WTI $82.66 -$1.99, Brent $84.58 -$1.82, Diff -$1.92 +17c, NG $6.20 +32c, UKNG 196.0p -23.11p

Oil price

Oil fell yesterday after the EIA inventory stats echoed the API numbers with a 4.3m build in crude stocks although analysts again didn’t appreciate the draw at Cushing of 3.9m, this may be an important number as winter draws in. Products drew which I would expect in distillates at this time of the year but gasoline’s fall of 2m barrels was indicative of more driving even though refinery runs were up by 0.4% and product supplies dipped below 20m b/d. The slight fall in gasoline demand in that number recognises the move into the fall and switch towards distillates.

Diversified Energy Company

DEC has announced the following operations and trading update for the quarter ended 30 September 2021, affirming that the Company is trading in line with current market forecasts. It has declared 3Q21 interim dividend of 4.25 cents per share (+13% vs 3Q20: 3.75 cents per share) following record average net daily production: 128 Mboepd (20% vs 3Q20: 107 Mboepd) and 3Q21 exit rate of 133 MBoepd (798 MMcfepd). 

3Q21 Hedged Adjusted EBITDA(a) of $92 million ( +22% vs 3Q20: $75 million); Free Cash Flow(b) of $72 million (+20% vs 3Q20: $60 million) representing a 23% annualised Free Cash Flow yield(b); Cash Margins(c) of nearly 50% (Unhedged: 65%) driven by higher revenue realisations.

Pro-forma leverage ratio post the recently announced Tapstone acquisition of  2.2x(d); Higher commodity prices and favourable outlook support hedging strategy as well as the Capital Markets Day scheduled for 17 November in Houston with an emphasis on the Company’s ESG initiatives. The company has retired ~115 Appalachian wells year-to-date at an average cost of ~$22 thousand per well(e), representing 144% of the annual state agreement requirements of 80 per year;

Following its closing of the Indigo acquisition in May, Diversified is pleased to have successfully closed its Blackbeard and Tanos acquisitions in early July and August, respectively. The Company is progressing its highly structured integration efforts of both the acquired assets and retained personnel. Teams within the Central Region are swiftly deploying the Company’s Smarter Asset Management programme designed to optimise compression and production.

The addition of these assets in harmony with Diversified’s disciplined management of its legacy assets underpinned the Company’s 3Q21 average net daily production and exit rate of 128 Mboepd (768 MMcfepd; +18% vs 2Q21 and +20% vs 3Q20) and 133 MBoepd (798 MMcfepd), respectively, including a full quarter of production from the May 2021 Indigo and early July 2021 Blackbeard acquisitions and a partial contribution from the Tanos acquisition completed in August.

Demonstrating its commitment to responsibly retire wells, Diversified has completed approximately 115 well retirements in 2021, 44% more than the 80 per year required under contractual agreements with the respective states and attributable in part to the Company’s continuing investments in in-house plugging capabilities. Diversified retired these wells at an average cost of ~$22 thousand per well(e), highlighting the Company’s ability to plug wells effectively, efficiently and within cost estimates. The Company will provide additional information regarding its well retirement programme and emission reduction initiatives at its upcoming Capital Markets Day event.

Rusty Hutson, Jr., CEO of Diversified, commented:
“We continue to deliver strong operational and financial results through the third quarter demonstrated by consistently strong Cash Margins and higher production from our recently acquired assets. The integration and diligence of our Central Region acquisitions are progressing nicely, giving us heightened confidence in our ability to execute our growth strategy and to increase our quarterly dividend to a new high of 4.25 cents per share. As we realise synergies, progress our Smarter Asset Management programmes and proactively hedge in a higher commodity price environment, we expect to achieve even higher margins.

Importantly and demonstrating our commitment to continuously improve our sustainability performance, we have not only met our annual state-required well retirements, we have exceeded that level by more than 40% thanks in part to the hard work and diligence of our in-house well retirement team. I look forward to sharing similar accomplishments along with providing a comprehensive overview of the Company’s ESG-related initiatives at our upcoming Capital Markets Day.”

It has been a difficult time for DEC in recent weeks but I think that they have handled things very well indeed. Firstly the bedding in of recent acquisitions has gone well and shows that this area of the company’s expertise is a major part of its investment appeal. Record production is no surprise nor is the strong rise in EBITDA, Free cash flow is quite astonishing and margins at nearly 50% have significant appeal. 

With higher commodity prices enabling hedging policy activation, providing excellent returns for the company they  will have much to talk about at the Capital Markets Day in Houston next month. This meeting will clearly also focus on the major ESG initiatives where they will comment on retired wells in some detail which I think will be well received. 

As always, I believe that the delivery of the model continues to show quite how well they manage the portfolio along with amalgamation of acquired assets, with financial backing and no seeming shortage of prospects I continue to expect DEC to be a rewarding hold for income and capital yield as the shares grow. 

Chariot 

Chariot has announced that it has signed a Memorandum of Understanding with a leading international energy group. The MOU relates to the key terms of gas offtake and partnering between the Parties in respect of the Anchois Gas Development within the Lixus licence, offshore Morocco.

The key terms of the future gas sales agreements will be for c.40 mmscf/d, for up to 20 years on a take or pay principle, to underpin the development. In addition, an agreed framework process has commenced to establish a long-term partnership. The Parties will progress discussions with the view to signing final agreements to implement the Anchois Gas Development with targeted Final Investment Decision in 2022 and first gas in 2024.

Adonis Pouroulis, Acting CEO of Chariot, commented:
“Ahead of our highly anticipated Anchois gas appraisal well in December I am very pleased to announce this MOU on gas sales and partnering. Along with the recent high international gas prices, this agreement clearly demonstrates that there is significant demand to underpin the Anchois Gas Development.

This agreement will help expedite the development of this value accretive gas project, for the benefit of all stakeholders.”

Chariot continues to deliver on its promises and this is a really key announcement for Anchois where drilling is upcoming in December. I expect them to flesh out the strategy with regards to Anchois and transitional power in its presentation to investors tonight to which I have been invited.

Predator Oil & Gas

Predator has its Report and Interim Financial Statements for the 6 months to 30 June 2021 this morning, the financial highlights include a loss from operations for the 6 months period of £929,089 (2020: full year Loss of £1,689,521).

Cash balance, at period end of £2,258,567 (2020 year end: £1,325,751) and a further £1,083,298 (US$1,500,000) held as restricted cash and £487,477 by way of a loan to FRAM Exploration Trinidad Ltd. for the investment in the Pilot CO2 EOR Project.

Fully-funded for Morocco drilling programme and Pilot CO2 EOR Trinidad, £3,285,000 (before expenses) raised through two over-subscribed Placings. 1,020,000 warrants issued exercisable at £0.105 before 12 March 2025, 600,000 warrants issued exercisable at £0.157 before 18 June 2025 and no debt.

During the period operational highlights included drilling MOU-1, first exploration well for 35 years in Guercif Basin, Morocco commences on schedule. The initial drilling confirms extension of gas-producing Rharb Basin into Guercif Basin with significant gas readings encountered whilst drilling.

Phase 3 of Trinidad Pilot CO2 EOR Project commenced and 469 metric tonnes of anthropogenic CO2 injected. Changes in CO2 injection parameters result in an accelerated reservoir pressure increase of up to 4 months ahead of pre-injection forecasts. Exclusivity over surplus liquid CO2 supply extended until 2023.

Submission made to Cork County Council Development Plan to highlight role of the Mag Mell FRSU Project in the context of security and diversification of Ireland’s energy supply.

Post reporting date MOU-1 completed for subsequent rigless testing, six zones selected for perforating within the pre-drill seismic amplitude “bright spot”. Re-correlation of the interval to be perforated supports MOU-1 having tested the western edge of the MOU-4 Prospect (CPR (2020) gross Best Estimate resources of 393 BCF). 

Environmental Impact Assessment commenced for step-out wells to MOU-1 within the MOU-4 Prospect. Compressed Natural Gas development option independently costed for profile of 10 mm cfgpd.

Operator of the Inniss-Trinity Incremental Production Services Contract unilaterally elects to shut down the CO2 EOR Pilot Project. Predator Oil & Gas Trinidad Ltd. considering its next steps under the terms of the Inniss-Trinity Well Participation Agreement.

£1,300,000 (before expenses) raised through an over-subscribed Placing.

Lonny Baumgardner appointed as Chief Operating Officer and Ronald Pilbeam steps down from the Board.

Paul Griffiths, Chief Executive of Predator, commented:
“Despite the recent “demonisation” of certain parts of the upstream and downstream Energy Sector, gas has a vital role to play in ensuring a stable Energy Transition and reducing the volatility in the energy markets that is leading to unprecedented spikes in the cost of energy for consumers. We are focussed on developing our gas asset in Morocco as a replacement for carbon-intensive imported fuel oil and coal.

In Ireland gas is important for restoring confidence in securing gas supplies that do not ultimately become wholly dependent on the Interconnector with the UK. In Trinidad we retain the ability to offer commercial CO2 sequestration which at present cannot be offered by renewable energy. Pragmatism is therefore required during the Energy Transition and integrated practical solutions to achieve the common goal of reducing CO2 emissions. This has been a busy year so far for us in developing these goals whilst maintaining a commercial perspective and we look forward to further progress over the next 12 months”.

Predator offers an interesting and diverse play within the energy market but clearly the focus is on Morocco where further drilling is expected in coming months. Management confidence there is high and with any discovery of gas coming very close to industrial markets which offer high prices and low fiscal terms would be very favourable for the company.

Hunting

A Q3 trading update from Hunting today, during Q3 2021 the Group has generated a broadly break-even EBITDA result given the ongoing subdued trading conditions. The Group continues to report a strong cash position of c.$84.3m, before lease liabilities, as at 30 September 2021.

Hunting Titan’s performance continues to strengthen as US onshore completions activity maintains its growth profile. The segment has traded comfortably ahead of management’s expectations throughout 2021 as activity levels within the key shale basins have continued to accelerate as the year has progressed. Our pricing increases announced in September 2021 have also held with clients, as activity continues to stabilise. The Group’s Subsea business units continue to see steady demand for its products, with growing interest from clients operating in Brazil.

The Group’s North America segment has been impacted by Hurricane Ida, with operations in Louisiana ceasing for between two to three weeks. Management’s efforts have been focused on providing essential supplies to our employees in the region, with nearly every member of staff being impacted by the hurricane. The Group’s operating sites were for the most part unaffected by the hurricane, however, operations were curtailed due to a displaced workforce and a lack of electricity throughout the area following the storm.

Management anticipate that activity levels in the Gulf of Mexico will remain subdued for the majority of Q4. Elsewhere across the Group, trading within the EMEA and Asia Pacific segments remains challenging, given the general market conditions and the reluctance of operators to increase activity as COVID-19 concerns compound an anaemic drilling response, despite higher commodity prices being recorded.

The Group has also progressed discussions on a new Asset Based Lending facility, which will replace our existing $160 million revolving credit facility. Subject to the successful completion of these negotiations, the new credit arrangements will provide Hunting with access to a facility of up to $200 million, which will materially increase the Group’s liquidity and borrowing capacity, enabling our businesses to meet the anticipated industry recovery.

Inventory levels at the end of the quarter were c.$266.3m, reflecting continued strong capital discipline. On 29 October 2021, the Group will pay the previously announced 2021 interim dividend of 4.0 cents per share, which will absorb c.$6.4m cash.

Jim Johnson, Chief Executive of Hunting, commented:
“Global energy markets continue to strengthen as demand recovers from the effects of COVID-19. Oil and natural gas prices have reached levels last seen in 2014.  The combination of production discipline from OPEC+ and the capital discipline being exercised by US onshore producers have helped restore the supply demand balance, with the near term outlook tipping towards an under supplied market and demand pushing future commodity prices even higher. As a result, the macro economic outlook continues to improve.  However, during the quarter, we faced weather and sporadic COVID-19 disruptions that weighed on both operating efficiencies and activity levels. Hurricane Ida took several operations in Louisiana offline for three weeks and disrupted our customers’ offshore activities in the Gulf of Mexico. COVID-19 continues to disrupt our operations, and continues to create supply chain disruptions that have impacted global supply chain networks. Despite the impact of these extraordinary events, we are encouraged by the strengthening fundamentals in the energy sector. The recent IEA forecast for demand for oil and natural gas further underscores our belief that we are in the early stages of a strong, multi-year recovery that, although slow and steady in Q3 and likely Q4, will accelerate in 2022. 

“Whilst our focus continues to be on improving operational efficiencies and profitable growth within our core product portfolio, we continue to pursue adjacent investments in technologies that are within our defined core competencies of metallurgy and precision manufacturing.  Our investment in Cumberland Additive, during the quarter is the latest example of that strategy.  With that investment, Hunting is partnering with an exciting business which provides innovative manufacturing solutions to customers. All of our main business groups are planning synergistic initiatives with Cumberland to commence in the coming months. To expand our geographic footprint, Hunting is also developing its plans in India, with a closer business partnership with Jindal SAW being pursued to enable the Group to access the high growth Indian OCTG and accessories manufacturing market.

“In summary, management now anticipate the Group’s EBITDA result for the 2021 full year will be broadly breakeven due to a combination of the above factors. However, the initiatives we have undertaken while the market was depressed by the impact of the pandemic have positioned the company well for the recovery that is beginning to manifest itself.”

The extensive nature of Jim Johnson’s comment above cover almost everything I can add, obviously Covid and the hurricanes, especially Ida have had an adverse impact in recent weeks. Without them they might have had a pretty good quarter but the outlook for 2022 seems pretty bullish to me. 

The shares which are almost back to the y/y lows, at this rate offer significant value, clearly these companies often quieten down after Thanksgiving but I think that this is pretty much in the price.

KeyFacts Energy Industry Directory: Malcy's Blog