Today’s Oil and Gas Update – Hurricane Energy; Pharos Energy and Nostra Terra Oil and Gase

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

Market Update: Friday 11 September 2020

Hurricane Energy (LON:HUR): Interim results, significant downgrade at Lancaster

Pharos Energy (LON:PHAR): Two-year extension granted at TGT field, Vietnam

Nostra Terra Oil and Gas (AIM:NTOG): Accretive acquisition confirmed, potentially more to come

Energy Prices

Brent Oil US$40.1/bbl vs US$40.4/bbl yesterday

WTI Oil US$37.5/bbl vs US$37.8bbl yesterday

Natural Gas US$2.30/mmbtu vs US$2.39/mmbtu yesterday

Oil Price News

In a welcome boost to Libya’s decimated oil industry, it has been reported that US oil company Hess may attempt to load a cargo of crude oil from Libya’s Es Sider port this week

If successful, the loading represents a glimmer of hope for oil-rich Libya who has had its oil production brought down to just 100,000bopd amid port closures as a result of the civil unrest, from 1.2MMbopd at the start of the year

Libya’s National Oil Company said earlier this week that a warship had been staying at the Ras Lanuf oil terminal, adding that its oil terminals remain out of service, having not exported any oil since January.

Libya’s National Oil Company declared a force majeure on Libya’s oil ports–including Es Sider, after the LNA blockaded the ports.

A closure of all the oil ports in the Gulf of Sirte resulted in a wave of blackouts in the country, as condensate reservoirs filled up, leaving no room to house the associated gas that is produced alongside the condensate

Libya’s oil industry is also battling a wave of Covid-19 infections, with Monday seeing the highest number of new cases since the start of the pandemic

Elsewhere, the surge in COVID-19 cases in many parts of the world, the end of a weak peak-summer demand season in the Northern Hemisphere, and the cessation of record crude purchases by Chinese refiners in the second quarter have created a chain of events that has crude oil futures falling significantly

Currently Brent crude is down to US$40.1/bbl while West Texas Intermediate futures are down a considerable 7% to US$37.5/bbl

The sell-off comes after news over the weekend that Saudi Arabia was cutting crude prices for October shipments to both Asian and US refining customers

This marks the first time since early in 2020 that the petro state has lowered prices for crude shipments to the US, putting its selling price to Asia back below the country’s target benchmark as Chinese shipments weaken after months of stockpiling

It’s the second consecutive month of reductions for barrels to the region and the first month in six that US refiners will see a cut

Gas Price News

Natural gas prices moved lower dropping more than 3% as milder weather began to spread across the United States

Storms continue to brew in the Atlantic Ocean and now the Gulf of Mexico

Tropical storms Paulette and Rene are moving east, northeast, but are not expected to hit or impact any natural gas installation in the US

There is a third disturbance coming off the coast of Africa, which has a 50% chance of turning into a tropical cyclone in the next 48-hours according to NOAA

There is also a storm in the Gulf that has a 20% change of becoming a tropical cyclone

Company News

Hurricane Energy (LON:HUR): Interim results, significant downgrade at Lancaster

Share price: 3.2p, Market Cap: 64m

Hurricane has issued its interim result to 30 June 2020 which confirms the operational challenges the Company is facing at its flagship Lancaster project.

Hurricane recorded revenues of US$81.9m during the first half of 2020 from seven liftings of Lancaster crude, compared to US$22.5m in H1 2019 but significantly lower than the US$147.5m generated during H2 2019.

Despite the significant volatility in oil prices during the period, the Company generated US$21.9m (H1 2019: US$6.1m) of operating cash flow due to low cash production costs of US$18.2/bbl (H1 2019: US$24.0/bbl).

Loss after tax for the period was US$307.7m (H1 2019: Loss of $21.4 million), including a US$238.9m (H1 2019: US$nil) relating to the impairment of the Lancaster field and a US$34m credit (H1 2019 : US$23.5m charge) in relation to the fair value of the Convertible Bond.

The Company held net free cash of US$106.2m on the balance sheet at the end of June (31 December 2019: US$133.6m).

However net debt has grown materially to US$123.8m at 30 June 2020 (31 December 2019: US$96.4m).

Operationally, the Lancaster EPS production averaged 14,600bopd for both H1 2020 and the year to date ended August 2020.

Prior to the recent scheduled shutdown, field production of c.15,000bopd was from the 205/21a-6 well alone on natural flow, with the 205/21a-7z well currently shut in to manage reservoir voidage and pressure decline.

In light of the revised interpretation of the OWC, the area of the P1368 Central licence outside the determined Lancaster field area is being voluntarily relinquished and, following relinquishment, the Company will be released of its obligation to drill the Lancaster commitment well.

As expected, the Company has confirmed that the Lancaster field is more complex than previously thought.

Preliminary analysis suggests that rather than being primarily a basement reservoir, Lancaster has important oil-bearing sandstones onlapping the basement flanks, which may contain significant volumes of oil.

Further work is required in order to understand their impact on current reservoir performance and their ultimate potential.

The Lancaster oil water contact (“OWC”) is now estimated to be at 1,330m TVDSS, compared to the range of 1,597-1,678m TVDSS in the Company’s 2017 CPR.

This shallower OWC is consistent with the observed earlier and higher water production, and more rapid reservoir pressure decline, than was originally anticipated.

Reflecting these new technical interpretations, the Company’s unaudited estimate of recovery from the two existing Lancaster EPS wells assuming no further activity has been reduced to 16.0MMbbls from 37.3MMbbls. Considering oil produced to end August 2020, remaining 2P reserves at 1 September 2020 are estimated at 9.4MMbbls (subject to economic limit test).

Hurricane’s near-term priority is therefore to evaluate options to mitigate forecast production declines at Lancaster by water injection or other means, and to assess the potential of the sandstones which onlap the Lancaster basement.

This work is expected to conclude before the end of 2020, in addition to ongoing work on Lincoln with the objective of considering possible pathways towards development.

Our take: Shareholders had been bracing for a significant downgrade at Lancaster, however many will be surprised as to the size announced today in our view. The Company has recognised a US$239m impairment and a significant downgrade in the economic resource potential of the field. Disappointingly, the average water cut at Lancaster has increased from 17% in Q1 2020 to 21% in the last quarter. That, in addition to a lack of well activity in the West of Shetlands, suggests to us that the prolonged negative sentiment will continue to weigh on HUR’s shares this year. A declining production profile coupled with a growing net debt position will also come as an unwelcome concern for investors in our view.

Pharos Energy (LON:PHAR): Two-year extension granted at TGT field, Vietnam

Share price: 14.8p, Market Cap: GBP59m

Pharos has confirmed that the Company has received approval from the Prime Minister of Vietnam for the TGT Full Field Development Plan.

This represents the last stage of the required process and follows the recent approval of an initial two-year licence extension to 7 December 2026, as announced in the TGT field licence extension and RBL update in August.

Ordering of long-lead items can now proceed to enable the commencement of the drilling of six firm development wells contained in the FFDP in Q4 2021 as planned.

This infill-drilling programme is targeted to increase gross production at TGT from the present ~15,000boepd to around 20,000boepd in 2022.

Our take: The formal grant of a two-year extension at TGT will come as welcome news to the Company and its shareholders, allowing Pharos to embark on its FFDP with the goal of increasing production in Vietnam. With the two-year extension Pharos will look to increase the tenor of the RBL ahead of further TGT drilling and enhanced oil recovery over time.

Nostra Terra Oil and Gas (AIM:NTOG): Accretive acquisition confirmed, potentially more to come

Share price: 0.35p, Market Cap: GBP1m

Following the initial announcement from last week, Nostra Terra has confirmed the acquisition of a 100% working interest in the Caballos Creek Oil Field, a producing oil field in Atascosa County Texas for US$425k from Oro Resources.

The primary assets are shallow, vertical oil wells producing 30bopd gross (22bopd net of royalties) with further development potential.

The associated proven reserves (producing and non-producing) have a PV10 of US$1m with estimated remaining economic life of the wells ranging from 16 years to 32 years per well, per third-party engineering report performed by NSAI.

The acquisition represents a 25% increase in the Company’s daily production, from year end 2019, financed entirely without dilution.

As at 30 June 2020, NSAI estimated proved remaining reserves of 92,100boe gross, 69,300boe net.

For the year ended 31 December 2019, the assets generated turnover of US$350k and profit-before-tax of c.US$220k.

The acquisition includes 5 producing wells, 2 injectors, and 1 shut-in producer located on 745 acres in Atascosa County Texas.

The entire acreage is HBP, hence the leases will continue in perpetuity due to the existing producing wells.

The primary producing formations are the Miocene Hockley, Navarro, and the Olmos.

The previous owner made a significant investment in the current infrastructure (estimated over $500,000), providing room for further development.

The Company estimates that the assets will reach payback of the acquisition cost in less than 2 years (based on current production rate and US$40 oil price).

In order to finance the acquisition, Nostra Terra has arranged non-dilutive financing from an unconnected third-party in the amount of $430,000.

The financing is a loan note carrying an 8% coupon, 10-month term, with a US$30k redemption fee.

The Loan Note has limited recourse only to the assets in Atascosa County.

The Company plans to move the financing for the acquired assets over to its existing Senior Facility prior to the Loan Note being due.

Our take: This appears to be an immediately accretive and strategic acquisition by Nosta Terra, adding low risk, producing assets, with an average life over 20 years, immediately adding net cash flow to the Company, all with non-dilutive financing. The Company will now look to further build out its portfolio with further accretive acquisitions, targeting assets with proven reserves (primarily producing), with a view to increasing cash flow immediately. As demonstrated by this acquisition, the Company is able to evaluate assets and close transactions quickly, using debt and equity.

Research – Oil & Gas

Sam Wahab – 0203 470 0473

[email protected]

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