Higher oil and gas prices and newly supportive government incentives are creating new catalysts for investors in North Sea small-caps like Deltic Energy PLC (AIM:DELT).
Deltic on Tuesday saw its shares rise after Shell, the AIM-quoted firm’s North Sea exploration partner, greenlit Selene which will be the second well in the joint venture.
It comes as Shell is preparing to drill the Pensacola well in September.
Pensacola is a project that promises much excitement for the AIM-quoted firm which is carried for most of the well expenses, via its partnership deal with Shell, and, the same will apply when its time to drill Selene.
Changes to the UK tax regime, meanwhile, mean the multinational super-major will also have a substantial portion of its costs supported.
Indeed, reliefs rolled-up into May’s windfall tax are a discreet factor in Deltic Energy’s increasingly busy schedule in the UK North Sea.
“Our projects that we have within our portfolio suddenly become even more economically and commercially attractive, and certainly [the reliefs] will facilitate further investment into those prospects,” chief executive Graham Swindells told Proactive.
“For companies like Deltic there's no doubt that this has actually presented an opportunity.”
He added: “It introduces a tax relief such that for companies or operators that are subject to the EPL they effectively have up to 91% cost saving for any new qualifying investments - like the Deltic opportunities and assets, such as Selene, Pensacola and our other opportunities.”
Basically, it means that any companies making money by producing oil and/or gas in the UK can claim the vast majority of their tax back if they’re also investing in new projects.
Perhaps, then, there should be little surprise that Shell has decided to advance its second North Sea well with Deltic – or that Capricorn (formerly Cairn) may follow suite in due course. Capricorn in November agreed to take stakes in five gas licences in the Southern North Sea, for which drill decisions are anticipated.
“I think the potential definitely exists there for us to see further investment into North Sea opportunities such as the ones which sit within the Deltic portfolio,” Swindells added.
Stifel sees significant upside
Meanwhile, in a note, stockbroker Stifel upgraded its target price for Deltic – up to 6.9p from 4.3p (current price 2.99p) – and said the Shell drill decision was “significant positive news”.
“Despite the attractiveness of the Selene prospect, we felt that there was still a risk that Shell may not elect to drill the well, given its focus elsewhere,” Stifel analyst David Round said.
“Deltic has exposure to some of the most exciting North Sea gas prospects being drilled in the next few years.
“Given the comparatively high chance of success attached to these wells, we believe the risk-reward on the shares looks attractive at these levels; we reiterate our ‘buy’ rating.”
Selene: Among ‘largest un-appraised structures’
The timing of the drilling has yet to be decided but the North Sea Transition Authority, the UK regulator, has been informed of Shell’s decision to proceed with the well.
Deltic holds a 50% working interest in the licence but will be carried for 75% of the costs of drilling and testing of the Selene well up to total of US$25 mln.
Shell will be the operator of the licence, which Deltic said is one of the largest unappraised structures in the Leman Sandstone fairway of the Southern Gas Basin.
Selene is estimated to contain gross P50 prospective resources of 318bn cubic feet (BCF) with a geological chance of success of 70%.
“The commitment to drill this material, high impact, low-risk gas prospect is another highly significant milestone for Deltic and our team," Graham Swindells, Deltic’s chief executive, said.
"Adding another committed well to our programme, following recent confirmation that Pensacola will be drilled in September, represents further endorsement of the quality of Deltic's assets."
But first, Pensacola
In June, Shell confirmed to Deltic that it had inked the rig contract for the Pensacola exploration well, with drilling set to start in September.
Pensacola will be drilled by the Maersk Resilient, a high-efficiency jack-up rig, which has already been under contract to Shell since the start of June.
The Pensacola project has the potential to unlock a significant new source of gas to the UK, according to Deltic, and as such has been highly anticipated by the industry.
“Pensacola is an increasingly valuable asset in the current energy environment and confirmation that the JV has now secured a high-quality drilling rig with an experienced team for the well is another key milestone as our planning continues to progress towards the drilling of this high-impact prospect," it said last month.
Deltic’s estimates for Pensacola put the prospect’s gross P50 prospective resources at around 309bn cubic feet of gas. If proven, that would make Pensacola one of the highest impact gas exploration targets in recent years.
Investments into the drilling of Pensacola and Selene – and, if their successful, the subsequent field development work – would qualify as investments under the EPL and would benefit from the generous tax relief scheme brought in by Rishi Sunak alongside the controversial windfax tax.