WTI $39.92 -$1.35, Brent (October) $43.25 -84c, Diff -$3.33 +85c, NG $1.83 -10c

Oil price

Patience is a virtue, virtue is a grace, Grace is a little girl who didn’t wash her face, goes the old line and one by which Opec+ should be bearing in mind at the moment. With the virus numbers still on the increase and the contango making it easier for traders to deal in the future there isn’t much upside for oil at the moment.

That doesnt mean that patience won’t be rewarded of course, just that while demand numbers are slightly flaky and China has stopped buying for its Strategic Reserve there might be a little wobble. Interestingly, looking at the US stats this week its been a mixed bag but by no means a disaster. Independent sources suggest that despite the awful economic data from the US it still registered oil demand of over 19m last week so at least that can be relied on.

Add that to the second half demand rise and the concomitant draw in stocks, Opec+ should realise that upping production too early would more than rock the boat it might tip the boat over as the song goes…

Savannah Energy

Savannah report FY 2019 results today along with an update for H1 2020 as well as an outlook for FY 2020, such have been the Covid delays. To be honest the 2019 numbers aren’t all that meaningful but worth detailing for the record.

FY 2019 revenue was $17.8m mainly gas at $3.64/Mscf but with $0.9m of liquids at $64/bbl. This gives adjusted EBITDA of $1.8m but a more realistic pro-forma number of $91.6m. ‘Contract liabilities (or “Deferred Revenue”) recognised in the Statement of Financial Position and related to invoiced sales in 2019 of US$13.3m, Pro-forma FY 2019 Deferred Revenue of US$59.8m; Loss after tax of US$96.8m (2018: US$24.6m) Net cash inflow of US$44.5m (2018: Outflow US$13.0m); Year-end cash balance of US$48.1m (2018: US$1.8m); Year-end net debt of US$484.0m (2018: US$13.1m); and Total Group assets amounted to US$1,145.0m at year-end (2018: US$266.0m)’.

As for H1 2020, in Nigeria cash collections of $82.1m ($55.3m)  average daily production (89% gas) increased by 18% to 21.3 Kboepd (18.1 Kboepd) including an increase from the Uquo gas field of 22% to 113.5 MMscfpd (92.7 MMscfpd) which included an all-time Nigeria Assets gas production record of 177 MMscfpd on 30th May.

Accugas’ customers achieved an all-time record peak contribution of 11.5% of Nigeria’s electricity generation or 486MW on 23 May 2020, with the contributed electricity being exclusively generated from Accugas sales gas; As announced on 31 January 2020, Accugas entered into the first new gas sales agreement for the business in over five years with First Independent Power Limited (“FIPL”), an affiliate company of the Sahara Group, for the provision of gas to the FIPL Afam power plant (“FIPL Afam”). Accugas is in the process of working with FIPL to validate the third-party infrastructure required to enable the commencement of gas sales under this contract;

In June 2020, Accugas signed a term sheet with a significant new industrial gas sales customer, a subsidiary of a well-respected international company, for an initial quantity of up to 5 MMscfpd of gas for an initial five-year period; and in addition, Accugas is progressing a project which could see the addition of multiple new gas sales customers located within an industrial hub area in close proximity to its existing pipeline network.

In Niger, an updated CPR was published in May  certifying 35MMstb of Gross 2C Resources for the R3 East discoveries with an additional 90MMstb of Gross Unrisked Prospective Resources (Best case) within tie-in distance to the planned R3 East facilities, and a 2C case economic break-even oil price estimated at US$26/bbl;

As previously announced, an agreement was reached with the Niger Ministry of Petroleum to combine the R4 area with the R1/R2 PSC Area into a new R1/R2/R4 PSC, extending the licences for a further 10 years and retaining the full acreage position previously covered by the R1/R2 PSC and the R3/R4 PSC, and that the R3 PSC area will continue as a stand-alone PSC area. Ratification of these changes is subject to Council of Minister approval and payment of the associated fee;

Plans for delivering the R3 East development continue to progress with the intention to commence installation of an Early Production System (“EPS”) within the next 18 months, market conditions and financing permitting; and significant further potential on the Savannah PSC areas remains, with 146 further potential exploration targets having been identified for future drilling consideration.

This means that their H1 financial update and guidance is as follows; Group cash balance of US$54m as at 30 June 2020; Total Revenues of greater than US$200m; Gross Production of 21 Kboepd to 23 Kboepd; Group Administrative and Operating Costs of US$68m to US$72m; Group Depreciation, Depletion and Amortisation of US$25m fixed for infrastructure assets plus US$2.6/boe, i.e. US$43m – US$45m based on production guidance; and Capital expenditure of up to US$45m.

(Total Revenues refers to the total amount of invoiced sales expected to be recorded in relation to the FY 2020 accounting period. This number is seen by management as more accurately reflecting the underlying cash generation capacity of the business as opposed to Revenue recognised in the Income Statement. A detailed explanation of the impact of IFRS 15 revenue recognition rules on our Income Statement is provided in the Financial Review section.)

i.e. when customers eventually take the gas that they have already paid for, it’s called “make up gas” and at that point the deferred revenue unwinds from the balance sheet and goes to the P&L. I get the impression that this ‘take or pay’ accounting treatment is quite unusual in the London market and, therefore, not well understood.

Andrew Knott, CEO of Savannah Energy, said:

“2019 was a pivotal year for our Company. We completed the Nigerian Asset acquisition in November 2019, which transformed Savannah into a highly cash flow generative full cycle energy company. Since acquiring the Nigerian Assets, we have made significant strides in terms of operational and financial progress, as seen with the strong production figures and robust cash collections in H1 2020, further strengthened our leadership team and stand poised to capitalise on the numerous opportunities that our asset portfolio in Nigeria and Niger presents us with. 

This is an exciting time for our business. In Nigeria, via Accugas, Savannah currently supplies more than 10% of Nigeria’s power sector.  We generated strong cash collections in-country, of US$82.1m in H1 2020 and remain on track to sign further gas sales agreements in 2020. In Niger, we aim to implement an EPS on R3 East for near term first production and cash flow within the next 18 months, subject to market conditions and financing, and consider future drilling in our bank of 146 exploration targets over the course of the coming years.”

I have deliberately quoted chunks of the numbers from the statement and indeed Andrew Knott’s comments verbatim, this is because having waited a while for an update and investors will want to see the red meat and less from me. Having said that the company is in the process of putting together a substantial business in Africa which wasn’t built in a day. The shares have done nothing for some months ahead of this announcement, it shows that the market wanted some meat to consume and this RNS provided that. A market cap of c.£75m for this business is by any standards way too low and I would expect it to significantly increase before long.

IOG

An operational update this morning from IOG this morning which goes into significant detail, something typical of the company as it furnishes investors with chapter and verse of current activities, and demonstrates that much is going on behind the scenes as they progress Phase 1.

The fabrication of the Southwark and Blythe platforms are well underway with work seemingly progressing well. This includes cellar, sub-cellar and mezzanine decks on Southwark as well as jacket fabrication ‘commencing shortly’. Expect a formal platform contract award ‘imminently’. SURF work is also well underway, with pipeline welding being completed or in progress at present.

In terms of drilling, Petrofac is assisting the company in the competitive selection process for the jack-up rig for the five well Phase 1 programme. ‘Several’ awards have been made for the typical variety of drilling services as they gear up for what will be a significant drilling campaign next year.

Onshore, at Bacton (BGT) the Thames Reception Facilities (TRF) engineering and procurement work is ‘accelerating’ with existing kit being cleaned out for reuse and tie-in works to be done during a scheduled BGT shutdown later this year.

Finally in subsurface and licences, IOG say that seismic reprocessing across the Vulcan Satellites licences is on track for completion by Q4 2020 as is reprocessing at Harvey and Redwell with Goddard and Abbeydale expected to complete in 1H 2021 – which should inform development plans for all these assets. The company also seems hopeful of a positive outcome on its ‘targeted’ applications in the 32nd Round.

Andrew Hockey, CEO of IOG, commented:

“I am pleased to provide this operational update to keep our investors informed on Phase 1 progress and wider business development. Amid the challenges of Covid-19 and the wider macroeconomic environment, the IOG team and our contractors and suppliers continue to work hard across the board to safely and efficiently execute the four key project elements – Platforms, SURF, Drilling and Onshore – and bring Phase 1 into production in Q3 2021. This in turn will catalyse our further value creation strategy, adding on higher-return incremental investments to our established infrastructure and using cost efficiencies to strengthen cash flows.

To that end, we are also making good progress with the seismic reprocessing work to advance our subsurface interpretations of all pre-development assets in the IOG portfolio, including Harvey, Redwell, Nailsworth, Elland, Goddard and Abbeydale. If successful, the additional nearby discovered resources that we have specifically targeted in our 32nd Round applications could also create further portfolio upside.”

IOG are sticking to the knitting and delivering a huge amount of work ahead of becoming a substantial UK gas producer in Phase 1 in Q3 2021. This generous update gives significant detail in every nook and cranny and should be appreciated by the market. As Phase 1 gets ever closer to production surely investors will start to take more notice of the excellent current value in the shares.

Predator Oil & Gas

As predicted yesterday I managed to get a CEO interview with Paul Griffiths of Predator Oil & Gas and the link is here. It gives a good insight into Predator and also how management plans to develop the business over the next year or so in a low carbon world with less fossil fuel acceptance.

Core Finance CEO interview: Paul Griffiths of Predator Oil & Gas

KeyFacts Energy Industry Directory: Malcy's Blog