WTI $75.25 +$1.15, Brent $76.49 +$1.33, Diff -$1.24+18c, NG $3.70 -5c, UKNG 84.47p -0.26p

Oil price

Oil fell yesterday to start with when the IEA report came out which as usual turned out to be absolute drivel. Although their numbers make the market look tight in the short term they are negative on Delta, Opec+ breakdown and Non-Opec supply so really don’t know whether it’s Christmas or Easter.

The API stats showed a draw of 4.1m bbls of crude and 1.5m b’s of gasoline whilst unsurprisingly distillates added 3.7m b’s. Today oil is flat as markets start to rally ahead of comments from the Fed on Capitol Hill and inflation numbers tightening.

Challenger Energy Group

Challenger has provided an update in relation to the logging of the Saffron-2 appraisal well as part of the broader Saffron project in the South-West Peninsula of Trinidad, and the entry into an associated term sheet for a potential Convertible Loan Note funding of up to US$17.5 million, to fund the future development of the Saffron project.

Logging of the Saffron-2 well has been completed. In total, approximately 1,400ft of reservoir sands have been intersected across the Upper, Middle and Lower Cruse formations. Based upon assessed net to gross measurements (NTG) this yields over 300ft of net oil-bearing reservoir sands (net pay).

 Across the Lower Cruse formation (the primary reservoir of interest based upon the Saffron-1 discovery well and the final reservoir unit to be drilled out) 63ft of net oil-bearing reservoir sands (net pay) has been measured, with a further 70ft of potential net oil-bearing reservoir sands indicated.

The drill rig has been released, well completion activities are underway, and perforation / production testing of the well is on track to commence on or around 23 July 2021. Based upon the Saffron-1 discovery well, the prognosed production rate from Saffron-2 is in the range of 200 – 300 bopd.

The company report continued progress with respect to securing additional sources of funding for development of the Company’s assets. In particular, a Term Sheet was entered into in June 2021 with Arena Investors LP for a potential Convertible Loan Note funding of US$10 million (and up to US$17.5 million) which, if concluded, would provide funds for drilling of future production wells as part of the first phase of a development of the Saffron project.

Eytan Uliel, Chief Executive Officer, commented:
“I am pleased to advise that logging of Saffron-2 – the first well drilled by Challenger Energy onshore Trinidad – has been completed, with oil-bearing sands identified in all reservoir sections of interest, consistent with pre-drill estimates and those indicated from the Saffron-1 discovery well. We now head toward production testing later this month, and once Saffron-2 is online and a degree of production history is established, we can then work with the authorities in Trinidad to plan how best to execute a broader development of the Saffron field.

In terms of funding, known production capacity translates to de-risked cashflow potential that can sustain less dilutive sources of capital. In this regard, we are pleased to have taken the first tangible steps, by entering into a term sheet with a leading provider of debt and hybrid-debt capital to energy companies. We are working to conclude a funding on mutually acceptable terms, with a view to having capital available once we have production data from the Saffron-2 well and have been able to assess development options and schedule for a broader Saffron development. I look forward to updating shareholders of our progress.”

Challenger has suffered from continued share price weakness which at this stage of its development should not be the case. In a discussion with me this morning, CEO Eytan Uliel was keen to point out that the Saffron well has come out in line with overall expectations but with occasional properties differing from Saffron-1 in particular as the ‘mobile shales’ between the Upper and Lower Cruse sands were encountered.

With a phalanx of further wells on the property I think that it is important that CEG has a well ready to produce and key lessons learned. The Arena funding is an option which will be looked at for Saffron not the whole company. The Suriname well is a proof of concept one and pretty much ready to go but waiting on an economy hit harder than most by Covid. Having seen this bad performance I think the shares are well overdue a rally, there is plenty of good news in this announcement to justify that.

Pharos Energy

A trading and operational update from Pharos today, firstly Group working interest.  H1 production 9,147 boepd net of which Vietnam H1 production was 5,429 boepd net and Egypt H1 production 3,718 bopd. 2021 Full year Group working interest production guidance remains unchanged at 9,200 – 10,600 boepd net, of which Vietnam – 5,200-6,200 boepd and Egypt – 4,000-4,400 bopd, prior to any investment from a farm-in partner.

Group revenue for H1 2021 of c.$73m before hedging loss of c.$14m, Cash balances as at 30 June 2021 of $28m, net debt also $28m. The company forecast cash capex for the full year updated to $41m, in Vietnam, four well TGT development drilling programme to start later this month.

The company remain committed to completing the farm-out process on both the El Fayum and North Beni Suef assets in Egypt and advanced negotiations with preferred farm-out counterparty, however the company point out continued ongoing interest from other parties.

Ed Story, President and Chief Executive Officer, commented:
“I am pleased to be able to report a period of progress for the Group. In Vietnam, we are about to embark on a major development drilling campaign at TGT which will look to increase production by up to 40% and also begin acquiring 3D seismic in Block 125, which has the potential to show some game-changing prospectivity offshore in the Phu Khanh Basin.

In Egypt, work on our farm-out, which will provide the investment for future development, is progressing well with all major drilling activity in the meantime having been put in abeyance until the process has been concluded.

Battening down the hatches and restructuring the company during the downturn has been a difficult but a necessary step in order to reposition it for robust growth and careful capital allocation in the best interest to all stakeholders. I look forward to updating the market further as we progress our plans for the year in both Egypt and Vietnam.”

Pharos is battling away well under the circumstances and whilst in Egypt the wait continues for a corporate conclusion and to reopen the drilling programme. However the durability of the portfolio and its ability to perform well at current economics has been proved in the two and a half times increase in the shares and it has a top quality management team. 

Hurricane Energy

An operating and financial update for June, 319 Mbbls of oil were produced at an average of 10,642 b/d which included a production loss due to tripped ESP.

Financially, revenue of c.$69 million from two liftings of Lancaster crude in the second quarter resulting in an average realised price of c.$66/bbl, compared to an average Brent price of $69/bbl for the same period. Operating costs and G&A of c.$36 million with net cash capital expenditure of c.$1 million and convertible bond coupon payments of c.$4 million.

Net movement to restricted cash of c.$12 million (including additional decommissioning security) and an increase in net working capital of c.$9 million, the majority of which are accruals relating to the Lincoln-14 well plug and abandonment activity.

"The Company believes that net free cash provides a useful measure of liquidity after settling all its immediate creditors and accruals and recovering amounts due and accrued from joint operation activities, outstanding amounts from crude oil sales and after settling any other financial trade payables or receivables. It should be noted that the net free cash is calculated as at the balance sheet date and does not take into account future liabilities that the Company is already committed to. As such, not all of the net free cash would be available for repayment of the Convertible Bonds at their maturity in July 2022".

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