WTI $42.61 -36c, Brent $45.10 +5c, Diff -$2.67 -17c, NG $2.63 -3c

Oil price

Oil rose about two bucks last month which is pretty good going given some bears were expecting supply increases and demand melt. As it happened Opec+ pretty much produced in line with quotas, indeed Iraq and Nigeria made good on promises to make up for previous cheating. Demand wasn’t too bad and although the reporting agencies mainly cut forecasts the market still expects stock draw down to increase as the year progresses.

Sundry stats include the rig count where overall units were unchanged with oil down 3 to 180 after the rise last week making a welcome tightening. Today’s retail gasoline numbers show another rise, at $2.222 per gallon it is up exactly 4 cents on the week, 4.6c on the month but still down 34.1c y/y. Finally the greenback remains weak and with the Euro and indeed sterling remaining strong oil benefits. We have moved contracts and the above price is for November Brent.

Finally as I always say around this time of the year it is now 41 years ago last weekend that I started in the Oil & Gas sector when I joined WoodMack in Edinburgh. I remain immensely grateful for the guys up there for helping start my career in the sector…

Genel Energy

Genel has announced that July 2020 payments from the KRG for oil sales have been received. Taq Taq was a net to Genel figure of $2.6m and at Tawke the company received a net $8.7m. Continuing payments from the KRG are encouraging and the shares rallied somewhat this morning.

Although the stock price has more than doubled from the April lows it is well off the top and looks to be back at the 50% retracement level which makes it very appealing on the chart. More importantly Genel has the balance sheet strength to invest in growth and maximise shareholder value, while still retaining sufficient strength to initiate a ‘material and sustainable dividend policy’. This policy leads to a current dividend yield of c.10% which is extremely attractive and justifies the management model of investment in its asset base whilst rewarding shareholders.

San Leon Energy

San Leon is to provide funding for the development of the Oza field in Nigeria via a funding model that gives it opportunity to provide a repayable loan at an attractive interest rate and with an additional significant equity kicker. This gives SLE the opportunity again to generate a meaningful return from repayments in the coming years as well as looking forward to a longer-term dividend return from the equity shareholding.

The starting point is subscription agreement with  Decklar (holder of the Risk  Service Agreement to the operator) for a $7.5m loan at 10% p.a. coupon as well as the opportunity for a 15% interest in the company. In addition the agreement allows San Leon to increase the loan notes by another $7.5m and the equity by another 15% to give them 30% of the equity in due course.

Put simply, this is another deal by which San Leon invests with limited risk into an older, marginal field albeit one with plenty of seismic and therefore upside. As it is onshore the wells are relatively cheap and have few if any issues commonly associated with offshore or semi-offshore in the country.

This deal will be decided as to commerciality pretty quickly, the first well will give the option to scale up the investment, following receipt of the result of the new drill proof-of-concept well after, say, c.90 days. Obviously the way the option is structured it would be possible for SLE to walk away if things don’t go according to plan. With wells producing 2,000-4,000 b/d it is possible that a 20,000 b/d total might not be ruled out for the investment.

So for a relatively modest outlay and very limited risk, San Leon has outlined another potential investment with high rewards. Returns should come from the coupon on the loan note but also from what might be a 30% investment at extraordinarily low outlay in Decklar. The shares have more than doubled from the lows but at 27p the shares still offer exceptional upside particularly when the management do deals like this.

Gulf Keystone Petroleum

GKP confirms that a payment of $7.8m net has been received from the KRG for Shaikan field crude sales in July 2020.

KeyFacts Energy Industry Directory: Malcy's Blog