Oil & Gas Daily Flow
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Market Update: Tuesday 1 March 2022
88 Energy Ltd (AIM:88E, ASX:88E, OTC:EEENF): Merlin-2 well operations on track, Alaska
President Energy PLC (AIM:PPC): Positive results yielded from drilling and workover programme
VAALCO Energy Inc (NYSE:EGY, LSE:EGY): Significant margin improvement at Etame, Gabon
Energy Prices
Brent Oil US$101.2/bbl vs US$98.7/bbl yesterday
WTI Oil US$98.4/bbl vs US$96.1/bbl yesterday
Henry Hub Gas US$4.67/mmbtu vs US$4.62/mmbtu yesterday
UK NBP Futures 255p/therm vs 225p/therm yesterday
Oil Price News
- Oil prices surged in early trading today as concerns over supply disruptions after Russia's invasion of Ukraine and related sanctions outweighed talks of a coordinated global crude stocks release
- A huge Russian military convoy approached Ukraine's capital Kyiv on Tuesday after ceasefire talks between Russia and Ukraine failed to reach a breakthrough
- Russia's economic isolation worsened as the world's biggest shipping firm Maersk on Tuesday said it would halt container shipping to and from Russia
- Major oil and gas companies, including BP and Shell, have announced plans to exit Russian operations and joint ventures
- Buyers of Russian oil are facing difficulty over payments and vessel availability due to sanctions with BP cancelling fuel oil loadings from a Russian Black Sea port
- The massed Russian assault by land, sea and air was the biggest attack on a European state since World War II, prompting tens of thousands of people to flee their homes
- Ministers of Arab oil-producing countries announced that OPEC+ should stick to its current agreement to add 400,000bopd each month to output, rejecting calls to pump more to ease pressure on prices
- Tight supply was seen in US crude oil stockpiles which unexpectedly fell 4.8MMbbls in the week to 4 February to 410.4MMbbls as overall refined product demand reached an all-time record
- This compares with a consensus forecast of a 369kbbl rise
- OPEC has forecasted that world oil demand might rise even more steeply this year
- The group has forecast an increase of 4.15MMbopd this year, as the global economy posts a strong recovery from the pandemic
Gas Price News
- European natural gas rose after a raft of sanctions against Russia over its invasion of Ukraine amplified concerns about energy shortages
- Russia supplies 40% of Europe’s gas supplies, and concerns that flows could be disrupted after Moscow’s invasion of Ukraine saw the price surge almost 70% on Thursday
- But prices cooled on Friday as traders analysed US president Joe Biden’s decision to include in his sanctions package a carve-out for energy payments, a crucial source of revenue for Moscow
- Russian forces fired missiles at several cities in Ukraine and landed troops on its coast after President Vladimir Putin authorised what he called a special military operation in the east
- Russia has warned European gas prices will more than double after Germany puts the Nord Stream 2 pipeline on hold
- Former Russian President Dmitry Medvedev threatened a “brave new world” where Europeans would pay €2,000/Mcm
- Benchmark European prices are currently trading at around €79/MwH, equal to about €830/Mcm
- Germany had been reluctant to include Nord Stream 2 in sanctions as the move would hurt its own gas supplies
- However, Chancellor Olaf Scholz said Russia had gone a step too far and the project should not be approved
Company News
88 Energy Ltd (AIM:88E, ASX:88E, OTC:EEENF): Merlin-2 well operations on track, Alaska
Share Price: 2.3p, Market Cap: £321m
- 88E has confirmed that the mobilisation of the Arctic Fox rig to the Merlin-2 appraisal well drilling location is now complete.
- Pre-spud operations are continuing and now entering the final phase.
- The Merlin-2 spud date is scheduled for the week commencing 7 March 2022, with the well permitted to a Total Depth of 8,000 feet.
- The well is planned to be initially drilled to 2,000 feet, with the surface casing then installed and the Blow Out Preventer system tested.
- This is anticipated to collectively take approximately one week.
- Drilling to TD is then expected to take a further four weeks, including wireline logging.
- A production test program for the Merlin-2 well has been designed and equipment placed on standby during initial well site operations.
- Flow testing of Merlin-2 will be contingent upon the wireline results, in particular the MDT outcomes, as well as government approvals and weather window considerations.
Our take: 88E is now entering the final phase of pre-spud preparations ahead of its high impact drilling operations. Success at Merlin-2 has the clear potential to be transformational for the Company in a success case. The Merlin-2 appraisal well is planned to be drilled into the highly prospective N18, N19 and N20 targets that were encountered in the successful Merlin-1 well (drilled in March 2021 to a depth of 5,267ft).
President Energy PLC (AIM:PPC): Positive results yielded from drilling and workover programme
Share Price: 1.6p, Market Cap: £32m
- President has issued a comprehensive operational and management update with regards to its corporate and asset base.
- In Argentina, the Company has confirmed that the first two wells drilled in Salta in the current programme have been in successful commercial production for over one week.
- Well DP 2001, currently successfully commercially producing in the first phase of testing will within the next 10 days undergo planned stimulation in two parts under the second phase of the production testing programme.
- Whilst each well behaves differently there is no present evidence to expect post stimulation anything materially contrary to the stated well performance expectations in this well of approximately 250bopd.
- Well DP 2003 is in an earlier stage of first phase of production testing although it is already clearly commercial according to management.
- As such, testing will continue for a period of time to optimise production and assess reservoir capabilities, the drilling rig has moved to and is in the process of setting up at well PG 13-1 at the Puesto Guardian field within the Salta Concession, some 45km away from the Dos Puntitas field.
- This well is planned to be a side track from an existing well location.
- Work is currently projected to commence this week with timing for the drilling rig work approximately 21 days.
- The benefit of the recent increased production is already being felt in Salta where realised domestic prices are currently c.US$60/bbl.
- In the US, the workover at the Triche well has now been completed and President has confirmed that both this well and the Simmons well are back on normal production as from 25 February.
- The Triche well is still settling down producing 180bopd gross with 60boepd of gas.
- The Simmons well is estimated to be producing 50bopd gross.
- On a corporate level, the Company has confirmed that it has recruited Daniel Musri, an Argentine national, to the position of CEO of President Argentina.
- Whilst it is a non-main board position, Daniel has overall responsibility for President's operations in that country.
- Daniel joins from Vista Oil and Gas, the Mexico/Argentina public oil and gas company, is a reservoir engineer by training and, prior to Vista, worked for 10 years as Vice President for Schlumberger in their Production Management arm, and before that for 18 years at the large Argentine oil and gas company Perez Companc, rising from junior reservoir engineer to asset manager.
- Daniel has been tasked with reviewing all operations within President's Argentinian business with a view to improving the returns from these operations and ensuring targets that are set are met with the appropriate accountability for results.
- Jordan Coleman, COO for LATAM, will continue to work with Daniel during the transition.
- His future focus will centre on President’s Paraguay exploration project, overseeing the business in the United States as well as providing such continuing support for Daniel.
Our take: Another encouraging update from President with operations in Argentina and the US yielding positive results following successful drilling and workover programmes. With stronger for longer commodity pricing set to continue, we would expect further financial progression this year. Investors will welcome the news that operations are progressing well at the Puesto Guardian Concession. With current prices there comparable to Rio Negro and fixed opex already covered by existing production, the incremental production additions to output will be immediately profitable.
VAALCO Energy Inc (NYSE:EGY, LSE:EGY): Significant margin improvement at Etame, Gabon
Share Price: 384p, Market Cap: £228m
- Vaalco has provided an update on the Etame field reconfiguration in conjunction with the replacement of the existing Floating Production, Storage and Offloading unit (FPSO) with a Floating Storage and Offloading vessel (FSO) offshore Gabon.
- The Company anticipates that all of the associated engineering, long-lead equipment and significant contracts are proceeding in-line with the project timelines and expected delivery schedules for the deployment of the FSO in the third quarter of 2022.
- Field reconfiguration activities are expected to begin in March 2022, as planned.
- The Cap Diamant, a double-hull crude tanker built in 2001 that is being re-engineered as the new FSO, arrived at a shipyard in Bahrain in late February 2022 on schedule, for the final modifications and certifications.
- Vaalco expects the vessel will begin sea trials in late June before being mobilised to Gabon.
- Compared to the current FPSO agreement, the new FSO will reduce storage and offloading costs by almost 50%, increase effective capacity for storage by over 50%, and is expected to lead to an extension of the economic field life, resulting in a corresponding increase in recovery and reserves at Etame.
- Current total field level capital conversion estimates are US$40m to US$50m gross (US$26 to US$32m net to Vaalco).
- This capital investment is projected to save c.US$20m to US$25m gross per year (US$13m to US$16m net to Vaalco) in operational costs through 2030, giving the project a very attractive payback period of less than two and a half years.
Our take: Shareholder will be encouraged that the field reconfiguration and FSO conversion are moving along on time and within budget. This new FSO, which is scheduled to be online in September 2022, costs almost 50% less than the current FPSO and is expected to reduce our overall costs by approximately 17% to 20%. This will significantly improve margins, enhance cash flow generation at Etame through to 2030. Elsewhere, Vaalco continues to protect is free cash flow outlook on the back of strong commodity pricing. This is particularly important as the Company is benefitting from the additional volumes associated with the acquisition of Sasol’s interest at Etame that closed in late February 2021. With these additional hedges, Vaalco has materially de-risked its work program from a funding standpoint, and management expects the Company’s capital commitments over the next 12 months to be fully funded through cash flow and cash on hand therefore avoiding any near-term shareholder dilution in our view.
Research – Oil & Gas
Sam Wahab - 0203 470 0473 / 0784 385 5037
sam.wahab@spangel.co.uk
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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%