WTI $114.67 -40c, Brent $115.6 -$2.00 (August), Diff -$93c, -$5.67, USNG $8.15 -58c, UKNG 166.0p -26.0p, TTF €87.555 -€6.145

Oil price

With Brent July expiring and WTI catching up from the holiday oil looks even more mad than usual. There are many conflicting issues, firstly the month end window dressing which ahead of the expiry saw the differential between WTI and Brent crater.

Secondly the price crashed yesterday after an influential oil journalist on the Wall Street Journal came out with a story that suggested that Opec were going to revisit the deal with Russia and go it alone. Oil fell by around $4 as the market thought that with Russia exempt, the rest of the cartel would pump like mad and create weakness. The trouble is that Opec can’t all increase their quotas and under the agreement any increase should be shared, the only way of doing it would be for the Saudis and UAE to make up the difference which won’t happen. (The Saudis have 1m b/d+ up their thawbs but only want that for a special occasion)

So tomorrow the Opec+ technical meeting starts first and followed immediately afterwards by the Ministerial Meeting which in recent months has not taken long. However good the WSJ journo is I’m not sure that they would make this decision and certainly not now, with Sleepy Joe visiting the Middle East this month.

As I mentioned yesterday the Chinese are relaxing the Covid regulations and Shanghai is opening up today. Believe nothing except that their vaccine is inefficient at best and this may happen again. Also the EU deal again mentioned yesterday is one typical of the bureaucrats over there and is hardly worth the paper it is not yet written on.

Bottom line? Underlying non-Opec supply isn’t sufficient to provide the market with enough oil, the USA ain’t supplying it, Iran aren’t talking the right language at the moment and Sleepy Joe’s efforts in Venezuela have yet to come to fruition.

IOG

IOG has provided an operational update.

On 23 May, the Company announced that Saturn Banks production had been shut in by Bacton terminal operator Perenco UK (PUK) due to a drainage system deficiency in the terminal condensate stabilisation unit’s (CSU) two recycle compressors. The Company announced that the shut-in was expected to last for approximately a week before a phased return to production could begin.

On 31 May, following a PUK modification to one of the CSU’s compressors, Saturn Banks production was duly restored at an initial level of approximately 30 mmscf/d. As previously indicated, modification of the second compressor is expected to take approximately one further week. This will then enable Saturn Banks production to be gradually restored to its prior stabilised levels of 55-65 mmscf/d over the following weeks. This is expected to be a gradual process to manage the high levels of liquids currently being worked through the Saturn Banks Pipeline System.

Andrew Hockey, CEO of IOG, commented:
“IOG, Perenco and ODE Asset Management have collaborated well to facilitate rapid execution of the PUK terminal modification and allow our production to be resumed at 30 mmscf/d. We look forward to a phased build up to double that level as fast as technically feasible over the coming weeks.”

No surprises here, following the RNS of the 23rd May the initial modifications have been made and the first restoration of production is under way. All being well the build up will continue in the next few weeks and IOG will return to the profitable production that is now resuming. 

Hurricane Energy

Hurricane has updated on its activities in the Greater Warwick Area (“GWA”). 

As announced on 28 April 2022, the GWA Joint Venture has reassessed its understanding of the area, evaluating both the basement and the Mesozoic potential of the JV’s licences and has considered all options for further appraisal and routes to possible development.

Hurricane has determined that further appraisal and development costs to reach an economic development on the Warwick discovery within the remaining licence term is not feasible for the Company. Further to discussions with the Company’s JV partner, Spirit Energy, the GWA JV has decided to relinquish the P2294 licence area. This is in addition to the previously announced decision to relinquish the Lincoln P1368(S) licence sub area.

The carrying value of the P2294 asset in the Company’s accounts of c.$4.1 million will be impaired.  This impairment will be an accounting charge only and will not have any cash impact.

Antony Maris, CEO of Hurricane, commented:
“We have made this decision deploying the rigorous screening criteria we bring to all opportunities in terms of determining the most appropriate allocation of our capital to deliver the best value for shareholders. There is no reasonable expectation that the P2294 licence could generate any near-term cash realisation, thus voluntarily relinquishing the licence at this time allows the Company to focus its time and financial resources on alternative and more attractive opportunities.

Following the recent May lifting we have updated our cash forecast such that if oil prices remain over $90/bbl we now forecast to have over $70 million of net free cash(1) post bond repayment.  As such we are looking to utilise this cash to generate the best return for shareholders at an acceptable level of risk.”

Much as this pains me, having followed Hurricane for so long, it is pretty inevitable and the GWA is no more. Ironically the state that HUR is in now is actually very strong, the cash at the end of July has gone up by  some $10m to $70m and that is done at $90 Brent, with current prices it will of course be much higher still. 

With my calculations the extra, say $15m than they expected, is worth some 3.5p per share and the tax losses that I understand are worth at least 6p a share. Even if you don’t use the tax losses Hurricane is throwing off cash at a phenomenal rate, forget about the windfall tax the company will generate around $200m of cash to shareholders in the next 12 months which more than covers the entire market cap and in some eyes puts the P/E at just 1X. Hurricane looks like a very attractive beast right now…

Jadestone Energy

Jadestone has announce that it is committing to Net Zero Scope 1 and 2 greenhouse gas (“GHG”) emissions from its operated assets by 2040.

Paul Blakeley, President and CEO commented:
“Today, we are announcing a firm commitment to achieve Net Zero Scope 1 and Scope 2 GHG emissions from our operated assets by 2040.  Our Net Zero target underscores the principle that sustainability is a key value in Jadestone’s business.

 We recognise that action is needed to arrest the impact of rising temperatures as a result of human activities and that the upstream oil & gas industry has an important role to play in the energy transition. We support the view that the world’s energy mix must diversify towards a low-carbon future, but oil and gas will continue to play a role in providing essential energy until the low-carbon energy system is sufficiently developed.

We believe that our existing corporate strategy is fit for this energy transition, as we are focused on maximising the life of existing fields through performance optimisation and selective investment, whilst further diversifying into gas which, over time, will increase its weighting in our portfolio. We are not explorers, and so are committed to avoiding the life-cycle emissions associated with opening new geological basins and greenfield developments – complementing a key finding of the IEA’s report on Net Zero Emissions by 2050.  While the upstream GHG emissions intensity of maturing assets may be relatively high, under Jadestone’s ownership, we plan to improve the environmental performance of acquired assets so they can continue to operate with a reduced GHG footprint.  We will work to support these claims with clear quantifiable evidence, across key areas of impact.”

Perfectly sensible stuff this and just what I would expect from a top management like that at Jadestone. Any other company with results due on Monday I would express some cynicism that this policy would get lost in the figures but not Jadestone… 

Tullow Oil/Capricorn Energy

Tullow Oil PLC – Recommended All-Share Combination of Tullow Oil PLC and Capricorn Energy PLC

• Merger of equals creating a leading African energy company with a material and diversified asset base and a portfolio of investment opportunities delivering visible production growth.
• Capricorn Shareholders to receive 3.8068 New Tullow Shares for each Capricorn Share held, with Capricorn Shareholders to own 47% and Tullow Shareholders to own 53% of the Combined Group on Completion.
• Delivers a Combined Group with robust cash generation and a resilient balance sheet, realising pre-tax net cash cost synergies of $50 million per annum.
• Establishes the basis for a sustainable shareholder returns programme, with a base annual dividend of $60 million.
• Commitment to reducing emissions from within its operating assets, targeting net zero Scope 1 and Scope 2 emissions by 2030, and continuing a proven track record of safe, low-cost operations.
• Positions the Combined Group to play a leading role in the African energy sector.

Summary

The boards of directors of Tullow Oil and Capricorn Energy PLC are pleased to announce that they have reached agreement on the terms of a recommended all-share combination of Tullow and Capricorn to create the Combined Group.

It is intended that the Combination will be implemented by means of a Court-sanctioned scheme of arrangement under Part 26 of the Companies Act, where Tullow will acquire all of the issued and to be issued Capricorn Shares.

Under the terms of the Combination, each Capricorn Shareholder will be entitled to receive:

• for each Capricorn Share: 3.8068 New Tullow Shares

On completion of the Combination, Capricorn Shareholders will hold approximately 47 per cent. of the Combined Group and Tullow Shareholders will hold approximately 53 per cent. of the Combined Group (based on the fully diluted share capital of Capricorn and the fully diluted share capital of Tullow, in each case as at the date of this Announcement).

Compelling strategic and financial rationale

The Boards of Tullow and Capricorn believe the Combination has compelling strategic, operational and financial rationale, with the ability to deliver substantial benefits to shareholders, host nations and other stakeholders. The Combination represents a unique opportunity to create a leading African energy company, listed in London, with the financial flexibility and human resource capability to access and accelerate near-term organic growth, add new reserves and resources cost-effectively, generate significant future returns for shareholders, and pursue further consolidation.  The Combined Group is committed to building a sustainable future through responsible oil and gas development, in close partnership and collaboration with joint venture partners and host governments.

The Boards of Tullow and Capricorn believe this Combination:

(a)  Creates a leading African energy company with a material and diversified asset base and a portfolio of investment opportunities delivering visible production growth.

• The Combined Group provides shareholders with a diversified pan-African upstream portfolio underpinned by low-cost producing assets, with a deep portfolio of incremental high return investment opportunities in Ghana, Egypt, Gabon and Côte d’Ivoire.
• Capricorn’s Egypt portfolio provides significant opportunity to deliver self-funded growth production via infill drilling and low-cost exploration to sustain the resource base over time, whilst championing electrification and decarbonisation initiatives.
• The major resource development project in Kenya provides additional growth and value creation optionality.
• The substantial prospective resource base in Guyana and Mauritania provides material potential upside with limited capital exposure.
• Pro forma reserves and resources of 343mmboe and 696mmboe with 2021A production of 96kboe/d positions the Combined Group as one of the largest, listed independent African focused energy companies today.

(b)  Delivers a Combined Group with robust cash generation and a resilient balance sheet and realises meaningful cost synergies.

• The Combined Group will have a resilient balance sheet, with pro forma 2021A leverage of 1.5x and $1.8bn of liquidity. Expected leverage of <1x at year end 2022 with rapid future deleveraging anticipated.
• The Combined Group is expected to realise pre-tax net cash cost savings of $50 million on an annual run-rate basis by the second anniversary of the completion of the Combination through the reduction of duplicate costs across Board, Corporate and Group operational and technical functions and administrative functions including consolidation of office space and rationalisation of IT spend.

(c)  Establishes a sustainable capital return programme for shareholders underpinned by robust cash generation.

• Stable, low-cost production delivering forecast cumulative pre-financing free cash flows of $2.4 billion over the 2022-2025 period at a flat nominal Brent price of $75/bbl.

Visible and robust cash generation, cost savings, a strengthened balance sheet and disciplined capital allocation create a platform for sustainable shareholder returns through a fixed plus variable returns framework:

• Base annual dividend of $60 million, with additional returns driven by a disciplined, value-driven capital allocation framework.
• Tullow currently has no distributable reserves and is therefore currently unable to pay dividends or make other distributions to shareholders. The Tullow Board intends to address this issue by taking such steps, which may include a capital restructuring of the Tullow Group or (as the case may be) the Combined Group and/or the upstreaming of dividends/distributions from other members of the Tullow Group or (as the case may be) the Combined Group, as may be required to achieve the dividend policy outlined above.

(d)  Creates a stronger, more resilient business with a deep commitment to environmental stewardship, social investment, development of local content and our national workforces.

• The Combined Group is committed to achieving net zero Scope 1 and 2 emissions by 2030. This is planned to be achieved through comprehensive emissions reduction programmes underway in Ghana, Gabon, Côte d’Ivoire and Egypt and by offsetting hard to abate emissions through company-run nature-based solutions.
• The Combined Group will be an important supplier of gas in Egypt and in Ghana – supporting the industrial development in these countries.

(e)  Positions the Combined Group to play a leading role in the African energy sector.

(f)   Commits to environmental, social and corporate governance standards, established stakeholder relationships, alongside a proven track record of safe, low-cost operations and a strong balance sheet.

The Combined Group

The board of directors and management of the Combined Group will comprise a mixture of individuals from Tullow and Capricorn, drawing upon the best expertise and talent of both companies to deliver value for the Combined Group’s shareholders and partners.  Upon completion of the Combination, it is intended that:

• Phuthuma Nhleko, currently Chair of Tullow, will become Chair of the board of the Combined Group;
• Nicoletta Giadrossi, currently Chair of Capricorn, will become Senior Independent Director of the Combined Group;
• Rahul Dhir, CEO of Tullow, will become CEO of the Combined Group;
• James Smith, CFO of Capricorn, will become CFO of the Combined Group.

The Board of the Combined Group will include a further 5 Non-executive Directors drawn from both companies, with 2 to be current Tullow Non-executive Directors and 3 to be current Capricorn Non-executive Directors.  The Board composition as outlined will be finalised by agreement amongst the parties at Completion.  The Board of the Combined Group is likely to evolve over time, to ensure a balance of skills and diversity including meaningful representation of the geographies in which the Combined Group will operate.

After almost 11 years as CEO of Capricorn, Simon Thomson will step down as CEO on Completion and will become Chair of the Integration Steering Committee to help with the integration of the two companies.

It is intended that, following completion of the Combination, the headquarters of the Combined Group will be at Tullow’s existing offices in London and it is intended that the Combined Group will also retain premises in Edinburgh and through the application of a flexible work policy enable employees to operate from both premises. The Combined Group will comply with any obligations to inform and consult with employees and their representatives in respect of these intentions.

Financial benefits and effects of the Combination

The Tullow Board is confident that as a direct result of the Combination, the Combined Group will generate meaningful cost synergies and create additional shareholder value. The Tullow Board, having reviewed and analysed the potential cost synergies of the Combination, and taking into account the factors it can influence, believes the Combination will result in $50 million of pre-tax net cash cost synergies on an annual run-rate basis by the second anniversary of the completion of the Combination.

The Tullow Board expects approximately 71% of these anticipated quantified net cash cost  synergies to be achieved by the end of the first twelve month period following completion of the Combination.

The Tullow Board estimates that realisation of these net cash cost synergies will give rise to one-off costs of approximately $45 million incurred in the two years post-completion of the Combination. The Tullow Board has considered potential areas of dis-synergy and these were determined to be immaterial for the analysis.

These anticipated net cash cost synergies will accrue as a direct result of the Combination and would not be achieved on a standalone basis.

As of the date of this Announcement, Capricorn has suspended its previously announced $200 million share buyback programme (other than in respect of the $25 million tranche announced on 7 April 2022, which is being conducted by JP Morgan Securities PLC on a non-discretionary basis and will end no later than 6 July 2022).

Commenting on the Combination, Simon Thomson, Chief Executive Officer of Capricorn said:
“The combination of our businesses will create a leading African energy company, with significant scale and opportunities for growth. Our two companies share a track record and continued vision of responsible energy production to support the economic and social development of our host communities. This combination will allow the two companies to accelerate investment in new opportunities across the continent, while retaining a resilient balance sheet and delivering attractive returns to shareholders.”

Commenting on the Combination, Rahul Dhir, Chief Executive Officer of Tullow said:
“Our two companies are a perfect fit and this combination draws on the proud heritage of both Tullow and Capricorn to create a leading African energy company. With renewed focus and ambition, the Combined Group will have the financial flexibility to accelerate organic growth and pursue further opportunities as they arise, while creating value for shareholders and host countries alike. Together, we are committed to building a better future through responsible energy development.”

At first glance I can see no good reason for this merger, apart maybe from making the combined entity cashed up and ready to pay-out as other E&P companies have been doing and Tullow has not, due to its debt. But that debt is there for a reason and its recent history has been one calamity after another so hitching up to multi-millionaire Capricorn must have been what attracted them…

The combination may appeal to some but the combined portfolios would not be what you would create if you had a blank sheet of paper and it looks like Capricorn shareholders do worst out of it. After all they were getting very decent returns of the cash pile and had quite an interesting Egyptian deal that they were only just getting to grips with. Also, Tullow claim the key Chairman and CEO slots as Simon Thomson bows out, he will be missed, at least by me…

The con call suggested low costs and high margins after the synergies but there don’t appear to be many that Capricorn shareholders would have already got for themselves. Edinburgh loses an important and historically heavyweight corporate and will be the poorer for that, just leaving a mound of stones… As for recent track record that is also somewhat marginal, better for Capricorn again as Tullow have much to clear up still, for example the much delayed, money starved exploration programme in Guyana, other partners here will hope that this does not delay even further that spend even using someone elses money. 

Gulfsands Petroleum

I commented on GPX yesterday and my presentation ended up looking somewhat odd in the formatting, here is a better way of looking at it, I hope!

Gulfsands has released an RNS Announcing publication of the 2021 Annual Report and AGM Notice are now published on the Gulfsands website.

https://www.gulfsands.com/2021-annual-report-and-notice-of-annual-general-meeting/

As previously reported, they have cleaned up their last remaining legacy assets in Colombia and the Group’s Core Assets and Focus remains the Block 26 Assets in North east Syria which remains in force majeure due to EU Sanctions.  Highlights in respect of those assets include:

The Quality of the Block 26 Assets Confirmed by Independent Review, updated in 2021

• Confirmed by Competent Persons Report undertaken by Independent Consulting Firm Oilfield Production Consultants, originally in 2019 and updated annually to ensure no material changes.
• +20 years resource life and potential to produce over 50,000 boepd from existing discoveries.
• Prospective portfolio takes the potential production of the field above 100,000 boepd.
• 2C Contingent Resources in Yousefieh, Khurbet East and Al Khairat fields (2P Reserves if it were not for force majeure) as at 31 December 2021 of 76.4 million boe (net to Gulfsands). This is a decrease in 2C resources compared to 80.1 million boe in the 2020 Annual Report, as a result of production during 2021.
  Combined unrisked, mid-case Prospective Resource of 546 million boe & risked, Prospective Resources of 134 million boe (both net to Gulfsands).
• Combined unrisked, mid-case Prospective Resource of 546 million boe & risked, Prospective Resources of 134 million boe (both net to Gulfsands).
• Economic Evaluations undertaken as part of the OPC reviews indicate a central range of EMV of Block 26 (Prospective and Contingent Resources), of $1 billion to $1.5 billion, prior to taking into account above-ground risks.

Re-entry Planning Continues at Pace

• CPR work included preparation, review and validation of a Full Field Development Plan of the Yousefieh, Khurbet East and Al Khairat fields, which is ready to implement when circumstances allow.
• CPR confirmed nine drill-ready prospects which could be targeted during an intensive drilling programme when circumstances allow.
• Potential development plans, as reviewed and confirmed by the CPR, illustrate production levels of around 50,000 boepd from existing discoveries and over 100,000 boepd from a full block development incorporating potential exploration upside.
• Regional technical, finance and administrative team remains in place to implement re-entry plan as soon as viable.
• Strategic Advisory Board established to assist Board and Management with complex political, legal and strategic aspects of re-entry.

Gulfsands issued their Annual Report on  Monday. I know that a lot of work has been done by the Gulfsands team to clean up its portfolio and it appears that this is now complete.  All non-core assets have been exited, with the elimination of related liabilities and, with the support of their Major Shareholders, they not only remain funded in the medium term but also have a clear pathway to equitising the debt they have provided.  This means that Gulfsands have avoided the threat of a debt overhang that so many small-cap oil and gas companies suffer from.

This clean balance sheet means that Gulfsands now has a solid platform to press ahead with their ambitions in Syria, when circumstances allow, and in the broader MENA region.

Their world class Block 26 in Syria remains Gulfsands’ core asset and it is clear that the team are ready to return when sanctions lift and that they are doing all they can to try and work with the international community to be part of an acceptable solution that can help get that country back on its feet.  As I previously reported (on 29th April 2022), that the oil and gas industry is the only industry that has the potential scale to make such an impact, generating billions of dollars (according to that interview with Gulfsands Managing Director John Bell, up to $20 billion per annum is possible) which, if properly channelled, can make a significant impact on the lives of ordinary Syrians.  Not only that but it can reduce reliance on aid and build self-sufficiency.

I have also noticed that Gulfsands has clearly invested significant time and efforts into its approach to ESG, with particular accent on sustainability,  something I applaud with all the companies I follow. I wish Gulfsands well in building upon this solid platform and those shareholders that are still invested in the Group are along for an exciting journey ahead.

KeyFacts Energy Industry Directory: Malcy's Blog