Oil price, Challenger, Sound, Scirocco, Helium One. And finally…

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WTI $70.91 +62c, Brent $72.69 +17c, Diff -$1.78 -45c, NG $3.30 +15c, UKNG 69.37p +0.48p

Oil price

Oil was indeed up on the week and has started up this morning by around 60c. With the G7 meetings in beautiful Cornwall at the weekend and other high level meetings continuing this week at the  NATO summit, (Wednesday sees the Putin/Biden meeting in Geneva) and the Fed two day meeting starts tomorrow.

The IEA has done a volte face and is now worrying about supply later in the year, remember where and when you heard that first. The Baker Hughes rig count on Friday showed a rise overall of 5 units to 461 and up 6 in oil to 365. Whilst in the US it seems that Shell is considering selling a package of Permian Basin assets over around 250,000 acres for in the region of $10bn.

Challenger Energy Group

Challenger has provided an update on progress at the Saffron-2 appraisal well, currently being drilled at the Saffron project in the South-West Peninsula of Trinidad. The well is targeting the Middle and Lower Cruse reservoirs with an expectation (based upon the Saffron-1 discovery well) of production rates in the range of 200 – 300 bopd.

The Saffron-2 well is currently being drilled in the South-West Peninsula of Trinidad, as a twin well to the Saffron-1 well (i.e., drilled from the same well pad). Challenger Energy has a 100% operating interest in the well and the broader Saffron project. The target total depth of the Saffron-2 well is 4,557ft, with the well design comprising three sections:

The top section, to intersect and assess sands of the Upper Cruse and upper parts of the Middle Cruse (these being zones previously intersected and logged in the Saffron-1 well, and which since completion of the Saffron-1 well have been the source of consistent oil production from that well), the middle section, to intersect and assess deeper Middle Cruse sands (these being zones previously intersected in the Saffron-1 well, encountering hydrocarbons, but which were not able to be logged and produced from the Saffron-1 well), and the lower section, to intersect and assess the previously unproduced Lower Cruse sands (as with the middle section, these zones were intersected in the Saffron-1 well but were not able to be logged and produced from the Saffron-1 well).

The primary targets of interest are the Lower Cruse and deeper Middle Cruse sands. The budgeted total cost for the Saffron-2 well is $3 million, with an anticipated drill time in the range of 25-30 days. The Saffron-2 well was spud at 7:30pm on 23 May (Trinidad time), and as advised by the Company on 2 June 2021, the top section of Saffron-2 was safely completed to a depth of 1,593ft (at 17 1/2″), and successfully logged, cased and cemented.

Since then, the middle section of the Saffron-2 well has been safely and successfully drilled (at 12 1/4″) to a depth of 2,804ft, logged, cased and cemented. The well penetrated various Middle Cruse zones including hydrocarbons zones as prognosed pre-drill, and with drilling rates and impact on surrounding clays and mobile shales improved significantly from Saffron-1 owing to the use of synthetic-based muds, thus providing a robust technical validation for the use of these muds, and a solid foundation for drilling design in any future field development.

In aggregate, the Saffron-2 well is currently running approximately 6 days over time, owing to difficult work conditions occasioned by heavy rains and some limitations on personnel and equipment movements due to the prevailing COVID-19 restrictions. However, incremental costs from time delays are being made up through operational savings and efficiencies, and offset to some extent from a higher than anticipated rate-of-penetration.

The final section of the Saffron-2 well (at 8 1/2″) is currently being drilled out, to a final target depth of 4,557ft. This hole section will include the primary reservoir targets of interest in the Lower Cruse, which will be logged and (assuming positive results) sampled via MDT (a wireline formation testing tool). This process, which should be sufficient to provide an indication of the aggregate resource and production potential, is expected to be completed on or around 23th June 2021, which timeline remains consistent with an overall 30 day expected drill.

Thereafter (and assuming positive results), the well will be lined and readied for production testing. It is expected that the process of preparing for production testing (including perforation) will take 2-3 weeks, such that initial production could occur in around mid-July.

 Eytan Uliel, Chief Executive Officer, commented:

 “I am pleased to provide a further interim update on the drilling of the Saffron-2 well, where the middle section of the well has now been successfully drilled, logged, cased and cemented. As with the first section of the well, drilling has progressed in-line with pre-drill expectations, albeit slightly overtime due to severe weather and COVID-19 constraints impacting access to site. Technically, the results thus far are in-line with pre-drill expectation, with hydrocarbons now defined in both well sections to-date, as prognosed, and with initial petrophysical analysis of the top two sections of the well indicating formation quality and thickness consistent with Saffron-1.

Most significantly, in this stage of drilling the use of synthetic-based mud has worked as intended, enabling for faster and smoother drilling and protecting the well bore through mobile shale zones, thus representing a major advance in Challenger’s technical understanding as compared to the water-based mud used for the Saffron-1 well. Overall, we have set ourselves up well for the final stage of drilling, which will tell us what the extent of the resource in the primary Lower Cruse target is, and pave the way for putting the well on production. I look forward to advising further on completion of drilling.”

Challenger is wisely giving detailed analysis of the well all the way down and the results that we know about already would indicate reasonable grounds for optimism, lets wait for CEO Eytan Uliel to report to the market.

Sound Energy

Sound has announced that it has entered into a sale and purchase agreement with Schlumberger Holdings II Limited to acquire the entire issued share capital of Schlumberger Silk Route Services Limited (“SSRS”). The Group will have increased participating interests in in the Anoual and Greater Tendrara exploration permits in Eastern Morocco  by 27.5% to 75%, together with full control over its 75% participating interest in the Tendrara Concession.

 This accretive acquisition has been made on highly attractive terms, it positions Sound Energy to generate enhanced returns, cashflow and value as it moves forward the phased development of the TE-5 Horst. At the same time it significantly enhances discovered and undiscovered resource position and increases participating interest to 75% but will not impact the planned phased development strategy in East Morocco and underlines Sound Energy’s position as a leading gas developer in country.

 Sound Energy will remain fully funded for its increased 75% working interest of planned phase 1 Tendrara Concession capital investments required until first gas, subject to finalising funding arrangements previously announced with Afriquia Gaz, our strategic partner and a major participant in the Moroccan gas industry.

 SSRS holds a 27.5% participating interest in the Anoual and Greater Tendrara exploration permits in Eastern Morocco together with a 27.5% indirect interest in the Tendrara Concession through its contractual relationship with the Group. Following completion of the Acquisition, Sound Energy will control operated working interests of 75% in the Exploration Permits and in the Concession.

In consideration for the Acquisition, the Group shall make an initial payment of US$1 (one US dollar) to the Seller in cash on completion and may make future payments to the Seller pursuant to a Profit Sharing Deed (“PSD”). Under the principal terms of the PSD, the Group will pay to the Seller an amount equivalent to between 8% and 11% of total net profits (after costs, taxes and other applicable deductions) arising from the Concession over a period of 12 years from first commercial production from the Concession.

In the event of a cash disposal by the Company of part or the whole of the SSRS’s interest in the Exploration Permits on or before 28 February 2023, the Seller would be entitled to receive from Sound Energy 27.5% of the net cash proceeds related to the disposal of the SSRS Permit Interest, rising to 55% of proceeds related to the SSRS Permit Interest in the event of such a disposal occurring prior to 31 December 2021.

 The Acquisition is conditional upon the Seller taking the necessary steps (including settling all intercompany balances) on or before 5 September 2021 to sell the entire issued share capital of SSRS to Sound Energy on a cash-free, debt-free basis at completion. Upon completion of the Acquisition, Sound Energy will grant to the Seller a share charge over 100% of the share capital of Sound Energy Morocco East Limited, the Company’s wholly owned subsidiary, in connection with the PSD and the Exploration Permit Disposal Right. Under the terms of the PSD, there is a mechanism for reducing this share charge upon certain milestones having been met and also for replacing the share charge with an alternative security mechanism following the first payment arising from the PSD. As at 31 December 2020, SSRS had unaudited net assets of US$ 87.1 million and recorded a loss for the year before tax of US$ 0.2 million.

 

Pursuant to completion of the Acquisition, Sound Energy will control rights to an additional 104 billion cubic feet (Bcf) of certified2 2C Contingent Resources and acquire an additional 5.3 trillion cubic feet (Tcf) of unrisked exploration upside potential3 in TAGI features across the Anoual and Greater Tendrara exploration permits.

Commenting, Graham Lyon (Executive Chairman) said:

 “We are delighted to have increased our working interest in our principal assets in Eastern Morocco on highly attractive terms. This accretive transaction will, when completed, underline Sound Energy’s position as the leading gas developer in Morocco and position us to generate enhanced returns, cashflow and value as we move forward the phased development of the TE-5 Horst. The increased position on the licences significantly enhances our discovered and undiscovered resource position in Eastern Morocco as we continue to deliver on our phased development strategy. Importantly, upon securing the funding envisaged under the Heads of Terms previously entered into with Afriquia Gaz, the Company will remain fully funded for its increased 75% working interest of planned phase 1 Tendrara Concession capital investments required until planned first gas.

Sound appears to have been very smart indeed and has taken advantage of SLB wanting to change its world wide strategy  with regard to upstream investments and has stepped back into this asset on very good terms. They have an NPI structure and are funded to go ahead with the prospects of considerable upside, another piece of smart management by Graham Lyon and team. 

Scirocco Energy

Scirocco has announced a proposed investment into Energy Acquisitions Group Ltd (“EAG”), a specialist acquisition and operating vehicle in the sustainable energy sector. This investment of £1.2 million will be funded from current cash resources and signals the Company’s first investment as part of the Company’s revised strategy that targets opportunities within the energy transition in Europe. By creating a joint venture platform alongside EAG, will leverage EAG’s strong network and industry leading expertise to gain access to a series of already identified acquisition opportunities within the anaerobic digestion sector.

This initial investment will be used by EAG to acquire 100% of Greenan Generation Limited (“GGL”) and associated 0.5 MWe Anaerobic Digestion plant located in County Londonderry, Northern Ireland. Anaerobic digestion is a process that creates biogas, a renewable energy source that will help the UK deliver on its decarbonisation commitments.

This transaction signals a material change to Scirocco’s investment policy and as a result, it is conditional upon shareholder approval, which is to be sought at the Company’s AGM to be held on 9th July, notice of which is being separately announced this morning.

In the process of this transition  Scirocco proposes to invest £1.2m into EAG, a specialist acquisition and operating vehicle in the sustainable energy sector which will be value accretive investment and funded by cash on the balance sheet. 

Importantly for the future Scirocco and EAG will form a JV platform to execute initial transaction and jointly explore further opportunities, this is most important, going forward all Scirocco’s energy space investments will look like this. The company indicate that there is a potential pipeline of AD plants in the UK totalling c.£30m in value and thus part of the new strategy proposed by Scirocco in their hunt for acquisitions in the European energy market. 

Through this investment, EAG will acquire 100% of GGL and its 0.5MWe Anaerobic Digestion plant in Northern Ireland, GGL is a cash generative, operational AD plant which can be optimised to enhance EBITDA margins and free cash flow. As part of this transaction, Tom Reynolds and Muir Miller will join the board of EAG.

EAG is a UK incorporated private company focused on creating a portfolio of Anaerobic Digestion plants which meet a well-defined set of operational and financial criteria. EAG was formed by Chris Kerr, an engineer specialising in renewable energy, synthetic and biogas sectors with over 20 years’ experience, and as such creates a good partnership with Scirocco whereby he provides the deals whilst Scirocco the funding.

Tom Reynolds, CEO at Scirocco Energy comments:

“I am delighted to update shareholders with this transaction today as we start to implement the new strategy that Scirocco Energy announced last year. The Biogas market is growing rapidly and will be key for the UK’s delivery of its decarbonization strategy. The investment into EAG will provide a platform for further attractive investments in the Biogas sector, enabling us to focus on growing a cash generative asset base within a sustainable investment mandate.

While the initial investment and acquisition is relatively small, it meets all our investment criteria in terms of cash generation, upside potential and ability to deliver sustainable returns.  More importantly it provides us with an initial platform from which to pursue our ambitious growth strategy. Going forward, we intend to capitalize on the significant pipeline of opportunities in this sector working with the EAG team.  We also believe that the addition of activities which benefit the UK’s net zero target will make Scirocco’s investment proposition more attractive for investors due to the growing importance of ESG considerations.”

Chris Kerr, Managing Director, EAG added:

“The establishment of this JV will enable both parties to leverage our respective expertise and networks to capitalise on an ever-growing pipeline of opportunities presented by the AD market.  EAG has extensive experience and understanding of this market, and we bring an established network and pipeline of near-term opportunities. The joint venture with Scirocco Energy will provide us with the platform to access that investment to ensure that all of our projects achieve best in class status over the next 20 years, and help all stakeholders achieve their goals.

 Our specific sector experience means we are uniquely placed to ensure acquisitions are completed on compelling valuation metrics, and will be able to realise the upside value associated with these assets through optimisation and innovative operating techniques.

What is really exciting about the AD market is its unique ability to de-carbonise the challenging sectors in industry such as heating, transport and agriculture. We are seeing this already with John Lewis, ASDA and Royal Mail adopting the use of biomethane in their transport fleets, but many of the existing projects that will service this growing demand for corporate decarbonisation require investment and optimisation. There is a bright future ahead.”

We are now beginning to see how the future is going to pan out at Scirocco, it has taken a while cooking but it seems a really good way of putting together funding and experience in the sustainable space by using a platform using them both. I am confident that extremely patient Solo/Scirocco shareholders will find it both rewarding and ethically smart in a world where ESG will be mandatory.

Helium One Global

Helium One has announced the commencement of its exploration drilling programme at the Rukwa Project (100%) in Tanzania. Drilling has commenced at Tai; a ‘must drill’ three-way dip closure, upgraded by the Company’s recent 2D infill seismic.

This is a three well exploration programme targeting shallow trap structures to a maximum depth of 1200m and the exploration drilling includes micro gas chromatograph and mini mass spectrometer used to identify elevated levels of helium in mud and reportable as a helium show. Also, wireline logs to identify reservoir and seal units and to confirm pay zones in success case plus, a drill Stem Testing unit to attempt to flow helium gas samples to surface and each well will take circa one month to complete.

David Minchin, Chief Executive Officer, commented:

“We are very excited to have commenced exploration drilling, continuing the advancement of the world-class Rukwa project.  The exploration programme is the culmination of five years of dedicated work with three holes testing three different styles of trap.  Each well will take roughly one month to complete with lessons learnt from the first well applied to refine and de-risk drilling of subsequent wells.

“Establishing a drill programme in the midst of a global pandemic is not without challenges and we are thankful to all Mitchell Drilling and Helium One team for their hard work in bringing this project to fruition.

 “We look forward to announcing results of our first well at what is a potentially transformative time for the Company.”

And finally…

The Euro 2020 Championship is well under way now and Wales drew their first game 1-1 against Switzerland. Yesterday England beat Croatia 1-0  at Wembley and today Scotland are about to kick off against the Czech Republic. The Christian Eriksen heart attack on the field of play brought an unwelcome start to the game and the good news is that he is making a good recovery.

England lost the second test to the Black Caps, most England players should have them fitted before being taken to the gallows. England were a disgrace to their country in every part of the game. The Batters are shocking and none got out to a good ball, they are as thick as short plans as they never learn. The bowlers serve up canteen rubbish and most should be despatched with the batters. An absolute shambles whichever way you look at it.

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