back online after Hurricane Ida made landfall at the end of August
The API reported a build in gasoline inventories also, of 3.555MMbbls for the week ending 24 September, compared to the previous week's 432,000bbl draw
Adding to the across-the-board builds, distillate stocks saw an increase in inventories this week of2.483MMbbls for the week, compared to last week's 2.720MMbbl decrease
Cushing inventories rounded out the builds this week, adding 359,000bbls to the total inventory, after last week's 1.748MMbbl decrease
Gas Price News
US natural gas futures climbed more than 2% to a seven-year high yesterday as record global gas prices keep demand for US LNG exports strong
However, prices remain volatile rising over 10% early in the session for a second day in a row, since volumes were thin with the front-month October contract expiring yesterday
Prices rose despite forecasts for milder weather and lower demand than previously expected over the next two week
Gas prices in Europe and Asia traded about four times over US gas due to demand for the fuel in Asia and low stockpiles in Europe ahead of the winter heating season, when demand peaks
The UK’s NBP virtual trading hub for natural gas also hit a record-high price, with front-month contracts reaching an all-time high yesterday afternoon
The surge in natural gas prices is also due to a massive supply shortage in Europe, a situation that is quickly spilling over into other countries and other markets, including the coal and oil markets as demand for power exceeds supply
The natural gas crisis is set to intensify as winter heating season approaches, with supplies insufficient to keep up with current demand, let alone build stockpiles for what will be increased demand in the cold season
Europe’s natural gas crisis has prompted European fertilizer producers to curb output, which could send food prices soaring along with the natural gas prices
It has also sparked warnings of blackouts and factory shutdowns
If the winter is colder than normal, natural gas supplies could run even shorter, leaving Europeans and possibly other countries, especially those that can barely afford current energy prices, in the cold
Company News
IOG PLC Blythe well 48/23a-H1 flows at c.46MMscf/d
Share price: 32.2p, Market Cap: £157.4m
A positive update from IOG confirms that its latest Blythe well 48/23a-H1 (the second Phase 1 development well) has been drilled to 10,750ft Measured Depth (MD), intersecting 1,238ft of good quality Permian Leman Sandstone reservoir along hole between 9403 ft MD and 10,641 ft MD, with a net:gross ratio of 95%, porosity at 10.6%.
Based on this initial data, the Blythe gas in place and recoverable volumes are estimated to be in line with pre-drill expectations.
Drilling performance saw a notable improvement over Elgood.
Over recent days the well was successfully cleaned up and flow tested to a maximum gas rate of 45.5MMscf/d through an 80/64th inch choke.
One operational challenge experienced during drilling was the loss of drilling mud due to natural fracturing in the reservoir.
This necessitated the use of Lost Circulation Materials (LCM) down-hole which may have constrained the clean-up flow rate with drilling mud being recovered to surface during clean-up.
Due to drilling fluid and LCM being recovered during clean-up, further analysis is required to determine the amount of condensate produced.
The Blythe field is planned to be produced through the Blythe normally unmanned platform, via the 12" pipeline laid earlier this year, which connects to the main 24" Saturn Banks pipeline to Bacton.
The Company continues to expect first gas from both the Blythe and Elgood fields in Q4 2021 once the final subsea and onshore installations are complete.
The rig is expected to mobilise shortly across to Southwark, the third of the Phase 1 fields, where it will spud the next production well through the Southwark platform.
Based on early indications from the Elgood and Blythe clean-up well tests, the Company expects that initial production rates from the Blythe Hub upon start-up will be within its planning case range.
Specific production guidance is expected to be available once onstream.
In light of high forward gas prices, management expect that the Company's cash flows over 2021-22 could substantially exceed its planning base case.
Our take: Another impressive update from IOG with the Company delivering the Blythe well within two months and achieving a maximum well test rate of 45.5MMscf/d. IOG will now integrate the well data into its planning for the start-up of both Blythe and Elgood in Q4. The improvement in drilling performance at Blythe is also very encouraging as the Company progresses on to Southwark and then on to drill the Goddard and Southern Hub appraisal wells in mid-2022.
Lansdowne Oil & Gas* Interim results, global commodity pricing increases value at Barryroe
Share price: 0.71p, Market Cap: £6.3m
LOGP’s interim results to the end of June 2021 saw the Company reduce its loss position from the same period in 2020 to £125k (1H 2020: £195k loss) due to a reduction in admin expenses to £149k (1H 2020: £195k).
Cash remains stable with the Company reporting a balance of £495k as at 30 June 2021 (FY 2020: £635k).
Operationally, the period saw a revised Lease Undertaking work programme submitted to the Department of the Environment, Climate and Communications (DECC), designed to move Barryroe to a declaration of commerciality, turning 2C resources into 2P reserves and subsequently seeking the award of a Petroleum Lease, prior to the commencement of production via the EDS.
In the early part of the year end, work continued on the technical and funding aspects of the Barryroe Early Development Scheme, but it became apparent that SpotOn would not be able to deliver the funding as required under the Farm Out Agreement (FOA) and during April 2021 the Barryroe Partners terminated the FOA, as allowed under its terms.
The Barryroe Partners have now retaken control of the project and Lansdowne will as a result retain its 20% original equity in the project, maintaining 69MMboe net 2C resources.
Management has reiterated that a considerable amount of new technical work is underway focused upon the eastern part of Barryroe, which is targeted for the first phase of development.
The rationale for locating in the eastern part of Barryroe is that the 48/24-10z well was drilled in this area and established good flow rates from the Basal Wealden A Sand (3,504bopd) as well as strong gas flow rates from the overlying Basal Wealden C Sand.
Furthermore, the 3D seismic quality is optimal in this area and the structural configuration shows low dips and little faulting.
The concept of a phased development of Barryroe, commencing in the eastern part of the field, has long been advocated and a first well location was identified by the Barryroe Partners in 2017 - labelled the K Location.
A site survey application was lodged for this area in 2020 and approval to carry this out was granted in February.
Planning for this survey is advanced and operations are expected to be carried out in October 2021.
Dialogue is continuing with DECC regarding the application for the Barryroe Lease Undertaking.
Our take: Whilst the setback with SpotOn will be regarded as another delay on funding for investors, there are some tangible positives to be taken from Lansdowne and Providence retaking control of the licence. When discussions commenced with SpotOn Energy in April 2020 the Brent oil price was below US$30/bbl, a result of the impact of the pandemic on the global economy. The oil price has since recovered to above US$75/bbl rendering the Barryroe project more valuable with enhanced project economics. Providence’s placed its last valuation of its 80% interest in the EDS at US$560m (for 16% of the resource) suggesting Lansdowne’s interest is worth US$140m at US$60 Brent. We remain of the view that the Barryroe discovery represents a unique and compelling development opportunity, especially in the current price environment. Barryroe will come in to greater focus given the material increase in global commodity pricing in our view, with European gas prices at record levels (UK NBP above £1.50/therm). Not surprisingly, Barryroe lying in shallow water (c.100m), with relatively shallow reservoir depth (7,000 to 7,500ft) has seen its NPV10 increase significantly at these updated base prices.
*SP Angel acts as Nominated Advisor and Broker to Lansdowne Oil & Gas
Mosman Oil & Gas* (MSMN) Mosman prepares to spud Winters-2 well, East Texas
Share Price: 0.16p, Market Cap: £6.1m
An update from Mosman today outlines that equipment to drill the Winters-2 well has started to arrive onsite.
Spud is expected in the next few days and the drilling is scheduled to take 7-10 days.
Mosman first acquired an interest in the Winters lease as part of its 100% purchase of Nadsoilco in June 2021.
Following a subsequent acquisition of an additional working interest in July 2021, Nadsoilco now holds a 29% interest in the lease.
Nadsoilco is the Operator of the Winters lease which is held by production with c.969bbls of oil sold in the last 12 months from the Winters-1 well.
Nadsoilco has been ready to drill the Winters-2 well on the Winters Lease for some time and has been awaiting the arrival of the drilling rig which was delayed due to the impact of the covid-19 pandemic.
The Winters lease holders have agreed to share the participation in the Winters-2 well (not the lease) with the owners of the adjacent lease operated by Arcadia.
The Winters lease holders will have a 78% working interest and the Arcadia Parties will have a 22% working interest in the well.
Therefore Mosman, through Nadsoilco, will hold an effective c.23% working interest in this well.
Winters-2 will be a 7,000ft development well in which the primary target is the Wilcox formation that is producing oil in adjacent wells (on other leases not held by Mosman).
The turnkey aggregate cost for drilling the well is now expected to be c.US$700k (Mosman's share c.US$160k).
Our take: Following the recent accretive acquisition of Nadsoilco, Mosman has swiftly turned its attention to repeating its drilling success at Stanley and Falcon to Winters. Winters-2 is a development well targeting the Wilcox formation, the same zone that is producing in adjacent wells (on other leases not held by Mosman). On a project economics basis, development of the Polk County area is the priority with its low well costs, low operating costs and low risk, coupled with existing infrastructure.
* SP Angel acts as Nominated Advisor and Broker to Mosman Oil & Gas
PetroTal (PTAL LN): Drilling commenced at the BN-9H (9H) development well, Bretana producing >15,000bopd
Share price: 15.8p, Market Cap: £121.8m
PTAL has commenced drilling the BN-9H (9H) development well, the Company's next horizontal well.
The 9H well is fifth the horizontal well drilled by the Company, and the tenth oil producer.
The well cost will be c.US$13.9m and is the first to be drilled with a synthetic mud system.
Drilling and completion should be finished in the second half of November 2021 and the well is expected to contribute materially to exit 2021 production.
Elsewhere, Bretana's average field production is currently a robust 15,494bopd.
These rates demonstrate the success of the revised water disposal strategy, allowing full water disposal into the two disposal wells.
Our take: Using a US$80/bbl Brent oil price and PTAL’s estimated EBITDA netback of approximately US$47/bbl, annualised EBITDA at 15,000bopd would be c.US$255m. This expected EBITDA growth, will easily allow the Company to complete the remaining Bretana development wells and potentially retire the bond obligations early.
TransGlobe Energy (TGL LN): Strong production base capitalising on robust commodity pricing
Share price: 162p, Market Cap: £118m
A comprehensive operations update from TGL shows during the current quarter to date, natural production declines in Egypt were more than offset by well optimisation activities and new drilling.
Production in Canada declined naturally while awaiting the production start from recent new drilling, which is anticipated in early Q4 2021.
In Egypt, the Company continues to utilise the EDC-64 rig drilling development oil wells.
In West Bakr, during the quarter, the Company drilled two development oil wells and is moving on to a third well, K-66, at quarter end.
The K-62 development well was drilled to a total depth of 1,473m, and encountered oil-bearing sands in the Asl-A formation.
The reservoir section has been fully logged and evaluated, with an internally estimated 24.2m of net oil pay in the Asl-A reservoirs and completed for oil production.
The second well in West Bakr, K-65, was drilled to a total depth of 1,730m, and encountered oil-bearing sands in the Asl-A, Asl-B, Asl-C, Asl-D and Asl-E formations.
The reservoir section has been fully logged and evaluated, with an internally estimated 10.6m of net oil pay in the Asl-A sand, 12.5m of net oil pay across the Asl-B sand, 6.1m of net oil pay across the Asl-C sand, 5.5m of net oil pay across the Asl-D sand and 11.4m of net oil pay in the Asl-E sand (total net oil pay 46.1m).
The Asl-E is expected to be completed for production in this well.
The Asl-A, Asl-B, Asl-C, and Asl-D are expected to be recovered through future recompletions of this well.
The Company drilled one well in North West Gharib, NWG-3B-2, to a total depth of 1,627m to assess Red Bed potential in the northern area of our development leases.
The well encountered Red Bed sands which were wet.
The results are under evaluation to identify any up-dip sidetrack potential.
The lower Bahariya reservoir at SGZ-6X continues to produce on Gas Oil Ratio control at a field estimated 680bopd of light oil with a 46% watercut.
With improved oil prices and spare capacity available in the South Ghazalat early production facility, the Company has accelerated drilling of an oil exploration well on the SGZ‑7B prospect to the east of SGZ-6X.
The well will target light oil in the Bahariya reservoir and fulfils TGL’s commitments to EGPC as part of the grant to the Company of a 10-block development lease in 2019. The Company anticipates spudding this well in early Q4 2021.
In Canada, the Company drilled, completed, and equipped one 2-mile and two 1-mile horizontal wells in the northern area of the Cardium reservoir extension at South Harmattan, first identified by the 2-20 well in 2019.
A 6km gas line to connect to Company infrastructure is nearing completion, along with the final surface tie-ins.
The Company expects the wells to be brought into production sequentially during October 2021.
Additional information on individual well performance will be provided when sufficient stabilised production history has been obtained late 2021/early 2022.
From a corporate standpoint, the Mercuria Prepayment Agreement was fully repaid during the quarter with the final US$10m being paid in August 2021.
The agreement has been amended to US$10m (undrawn) and extended to 31 December 2021 to coincide with the expiry of TGL’s remaining Brent Crude Oil (LSE:BRENT) hedges of 150,000bbls.
Our take: An impressive update from TGL and it is no surprise the share price has returned a >100% YTD increase for investors. With an active operating campaign across two geographies translating to robust production growth we see further running room in the stock this year. With stronger oil prices and spare capacity available in the South Ghazalat production facility, the Company is evaluating accelerated drilling of an exploration well on the SGZ‑7B prospect to the east of SGZ-6X. The earliest SGZ-7B could be drilled is Q4 2021. In Canada, the latest South Harmattan well, directly adjacent to TGL’s original 2-20 well drilled in 2019, has come on within expectations which bodes well for our the imminent three well program currently drilling in our view.
Victoria Oil & Gas (VOG LN): Settlement reached with RSM
Share Price: 3.7p, Market Cap: £9.6m
VOG has provided an update on the dispute with RSM and the arbitration proceedings under UNCITRAL rules (dating from February 2020).
RSM is the joint interest owner in the Logbaba Project in Cameroon with a 38%, alongside the Company and the National Hydrocarbons Corporation of Cameroon.
VOG and RSM have now reached a settlement agreement which has enabled the parties to dismiss the UNCITRAL hearing which was due to commence this week in London.
The settlement involves the agreement of certain accounting policies and procedures, the clarification of certain decision-making processes, and an agreement on the amount of monies payable to RSM in line with their existing contractual arrangements from existing cash resources in country.
Our take: A positive update from VOG which will come as welcome news for shareholders. This hearing and the inevitable follow-up would have likely cost the Company a substantial amount in legal costs alone, whilst the amounts under dispute were material. Operationally, the Company is considering adding perforations to well La-108, more than doubling the net pay, and this is being discussed with partners. Such is the depth and pressure difference between the top and bottom of the reservoir that perforating must be done in two stages. Adding perforations could increase the well’s productivity, reduce the overall water cut and allow the Company to access all of the well’s connected gas volumes.
Zephyr Energy (ZPHR LN): Zephyr commences 100% carbon neutral operations
Share Price: 6.1p, Market Cap: £78.9m
In line with the Company’s commitment to net zero, Zephyr has confirmed it has commenced 100% carbon neutral operations ahead of its 30 September 2021 target.
This leading initiative is designed to ensure that all hydrocarbons produced by the Company from this point forward have a net-zero operational carbon impact.
Over the last four months, Zephyr worked with the Prax - a British multinational independent oil refining, trading, storage, distribution and retail conglomerate dealing in crude oil, petroleum products and bio-fuels - to prepare for the commencement of this initiative.
Prax has helped Zephyr measure and mitigate the Company's greenhouse gas (GHG) emissions, with mitigation efforts primarily focused on the purchase of Verified Emission Reductions from developers of sustainable projects.
Emissions to be mitigated include those from Zephyr's current corporate carbon footprint, its non-operated production assets in the Williston Basin, and from its operated project in the Paradox Basin.
The cost to purchase the appropriate number of VERs to offset Zephyr's growing operational footprint currently averages under US$1/bbl of oil equivalent produced, although the net cost to Zephyr may be less given the potential to sell oil volumes at a premium as a result of the anticipated net-zero operational carbon status of those volumes.
Zephyr has further entered into an agreement in which Prax will be responsible for marketing the oil produced from its Paradox project, with the purchase of the VERs offset from revenue payments due to Zephyr.
Our take: An interesting update from Zephyr, with the Company demonstrating its clear commitment to a net zero target. This, coupled with a strong return of value to shareholders, will likely open up a significantly greater investor base to the Company in our view. Operationally, Zephyr has now closed five separate acquisitions this year and the Company now has interests in 22 producing or near-term production wells, in addition to exposure to non-operated drilling expected in 2022, alongside the interesting State 16-2LN-CC well. Given strong and stable commodity prices, shareholders will be satisfied that economic production has the potential to generate enough cash flow to self-fund additional Paradox Basin development, thus negating future equity dilution in our view.