WTI -$37.63 -$55.90, Brent $25.57 -$2.51, Diff -$63.20 +$53.39, NG $1.92 +17c

Oil price- Super Contango at work…

What a fuss eh, yesterdays price action whilst not forecast by anyone was really only an extension of what happens when a contract expires and delivery has to take place. If you own a contract of WTI crude which settles at Cushing, Oklahoma you know that sometime before expiry you have to find a home for it or cut a deal with the person on the other side of the contract. As such you are between a rock and a very hard place, memo to investors, this is likely to happen with the June contract which is already falling, yesterday I quoted it as $25.03, today as I write it is $14.00….

Just a few threads, I have cooled down since watching the news last night when even so-called professionals were getting the wrong end of the stick. Sure this has started by massive demand destruction caused by the COVID-19 virus, as I keep saying if you can’t drive the car or fly the aeroplane then there is no demand from refiners until you can, so that’s your first yardstick. This feeds through directly to the US oil patch, many years of riding the high oil price created by the Saudis and the Russians is now coming home to roost, if I thought that the US oil production was falling fast a week or two ago then things just got a whole lot worse. Banks have no choice to shut up shop, even running these companies for cash won’t succeed, leading to inevitable bankruptcies and soon.

Almost finally on answering sundry questions it should be stating the b obvious to say that there is no market for crudes that can’t travel, viz US crude is to a large extent landlocked, take a look at the map, Oklahoma has no coastline and Cushing is getting awash, up 9% last week with only around 75m barrels of space. Seaborne crudes such as Brent have not suffered this technical situation, they can settle anywhere but are still suffering the demand evaporation in the economy.

This brings us to whether we can do anything about the supply situation, with the 12th April Opec+ deal not starting until at least May 1st and the next meeting June 10th it looks bleak but I am hearing whispers that Aramco has already started to cut back. It won’t do much and it probably won’t help the WTI June contract but combined with some world economies slowly going back to work it might help, a bit just a bit and it is clutching at straws…

Finally and I really don’t want to go here but investors have been going to ETF’s, presumably to try and find the bottom of the oil market, as I understand it and I am happy to stand corrected, those funds holding expiring contracts will have to roll over to the next one, effectively selling the cheap one and buying a dear one. Selling low and buying high was never top of the recommended  investment policies I ever read but the retail punting the oil price seems to be doing this. It is a bit like playing 3 card brag and keeping closed, you can stay in the game as long as you have the ante…As I understand it USO alone has at least 25% of the currently open contract, have I got your attention yet? Bottom line is that the next six weeks are likely to remain highly precarious unless the Saudis announce an early production cutback or there is that coordinated buying in for SPR’s which is probably more clutching at straws. Plan B, find out who is buying all this crude at the moment for he or she will make out like a  bandit if they have deep pockets.

PetroTal Corp

A Bretana oilfield update from PetroTal this morning and operationally it proves that the company is producing yet another upstream success. The 6H well came on line on April 10th and is now producing 5,750 b/d in line with management expectations and again is on time and below budget. In the first quarter the Bretana field reached a new record production of 9,688 b/d and PTAL completed commissioning of the enhanced central production facilities, bring overall oil production capacity to between 16,000 bopd and 18,000 bopd.

To conserve cash the company is postponing  drilling the water well due right now and delaying the completion of the CPF-2 facilities, thus reducing the 2020 capex budget by 33% to $66m, finally it will postpone drilling the 7H well until ‘at least July 2020 from its original May slot.

As at 31/3 the company had $7.3m in cash before March oil sales of $7.5m and with a favourable, positive netback situation as detailed by the company. As announced on March 10, 2020, the Company expected to achieve operational netbacks of $11 per barrel with its benchmark Brent priced at $30 per barrel.  To date, the Company has achieved netbacks of $12 per barrel and continues to engage with all its contractors to further optimise its cost structure. PetroTal will now look to achieve netbacks of $13 per barrel, equivalent to 43% at $30 Brent.

So, PetroTal remains flexible and is in discussions regarding credit facilities based on reserves valuation at the year end or the CPF. This will strengthen PetroTal’s liquidity and allow it to continue to progress the majority of its development plans, and it has additional flexibility to further reduce its cost structure as needed. In this respect it is totally understandable that the company suspend the dividend and the board will evaluate on a semi-annual basis.

I continue to be impressed by PetroTal, even in these difficult times operationally they are in very good nick and the high margin nature of the business is strongly defensive compared to its peers. The management is first rate and has managed to conduct a modest restructuring whilst  keeping the company profitable. It has a good stock of wells in the portfolio and can manage the business around whatever the market chooses to throw at it in the long term.

Diversified Gas & Oil

My error, somehow the RNS the other day slipped the net and thanks to an astute blog reader who reminded me to comment on the move of the share listing. The company has confirmed its intention to apply for admission to the Premium listed segment of London’s Main Market and will produce a prospectus on or around the 11th of May with the commencement of trading on the 18th of May. At this time there will be a simultaneous cancellation of the AIM quote subject of course to the necessary approvals by the FCA and LSE.

Overall this move should improve liquidity and give access to a selection of international indices, give greater exposure to institutional investors (although I have always been impressed by its current blue chip list) and up the profile to new UK and international investors. From the Main market, access to better suited and enlarged funding platforms with the ability to use its shares as currency to support the Company’s long-term growth strategy through accretive acquisition of long-life, low decline cash-producing assets is a significant benefit.

CEO Rusty Hutson Jr commented “we believe the move to the Main Market is the natural next step in the Company’s evolution and reflects DGO’s progressive growth and strategic ambitions. We believe our focus on low-risk cash flow and unwavering commitment to shareholder returns in the form of reliable dividends sets us apart from our peers and will resonate with a broader investor audience as we continue to prudently grow the business and expand our track record of value creation on the Main Market.”

As I pointed out in the interview I gave yesterday to Total Market Solutions, DGO remains a clear favourite of mine so I am retaining the link here, either way I think that this move by the company forges a further path for growth and good fortune for the shareholders.

Total Market Solutions interview: Malcy Talks Oil & Gas XIX