WTI $66.09 +$2.26, Brent $69.36 +$2.62, Diff -$3.27 +36c, NG $2.70 -5c, UKNG 42.1p +2.16p
Virus numbers are falling very rapidly and importantly the USA is taking a leaf out of the UK’s book in terms of both jacking up the numbers as well as telling the story about the vaccine being 100% effective. Combine this with the shortfall from Opec+ and the oil price continues to rise in line with stock reductions as planned by the KSA.
Under this scenario the downside to the oil price is protected particularly with figures such as Chinese imports up 17.3% in February and virtually no change in the rig count meaning US production aint going up anytime soon. The era of drill baby drill is definitely over.
Add to all this some geo-political grief which in a tight market is way more hard-hitting, as the Saudi Ras Tanura facility came under attack by ballistic missiles and drones from Houthi rebels who took responsibility for the hits. With Biden changing the US stance in the Gulf and his bluff being called by Iran there is more to come from here.
Diversified Gas & Oil
Finals from DGOC this morning, December exit production was 103 MBoepd, some 8% more than the 2019 exit number of 95 MBoepd. This shows an exceptionally low corporate annual decline rate of ~7% including both conventional and unconventional wells. This means that DGO stands as the largest independent producer on the London Stock Exchange.
Hedged Adjusted EBITDA of $301 million (up 10% over $273 million in 2019) bolstered by hedge cash settlements of $145 million that significantly offset low natural gas prices. Indicative of the improved natural gas pricing outlook that creates a non-cash pre-tax mark-to-market hedge valuation loss of $239 million, the Group reported a net loss of $23 million in 2020 (2019: $99 million net income inclusive of a pre-tax non-cash mark-to-market hedge valuation gain of $20 million).
Impressive Adjusted Net Income of $175 million represents an 83% increase over prior year (2019: $96 million) and excludes the mark-to-market valuation change and other non-cash and non-recurring items. Adjusted Total Revenue (which includes $145 million of cash hedge settlements) of $553 million was 8% higher in 2020 vs 2019 ($512 million including $49 million of hedge cash settlements)
Total revenue (which excludes hedge settlements) of $409 million in 2020 vs. $462 million in 2019 due to lower commodity prices in 2020 partially offset by higher production from our acquired production (Carbon and EQT assets). Cash Margin of 54% driven by a 10% reduction in total cash expenses to $1.15/Mcfe ($6.92/Boe) and hedge cash settlements was excellent and paved the way for a dividend increase of >14% with two consecutive quarterly raises during 2020.
This saw the company recommending a final quarterly dividend of $0.04/share, bringing the full-year 2020 dividend to $0.1525/share, 10% higher than 2019 ($0.1392/share), supported by accretive growth of its low-decline, long-life assets.
Other Operational Highlights include record full-year average daily net production of ~100 MBoepd, up 18% vs 2019 (85 MBoepd) and average daily production from conventional (Legacy) assets consistent with 2019 at ~69 MBoepd reflective of effective Smarter Asset Management. Also, acquired and fully integrated ~$243 million (gross) of assets which expand scale and reduce unit costs which included in May 2020 conventional upstream and midstream assets from Carbon ($110 million) and primarily unconventional upstream assets from EQT ($125 million) as previously discussed in the blog and the 4Q20 acquisition of five unconventional wells in Ohio for $8 million.
ESG enhancements included broader leak detection and repair programme and progress on further refining the Group’s comprehensive facilities inventory contributing to lower reported emissions, and DGOC exceeded their 80-well annual well retirement commitment by retiring 92 wells averaging ~$25K each whilst proactively working with regulators in Ohio to extend our retirement agreement to 10-year term.
The other jewel in the crown for DGOC has been the hedging book, the company has remained ‘proactive and opportunistic to protect cash flows and provide dividend stability through hedging’. This has included ~90% of 2020 production protected by natural gas hedges, with current forward hedge positions including, ~90% of 2021 natural gas hedged at a weighted average floor price of $2.94/Mcfe ($2.67/MMBtu) and ~65% of 1H2022 natural gas hedged at a weighted average floor price of $2.84/Mcfe ($2.59/MMBtu).
Once again DGOC led the field in significant field operating efficiencies and reduced total unit cash costs inclusive of higher Adjusted G&A. The additional administrative expense supports the enlarged business, positions the Group with a scalable corporate platform for additional growth and reflects enhanced corporate governance following its transition from AIM to the Premium Segment of the Main Market.
So, base lease operating expense was down 24%: $0.42/Mcfe ($2.53/Boe) (2019: $0.55/Mcfe ($3.31/Boe) with total operating expense down 15%: $0.93/Mcfe ($5.58/Boe) (2019: $1.09/Mcfe ($6.54/Boe) and adjusted G&A expense up 14%: $0.22/Mcfe ($1.33/Boe) (2019: $0.19/Mcfe ($1.17/Boe).
DGOC continued its sector leading distributions, benefiting shareholders in 2020 totalled $115 million with dividends paid in 2020: $99 million ($0.1425/share), up 5% (2019: $0.1362/share) and a share repurchases of $16 million (~13 million shares) (2019: $53 million)
Net Debt of $725 million resulting in Net Debt-to-Hedged Adjusted EBITDA1 of 2.2x at 31 December 2020 and debt reductions in 2020, adjusted for acquisitions, total $82 million, driven largely by repayments of scheduled amortising debt structures. This gave year-end liquidity >$210 million and full reaffirmation of $425 million borrowing base twice during 2020, despite volatile commodity price market, with no changes to terms and full support of 17 lenders in the Credit Facility.
Finally, a successful move to the Main Market of the London Stock Exchange and inclusion in FTSE250 Index was achieved.
The company established a strategic partnership with Oaktree Capital Management, L.P. who committed $1 billion to jointly identify and fund future proved developed producing (“PDP”) acquisition opportunities as a non-operating working interest partner and for completed acquisitions, the Agreement compensates DGO through an upfront promote and includes reversion interest opportunities to the Group.
Successful financings support the growth platform: $200 million (gross) asset securitisation to term out a portion of the Group’s revolving Credit Facility and the combination of an $85 million (gross) share placing and $160 million (gross) 10-year amortising secured term loan to primarily fund acquisitions during 2020.
Also, significant ESG initiatives reflect stewardship emphasis and transparency including a published inaugural year 2019 Sustainability Report with plans to issue the Group’s 2020 Sustainability Report in April 2021. In the period DGOC initiated comprehensive Enterprise Risk Management reviews, a Task Force for Climate-related Disclosure reporting practices and adopted new corporate policies on human rights, environmental, health and safety and corporate responsibility.
Commenting on the results, CEO Rusty Hutson, Jr. said:
“I am exceptionally pleased with our results in 2020 as they reflect the resilience of our business model and its proven ability to consistently deliver shareholder value and returns, even in the most challenging of markets. Our commitment to value-accretive growth, operational excellence, cost discipline, and risk mitigation drove the Group’s solid performance through turbulent times. Our long-standing strategy of focusing on low-risk assets and reliable cash flows position DGO for further growth, and enables us to maintain our firm commitment to shareholder returns, evidenced by the increase in our per-share dividend, which we raised twice, or 14%, during the year.
“With a business model grounded in asset and environmental stewardship, we made significant strides in developing plans and adopting disclosure frameworks aimed at improving our environmental footprint. Additionally, we strengthened our track record of accretive growth with the successful acquisitions of both upstream and midstream assets, contributing to a consistent, strong cash margin and enlarging our portfolio of Smarter Asset Management opportunities on a base of assets with an exceptionally low corporate decline rate of ~7%. Our commitment to acquire low-decline assets enables us to replace production declines with approximately 10% of our Adjusted EBITDA while meeting our operating and ESG commitments, reducing our debt and making consistent quarterly dividend payments to shareholders.
“Our move in May 2020 to the premium segment of the Main Market and subsequent inclusion in FTSE250 reflects the evolution of our business and enables us to solidify our position as the leading independent producer on the LSE. Even so, with the shifting market dynamics of the last few years, we are seeing a generational opportunity to accelerate our accretive consolidation strategy, and our strategic partnership with Oaktree Capital uniquely positions us to capitalise on these opportunities, whether within or outside the Appalachian Basin. The positive fundamentals and outlook for US natural gas are creating a supportive tailwind, which gives us confidence in our ability to sustain our dividend and create value for our stakeholders.”
DGOC know how to deliver year after year and last year was no exception. The presentation on the con call shows detailed workings of how the DGOC model is working and incredibly maintaining a margin of over 50%, this year cash margin was 54% and this capped a three year spell of being over 50% despite volatility in oil and gas prices. Indeed natural gas prices are at the lowest since the early 90’s and with the strong balance sheet and high levels of liquidity, delivered after paying dividends, share buy-backs and debt and other costs is creditable.
With the Oaktree JV still waiting to be used, although management insist that they will spend it, there is masses of scope for further growth and with the impeccable record investors should trust the management. DGOC sees every opportunity that comes up on the market because they of their ability to complete so no problems on the growth front.
The shares have doubled from the low, give a cracking income and in my view total return and I havent even mentioned the Smarter Asset Management to improve production and lower unit costs and reduce fugitive emissions. Oh and by the way, they tick all the ESG boxes on the way through as they do for being part of the Bucket List and I expect further strong upwards movement in the share price.
Genel has announced that the Sarta-2 well has entered production at the Sarta field (Genel 30% working interest), with gross field production now in excess of 10,000 bopd. Genel expects this figure to increase from the existing two producing wells, as optimisation of facilities configuration continues post production start-up.
The high-impact 2021 appraisal drilling campaign is on track to begin at the start of Q2, with the Sarta-5 and Sarta-6 wells set to be drilled back to back.
The jury is no longer out as Sarta not only delivers the goods but has done so in impressive time and now with meaningful production. With more to come from existing well stock and of course the 5 and 6 wells only weeks away it is no surprise that the shares are at the peak for the year and with the oil price helping on revenue and KRG fronts the assertive moves by the company and its partner have proved to have been the correct calls.
Sound Energy, announced on 6 August 2020 that its Italian former subsidiary, Apennine Energy SPA, had entered into a Pre-Sale Agreement with a buyer pursuant to which Apennine had agreed to sell the area of land upon which the Badile exploration well was drilled in 2017 (the “Badile Land”).
Under the terms of the Pre-Sale Agreement, it was agreed that the sale of the Badile Land would proceed in two independent stages, being an initial sale of “Area 1”, on which no restoration works were required to be undertaken and the subsequent sale of “Area 2”, which remains subject to the requirement for restoration works to be carried out and certified as complete. The restoration works on Area 2 are pending a decision of the Italian local authorities as to the proposed scope of the restorative actions.
Apennine has now concluded the sale of Area 1 of the Badile land and Sound Energy has received sales proceeds of EUR 182,535.20 net of administrative, agency and legal fees. It is anticipated that conclusion of the sale of Area 2 (for a consideration of EUR 350,000) will conclude later this year.
For Sound this is relatively small beer as they press ahead with the bigger issues, but tidying up of residual drilling activity is continuing and proves that the management is on the case.
United Oil & Gas
United Oil & Gas, has announced the spudding of the ASD-1X exploration well in the Abu Sennan Licence, Egypt on 6 March. United holds a 22% working interest in the Licence, which is operated by Kuwait Energy Egypt. Drilling of the ASD-1X exploration well, which will test a number of stacked reservoir targets, has commenced and the well will take up to 60 days to drill and is funded entirely from operational cash flow.
United’s Chief Executive Officer, Brian Larkin commented:
“There is considerable exploration potential in the Abu Sennan licence, and it is great to be actively drilling wells to unlock that potential. We are delighted that the ASD-1X exploration well has been spudded and look forward to updating shareholders once the well has reached the target reservoirs.
“The improving oil price environment of recent months has significantly enhanced operational cashflows and improved the economics of additional development wells so it is also very pleasing to have confirmation of the drilling of the AJ-8 development well immediately after completion of ASD-1X.”
In brief…The Prem had plenty of excitement as usual, on Saturday Burnley drew 1-1- with the Gooners, the Blades lost 0-2 to the Saints, Villa and Wolves drew 1-1 and the Seagulls lost 1-2 to the Foxes.
Yesterday the Baggies and the Magpies drew 0-0, Spurs beat the Eagles 4-1 and The Red Devils went to top of the table Noisy Neighbours and won 0-2. Finally aiming to avoid a record of losing 6 in a row at home Liverpool entertained the Cottagers who won 0-2 and did their chances of staying up no harm.
Tonight Chelski host the Toffees and the Hammers host Leeds.