WTI $75.93 +36c, Brent $78.93 +33c, Diff -$3.00 -29c, NG $4.16 +8c, UKNG 240.0p -27.82p

Oil price

This week is surely the most unrepresentative of them all especially in crude oil, known as the isn’t week as it isn’t Christmas and isn’t New Year volumes are low and often senior traders are at home with the punch bowl. It will get worse tomorrow and particularly on Friday when the week, month, quarter and year ends so there are no points for keeping a high risk book over the holiday.

Omicron is breaking records, in the US the last seven days a record 257/- cases were discovered but so far it doesn’t seem to be causing too much grief.

Sound Energy

Sound has announced the entry of binding conditional agreements in respect of a US$18 million Phase 1 Tendrara LNG Development loan note financing and that, with the other remaining conditions precedent to the Phase 1 LNG gas sales agreement announced by the Company on 29 July 2021  now waived by the parties, the LNG GSA is now unconditional.

In satisfying the final material condition precedent to the LNG GSA, the Company has entered into agreements with Afriquia Gaz S.A. (the “Lender”) in respect of an US$18 million 6% secured loan note maturing in December 2033.

The Loan, which is secured on the issued share capital of Sound Energy Meridja Limited, will be available to be drawn down by the Company in whole or in tranches, at the Company’s election, over a three year period commencing on 24 December 2021 and will be applied towards the  development of the Tendrara Production Concession.

Interest on the drawn principal of the Loan of a fixed 6% per annum will be payable quarterly but deferred and capitalised semi annually until the second anniversary of entry of the Loan agreements. Thereafter, principal and deferred interest will be repayable annually in equal instalments commencing 7 years from the date of execution of the Loan agreements.

Conditions precedent to the Loan include a project contract with Italfluid Geoenergy S.r.l (Italfluid) for the provision of a gas processing and liquefaction facility relating to the Phase 1 development being effective and evidence being provided to the Lender of the issue by the Tendrara joint venture partners of “Notice to Proceed” to Italfluid.

Graham Lyon, Sound Energy’s Executive Chairman, commented:
“We are delighted to have executed all loan note documentation which ensures that Sound Energy will be fully funded for its share of Phase 1 development capital. This is a key milestone for the Company and we will now move to issuing the Notice to Proceed to Italfluid and drawing down initial funding from the Afriquia Gaz loan in order to proceed with execution of the Phase 1 development.”

This is another excellent achievement by Sound and its team who have spent 2021 flat to the boards putting the Phase 1 development into play which it now is. The terms of the loan are excellent and also includes a project contract with Italfluid Geoenergy for the provision of a gas processing and liquefaction facility relating to the Phase 1 development. 

Sound shareholders should be delighted and whilst the shares have doubled since the lows three times this year, 2.5p is not a genuine reflection of the changes for the good that the management team has put into place. 

IOG

IOG has provided an update on Southwark drilling operations. The first Southwark development well was expected to spud by the weekend of 18-19 December, following the repair of the Noble Hans Deul rig. Having initially anticipated a minor delay, owing to repeated technical issues with the underwater Remotely Operated Vehicle (ROV), it has not yet been possible to safely spud the well. A fully functioning ROV is required for surveying the rig’s spud cans (leg footings) and ensuring the rig is correctly aligned, as an essential prerequisite for drilling to proceed.

A second, higher specification ROV, together with spares and additional personnel, has been mobilised to the rig but has as yet been unable to complete the necessary surveys owing to further technical issues. Repair operations are underway to rectify both units and an alternative vessel-based solution is being put in place should it be required. It is currently expected that the well will be spudded in the coming days and the Company reiterates its guidance for Southwark first gas in mid-2022.

Andrew Hockey, CEO of IOG, commented: 
“After the extensive efforts to get the rig successfully repaired and remobilised to Southwark, it is very frustrating to have not yet spudded the first Southwark development well. However, as always, safety is paramount and we are actively pursuing alternative solutions with the relevant contractors. With spud now expected in the coming days, Southwark first gas remains planned for mid-2022.”

Whilst CEO Hockey is right about the frustration of repeated technical issues but offshore drilling was ever thus and  safety is always the ultimate issue. Having said that IOG has moved the Phase 1 with considerable speed and investors will remember not so far back when partners, financing and the building bricks for the project had not even started. 

Accordingly the fact that first gas from Phase 1 is imminent is a great achievement and with such a high current gas price they will be rewarded for the good and timely work that they have done.

Diversified Energy Company

Diversified Energy is pleased to announce the closing of its sale of certain predominantly undeveloped Haynesville acreage in Texas as first announced on 12 November 2021. Diversified and Oaktree Capital Management, L.P. divested their working interests in the acreage for a total cash consideration of approximately $67.4 million (net $34.6 million to Diversified) after closing price adjustments. A second closing under the transaction of up to approximately $4 million (net $2 million to Diversified) may be conducted at a date in the near future.

The sale of acreage represented approximately 1,700 net Mcf per day of production as of November, 2021, or just 2% of the production that Diversified originally acquired as part of the Tanos Energy Holdings III LLC  deal in August 2021. Consistent with previous acquisitions, Diversified ascribed no value to the undeveloped Haynesville leasehold though this divestiture effectively reduces the Company’s investment in the Assets Diversified acquired from Tanos by 29% to $83 million from the original $118 million, net of purchase price adjustments. The Company’s sale of the Assets reflects its proven ability to purchase predominantly PDP (proved, developed, producing) assets at low multiples and drive further value through the strategic monetisation of undeveloped upside potential and non-strategic assets.

Rusty Hutson, Jr., CEO of the Company, commented:
“Monetizing a portion of the undeveloped Haynesville acreage we acquired in the Tanos transaction marks a strong finish to an exceptional year for Diversified and boosts our returns from that acquisition by reducing our purchase price by nearly 30%. Using the nearly $35 million of proceeds to reduce the borrowings on our revolving credit facility enhances our financial flexibility as we evaluate other value-accretive opportunities. We enter 2022 with momentum as we integrate our Central Region assets, progress our comprehensive ESG initiatives and remain ever focused on opportunities to expand our portfolio of producing assets.”

The DEC story has been one of incredible success and this nuance of monetizing parts of acquisitions proves the ingenuity of the company and its financial backers. So, I would expect more of the same as we head into 2022, financially flexible and with the ability to pay significant dividends from its highly robust cash flow and continued strict controls on expenditure.

I expect further forays into the M&A market to enable significant growth but it must not be forgotten that it also boasts the ESG policies as detailed at the recent CMD in Houston which was highly impressive leaving DEC to be at the forefront of low carbon development and that near-term goal to reduce 2020-level methane emissions by 30% by 2026 on the way to net-zero by 2040.

Pharos Energy

Pharos has announced that, on Sunday 26 December 2021, the Egyptian Parliament approved the Third Amendment to its El Fayum Concession Agreement  which encourages investment into this Concession to increase production rates for the mutual benefits of Egypt and Pharos and its partners.  

The Third Amendment will now go to the desk of the Egyptian President Abdel Fattah El-Sisi for ratification. Signature of the Third Amendment by the Minister of Petroleum and Mineral Resources, the Egyptian General Petroleum Corporation (EGPC) and Pharos is expected shortly thereafter.

The approved terms, which includes an increase of the cost recovery petroleum percentage and a three-and-a-half-year extension to the exploration licence term, was approved by the EGPC Main Board in March 2021 and by the Egyptian Cabinet in October 2021.

The improved fiscal terms are backdated to November 2020, increasing the contractor share of revenue from c.42% to c.50% and lowering the development project break-even while in full cost recovery mode.  

Signature of the El Fayum Third Amendment is one of the conditions precedent to the farm-out of a 55% share of Pharos’ interest in the El Fayum Concession and the North Beni Suef Concession to IPR, as announced on 15 September 2021.

This speaks for itself as Pharos get close to the closure of this deal and the inevitable growth that it will provide in cash flow so that Pharos can really kick on in Vietnam. 

United Oil & Gas

United has announced an update on the drilling of the Al Jahraa-13 development  well (“AJ-13”) in the Abu Sennan licence, onshore Egypt.

Highlights included , AJ-13 development well encountered 17.5m of net pay in the oil-bearing Upper and Lower Bahariya reservoir targets and the discovery of commercial net pay in AJ-13 makes it the seventh successful well in a row at Abu Sennan since United acquired its interest in the licence.

The AJ-13 well, which is a follow up to the successful Al Jahraa-8 well, safely reached a TD of 3,840m, several days ahead of schedule and under-budget. The well has been logged and interpreted to have encountered 17.5m of net oil pay across the Upper and Lower Bahariya reservoir targets, in line with the range of pre-drill expectations.

The well will be tested and completed in the coming days and will then be brought immediately onstream through the existing Al Jahraa facilities, adding additional production and revenue for the Company.

The AJ-13 well is the fifth and final well in the Abu Sennan 2021 drilling programme before the 2022 drilling programme begins. United holds a 22% working interest in the Licence, which is operated by Kuwait Energy Egypt.

United’s Chief Executive Officer, Brian Larkin commented:
“We have had outstanding results with our drilling campaign in 2021 with five out of five successful wells drilled at Abu Sennan this year. All of the wells have been brought into production quickly, generating cash flow for the Company. The 2021 drilling campaign has further de-risked the exploration potential at Abu Sennan and the development wells have provided further valuable data for future exploration drill targets two of which are included in the 2022 programme; ASF-1X and AST-1X.

This is a great way to finish 2021, and we look forward to commencing the 2022 drilling campaign, with a number of development and exploration wells planned.”

UOG have had a good deal of success this year at Abu Sennan and with the extension of the Jamaican asset the long term excitement is still very much in place.

KeyFacts Energy Industry Directory: Malcy's Blog