Today’s Oil & Gas Update – Union Jack Oil

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Oil & Gas Daily Flow

Non-Independent Research; Marketing & Sales Commentary – MiFID II exempt information – see disclaimer below

Market Update: Wednesday 26 August 2020 

Lekoil* (AIM:LEK): FY19 results, strong operational progression

Union Jack Oil* (AIM:UJO): Settlement proceeds received regarding PEDL253

Pharos Energy (LON:PHAR): 1H 2020 results, large impairment recognised

 

Energy Prices         

Brent Oil US$45.9/bbl vs US$45.3/bbl yesterday

WTI Oil US$45.9/bbl vs US$42.6bbl yesterday

Natural Gas US$2.49/mmbtu vs US$2.52/mmbtu yesterday

 

Oil Price News

Oil prices continue to hold well on reports that the API confirmed another draw in crude oil inventories of 4.524MMbbls for the week ending 21 August

This came in higher than a consensus draw of 3.694MMbbls

In the previous week, the API reported a draw in crude oil inventories of 4.264MMbbls, after analysts had predicted a draw of 2.670Mbbls

Oil prices have failed to gain any real traction over the past month, even with OPEC’s historic production cut and production declines in the US, on the back of grim forecasts of subdued future oil demand in the coming months

Oil production declines in the US held steady this week, still down from a high of 13.1MMbopd in March US oil production currently sits at 10.7MMbopd as of 14 August according to the EIA

This represents a 2.4MMbopd loss that lends aid to OPEC’s efforts to curb production to regain market balance

Gas Price News

Gas prices remain strong as tropical storm Marco and tropical storm Laura baring down on Loiusinana’s Port Author, approximately 45% of the natural gas in the Gulf of Mexico could be taken offline

Tropical Storm Laura is expected to be a Hurricane category 2, by the time it makes landfall during the middle of the week, which could create a significant impact

The weather is expected to be warmer than normal throughout west and southwest over the next two weeks which could generate additional cooling demand

 

Company News

Lekoil* (AIM:LEK): FY19 results, strong operational progression

Share price: 2.6p, Market Cap: £14m

LEK’s FY19 results saw a 13.7% drop in net revenues to US$42.0m (FY18: US$48.7m) despite a small average increase in production tempered by prevailing commodity pricing.

This led to FY19 a loss of US$12.0m (FY18: loss of US$7.8m) and ended the period with cash and bank balances of US$2.7m (FY18: US$10.4m).

Total outstanding debt financing net of cash was US$16.5m (FY18: US$10.1m).

In March 2019, documentation for the partial refinancing and re-denomination of the outstanding Naira Debt Facilities, totalling N3.1bn, into one new US$8.6m facility with FBNQ MB was completed.

The new facility priced at LIBOR + 10%, had a six-month principal repayment moratorium effective June 2018 followed by quarterly principal repayments.

As part of the transaction, the tenor on facilities with FBNQ MB (including the existing USD facility, amounting to US$5.0m) was extended to 30 June 2021 from 30 June 2019.

This partial refinancing and re-denomination transaction was undertaken to reduce the high financing costs of local currency debt.

Further debt capital of US$11.5m was raised in October 2019 to fund Licence extension fees on OPL 310 and OPL 276 and to fully repay the outstanding balance on Shell Western Supply and Trading Limited Prepayment Facility.

The facility has a maturity of four years and is repayable quarterly with a margin of LIBOR + 10%.

Earlier this month, it was announced that the existing three interest-bearing term bank loans were restructured into one secured loan with FBNQuest Merchant Bank.

The restructuring provided an extension of loan tenor with new term loan maturity date of 31 March 2024 representing an increase on the average maturity of the three existing bank loans by 15 months.

A cash saving of over US$3.0m over the next 15 months was also delivered from the new sculpted loan principal repayment schedule compared to the previous loan structure.

Operationally, the Company reported average FY19 production volumes of 2,122bopd net (FY18: 2,076bopd net).

The year saw a deliberate effort to reduce the cost of sales to achieve a lower cost of production at the Otakikpo marginal field which remains the sole revenue source.

In 2019, underlying cost of sales were reduced by 22%, and the Company has confirmed it intends to progress the work programmes in OPL 310 and OPL 276 to bring them to commercial production.

In terms of outlook at Otakikpo, Phase Two plans underway, subject to the securing of funding, for a five to seven well drilling programme, targeting the increase of production to around gross 15,000 to 20,000bopd (6,000-8,000bopd net to LEK).

Operations are also progressing at OPL 310 which contains the significant Ogo discovery.

LEK and its partners have advanced plans for the Ogo appraisal drilling programme with well locations selected. Funding discussions currently underway with industry partners.

The Company also executed a legally binding Cost and Revenue Sharing Agreement to progress the appraisal and development programme activities at the Ogo discovery and conversion to an Oil Mining Licence (OML).

In addition, the OPL 310 Licence was extended to 2 August 2022, following the payment of an extension fee by LEK.

Our take: Shareholders will be encouraged by the preservation of a stable production base at Otakikpo which underpins the Company’s advancement of the drilling programmes at both Otakikpo and Ogo in OPL 310. The next two years could therefore prove to be transformative and provide key catalysts as LEK progresses its multiple appraisal campaigns whilst simultaneously growing its production base.

*SP Angel acts as Broker to Lekoil

Union Jack Oil* (AIM:UJO): Settlement proceeds received regarding PEDL253

Share price: 0.28p, Market Cap: £42.7m

STRONG BUY – 0.82p TP 

Union Jack high highlighted the positive announcement made today by Egdon Resources, the Operator in of PEDL253 which includes the Biscathorpe project.

Egdon has confirmed that it has received proceeds from the confidential settlement from Humber Oil & Gas.

The joint parties to PEDL253 have therefore resolved the dispute arising under the JOA and can now focus on future development of the licence.

Union Jack holds a 22% interest in PEDL253, located within the proven hydrocarbon fairway of the Humber Basin, on trend with the Saltfleetby gas field and the Keddington oil field which produces from the Upper Carboniferous Westphalian aged reservoir sandstones.

Union Jack and its partners intend to further appraise the Biscathorpe play following the Biscathorpe-1 well which recorded elevated gas readings and oil shows supported by calculated oil saturations in the Dinantian Carbonate over a 99m interval indicating proximity to an effective petroleum system.

Our take: With so much activity currently taking place at West Newton and Wressle, it can be easy to forget the significant upside potential at Biscathorpe which is estimated to hold substantial oil accumulations in the Dinantian Carbonate. Having today’s settlement in place allows the partners to focus on the next stage of appraisal for this key strategic asset in our view. We therefore reiterate our STRONG BUY rating and 0.82p TP.

*SP Angel acts as Nominated Advisor and Broker to Union Jack Oil

 

Pharos Energy (LON:PHAR): 1H 2020 results, large impairment recognised

Share price: 14.5p, Market Cap: £58m

PHAR’s interims show revenues for 1H 2020 fell by 12.2% to US$80.1m (1H 2019: US$91.8m).

Nevertheless, hedging positions have provided a solid protection in the period with a gain of US$21.1m (1H 2019: loss of US$0.9m)

The Company has confirmed that approximately 35% of PHAR’s forecast production until September 2021, is hedged at an average price of US$44.8/bbl

The Company reported that cash operating costs were US$11.13/bbl (1H 2019: US$9.41/bbl), leading to cash generated from operations of US$55.9m (1H 2019: US$55.2m).

Cash balances as at 30 June 2020 were US$37.8m (1H 2019: US$66.3m), whilst net debt was reduced significantly as at 30 June 2020 to US$36.1m (1H 2019: US$33.7m)

The Company reported a net loss of US$268.3m (1H 2019: US$19.0m loss), including non-cash impairment of US$265.5m (after tax), primarily oil price related.

Despite the challenging backdrop PHAR continues to manage its operations carefully with working interest 1H 2020 production 12,093boepd net (1H 2019: 12,541), in line with production guidance.

In Vietnam, 1H 2020 production 6,114boepd net (1H 2019: 7,279boepd net), and the TGT field licence extension for two years has been formally granted by the Ministry of Industry and Trade in Vietnam.

In addition, the CNV field licence extension for two years has also been formally granted by the Ministry of Industry and Trade in Vietnam.

The 2019 two-well TGT drilling campaign completed in 1H 2020 on time and under budget, and the upgrade to Gas Turbine compressors completed ahead of schedule in Q1 2020.

The Company’s operations in Egypt continue to perform well with 1H 2020 production averaging 5,979bopd (2 April – 30 June 2019: 5,262bopd)

The three drilling-rig programme in Q1 2020 increased production in April, production averaged 6,396bopd and production peaked at 7,009bopd on the 23 April 2020.

Production operations in Egypt have continued, focusing on well intervention and water-flood enhancement following scaling back of drilling activity.

Reductions agreed on both El Fayum oil price discount (US$1/bbl reduction) and refinery handling charge (US$0.80/bbl reduction), initially for six months while technical review continues.

Our take: Whilst today’s update will not make for pretty reading for Pharos shareholders, we are encouraged by the successful bedding in of the company’s new interests in Egypt and the ambitious revised forward plan slated for 2020. However, production guidance in Vietnam and potentially Egypt will come as a disappointment in our view, as will the corresponding impact on cash flows in 2020 which has led to the dividend being postponed.

Research – Oil & Gas

Sam Wahab – 0203 470 0473

[email protected]

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Buy – Expected return >15%

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