WTI $65.61 -41c, Brent $69.22 -41c, Diff -$3.61 -30c, NG $2.60 -7c, UKNG 46.5p +0.5p
IOG has provided a technical update on its P2438 (Goddard) and P2442 (Abbeydale Area) licences in the UK Southern North Sea (SNS), both of which are jointly held by IOG (50%, operator) and CalEnergy Resources (UK) Limited (CER) (50%).
The key highlights are as follows but investors are well advised to go to this link for the presentation and catch up on all the detailed numbers. https://bit.ly/38BpttB
Interpretation and mapping of 1,200km² of 3D seismic data newly reprocessed to Pre-Stack Depth Migration (PSDM) level has significantly improved subsurface understanding of these licences, enabling management resource estimates to be updated. This enhances the potential to create two new incremental high-return gas hubs, a northern hub in P2438 and a southern hub in P2442, in line with Company strategy and both hubs would be within scope of the Thames Pipeline export route.
The P2438 licence potential is enhanced by higher resources at Goddard discovery and identification of nearby Southsea prospect, the Goddard gross 2C contingent resources increased from 108 billion cubic feet (BCF) in the 2018 Competent Persons Report (CPR) to new management estimate of 132 BCF.
The two Goddard flanks gross mid-case prospective resources revised to 27 BCF and 16 BCF, with geological chance of success (GCOS) up to 71% from 48% (CPR) whilst the Southsea has gross mid-case prospective resources of 31 BCF and 48% GCOS.
The P2442 licence also shows potential for a valuable multi-field gas hub, given identification of Thornbridge and Kelham prospects and higher Abbeydale resources and where the Abbeydale discovery gross 2C contingent resource estimates increased from 6 BCF to 23 BCF, significantly increasing its commercial potential. Thornbridge has gross mid-case prospective resources of 66 BCF with 32% GCOS and Kelham has gross mid-case prospective resources of 31 BCF with 80% GCOS. In addition, several further leads have been identified with excellent reservoir quality across the licence. Finally, further detailed mapping, amplitude analysis and static and dynamic reservoir modelling is being progressed across these assets to advance them towards development decisions.
Andrew Hockey, CEO of IOG, commented:
“It is very pleasing that our extensive seismic reprocessing work over the past year has identified additional resources and opportunities on both P2438 (Goddard and Southsea) and P2442 (Thornbridge, Kelham and Abbeydale). The new data shows enhanced potential for both licences to host production hubs with step-out exploration and appraisal upside. This fits squarely within our infrastructure-led strategy with our co-owned and operated Thames Pipeline providing direct access to market for all our gas hubs.
At IOG we always seek to plan our developments based on the best subsurface understanding of our assets. Applying this technical rigour to our portfolio helps us to allocate capital appropriately, select the right development concepts, optimise drilling designs, and ultimately to generate best shareholder value. I look forward to providing further technical updates on the rest of the portfolio while we continue on the path to Phase 1 first gas in Q3.”
It is very good news for IOG shareholders that the company continue to do valuable work across the whole portfolio, not just the much talked about Phase 1 which is mentioned above as still being on target for first gas in Q3 2021. Apart from reminding us that the long term is not only in place but being addressed through diligent seismic analysis. This proves up the company’s view that long term value creation can be achieved by getting detailed technical work upfront.
IOG is in the Bucket List for a good reason, I see an excellent development that paves the way for a step-out but reasonably low-risk exploration programme without adding too much risk. At 17.5p the shares are not far off the year’s high and well above the 9.32p low, I can see that recent high being challenged before long and the upside is still plentiful.
Union Jack Oil has announced the purchase from Cambridge Petroleum Royalties Limited (“CPRL”) of a 2.5% cash generating royalty interest (“Acquired Interest”) that is part of the royalty unit over 20% of the revenues from oil and gas production from the Claymore, Piper and Scapa oilfields located in the Central North Sea, known collectively as the Claymore and Piper Complex (the “Royalty”) for a total consideration, including working capital adjustments, of US$130,000 (£93,730) and paid from the Company’s existing cash balance.
The unit is an attractive, cash generating and high yielding investment, consistent with Union Jack’s wider strategy and objectives to invest in the UK oil and gas sector and shows a smart way of investing in financially prudent production.
It offers superior financial returns from North Sea oil and gas production whilst generating ‘a compelling estimated Internal Rate of Return (“IRR”) of approximately 129%’. This cash generating investment with an estimated average annual compound yield estimated at 16.5% over the life of the Royalty, vastly superior to high street banks, other fixed interest, or treasury investment alternatives.
What is most ‘compelling’ is that payback, including accrued royalty payments of the original investment, is estimated to be less than 12 months and the company benefits from an indirect contractual exposure to North Sea offshore oil and gas production revenues without any ongoing capital investment, decommissioning and joint venture operating costs.
This represents the first such royalty investment in the Claymore and Piper Complex by Union Jack with further transactions planned for 2021 and where a second, material transaction is at an advanced stage.
David Bramhill, Executive Chairman of Union Jack Oil commented: “This compelling investment in a cash generating royalty over the Claymore and Piper Complex’s oil and gas revenues, plays strongly to the Company’s technical and analytical strengths in oil and gas and represents a low-risk entry strategy to the North Sea while generating superior investment returns.
“The Royalty provides Union Jack with the benefits of an attractive cash flow stream and high yields from North Sea oil and gas production without the accompanying capital and operating costs associated with direct participation in the underlying oil field developments and infrastructure.
“The Royalty’s superior returns and cash flow characteristics are consistent with Union Jack’s wider strategy and objectives to invest in the UK oil and gas sector.
“This initial acquisition represents our first royalty investment over the Claymore and Piper Complex’s future oil and gas revenues and where we have the objective of making further investments during 2021. Encouragingly, a second material transaction is at an advanced stage.
“The objective of Union Jack remains to become a mid-tier producer and we see that is now within our grasp with development and free-flowing oil demonstrated at Wressle, the execution of the upcoming well tests at West Newton and planned drilling at Biscathorpe. All these projects are at an advanced stage and evidence significant progress towards our aim.”
This is a very smart move by UJO who have exhibited a remarkable clean pair of heels to the energy sector. Already financially strong and with more of this deal yet to come by the looks of it, I feel that with the developments of West Newton, Wressle and Biscathorpe yet to come the outlook for UJO looks highly encouraging nay even very, very cheap.
Zephyr state that initial core analysis from the Cane Creek reservoir provides further evidence of hydrocarbon saturation and that board approval to proceed with State 16-2 lateral production well has been given based on updated project economics.
Since the completion of the State 16-2 well, Zephyr and its project partners have been analysing the considerable reservoir data obtained from both the Cane Creek reservoir (the Company’s prime reservoir target) and from multiple other shallower reservoir targets. This data included 113 feet of continuous core obtained from the Cane Creek reservoir which I consider to be of paramount importance.
Initial analysis of the Cane Creek continuous core data provides further evidence of hydrocarbon saturation across the Cane Creek reservoir. When integrated with the recently acquired log data, existing 3D seismic data, geologic and regional analogue analysis, the Company believes there is a strong justification to proceed to test the Cane Creek reservoir zone with a target to deliver initial oil production.
Zephyr’s Board has therefore elected to proceed with the near-term drilling of a side track lateral off the State 16-2 well (the “State 16-2LN CC” or “the lateral”), the lateral will target production from the Cane Creek reservoir and will utilise the pre-existing roads, pad and wellbore from the State 16-2 as a low-cost, low environmental impact side-track host.
The structure to be drilled has comparable geometry and form to other productive structures found within the neighbouring Cane Creek Field, and is characterised by multiple seismic indicators along its length that may represent natural fracture networks within the Cane Creek reservoir. The use of the State 16-2 well’s top hole enables a substantial well cost reduction and drilling risk mitigation.
The Board’s target is to deliver first oil production – and benefit from the improved commodity price environment – in a rapid and responsible manner, permitting and detailed drill planning efforts for the lateral are underway, and the Company has targeted a spud date of late H1 or early H2 2021, subject to final permitting, funding and internal approvals. All of these are music to my ears, not only has the company already benefited from government funding but it is already a long way down the well as a starting point, finally, the Company is in advanced discussions with potential industry and financial partners regarding the funding of the lateral well.
The Company continues to refine the cost and economic benefits of the lateral. The State 16-2LN CC is forecast by the Company’s Board to have strong standalone economics based on its 2C estimate which includes an estimated drilling cost of US$3.5 million, a single-well net present value of approximately US$8.2 million at US$60.00 per barrel of oil and at a ten percent discount rate (“NPV-10”).
To make matters even better, a breakeven oil price of US$23.00 per barrel of oil is forecast and a single-well estimated ultimate recovery of 694,000 barrels of oil equivalent (“mmboe”) expected. On a project-wide 2C basis, the Cane Creek reservoir on the Company’s acreage (which includes the State 16-2LN CC) is estimated by Zephyr to hold some net recoverable resources of over 12mmboe; and NPV of approximately US$156 million using a flat oil price of US$60 per barrel of oil and a ten percent discount rate.
The above estimates only include forecast resources in the Cane Creek reservoir and do not include the significant potential upside from additional overlying reservoirs which are being evaluated following the drilling of the State 16-2 well and in addition, the analysis and interpretation work on the multiple shallower reservoir targets continues to progress. Initial results have provided encouraging evidence for the presence of multiple stacked continuous oil and gas plays, and significant additional data remains to be processed and analysed over the coming months.
Colin Harrington, Zephyr’s Chief Executive, said “I am delighted that the initial results obtained from the State 16-2 Cane Creek reservoir core data both corroborate and support the Board’s long-held view that the Paradox has the potential to be a project of considerable scale with robust and highly attractive economics.
“Furthermore, I am proud of the team’s progressive achievements in the last six months. Over this period, Zephyr drilled a stratigraphic well in record time, obtained and evaluated well logs which show a strong analogue to other productive wells in the Paradox Basin, and acquired significant continuous core data which has now shown evidence of oil saturation across our primary reservoir target. Combined with the securing of the Company’s grant funding (which reduced the cost of the wellbore host by $2 million) and an environment in which global commodity prices are rising, the Board feels the timing is excellent to undertake the next step in the careful and responsible development of this project.
“This is fantastic progress, and comes on the back of seven years of substantial time and resource investment in this project. The Board believes the next step – drilling the lateral well – is an ideal catalyst to further unlock the project’s value and has the potential to deliver the Company’s first production from the Paradox.
“We are well underway with the preparations required for our target to spud the lateral in the middle of this year and I’m confident that we have the right team in place to deliver a safe and responsible well – the same team that delivered the successful State 16-2 vertical well. This well will now be used as a low-cost, low impact side-track host for the lateral.
“As well as providing our first opportunity to produce oil from the Paradox, the lateral will also provide us with vital information to further understand the asset and to optimise our future work programme for the project.
“In addition, we remain encouraged by indications that demonstrate the potential for multiple stacked overlying reservoirs across our resource base. Unlike the Cane Creek reservoir, these overlying secondary zones were not targeted historically and therefore require significant evaluation before a resource base assessment can be concluded. We will keep the market updated as this detailed analysis progresses.
“Our goal, as always, is to create maximum economic value with minimum environmental impact, and we believe this next step – the drilling of the State 16-2LN CC – gives us a clear pathway to deliver on these objectives.”
Despite the significant rise in the Zephyr price recently I believe that there is so much potential upside in the company that today’s near 10% drop in the share price is merely a buying opportunity in the long term cycle.
I am convinced that the fact that the recent logs look exactly like the south side of the Paradox Basin and that the economics make the rapid development a no-brainer. The company has indeed had tail winds, cost-wise it has been cheap to get underway, the infrastructure is already in place and the oil price speaks for itself.
Armed with a terrific development the company looks to be starting life very well, the inherited Paradox looks like a gift horse and don’t forget that I am still a huge fan of the whole management team whom I am convinced have other deals up their sleeves. Bring it on….
England got a bit cocky and lost the 2nd T20 against India in the 5 match series, next stop tomorrow at 1330.
In the 6 Nations Wales inflicted the customary thrashing on Italy whilst England got some of their mojo back in beating France at Twickenham. Yesterday saw a narrow win for Ireland at Murrayfield in a match which might have gone either way.
In the Prem, Friday saw the Magpies draw 1-1 with Villa and on Saturday the Noisy Neighbours took all the points at The Cottage, the Toffees lost 1-2 at home to Burnley, the Eagles beat the Baggies 1-0 and Leeds and Chelski drew 0-0. Sunday saw the Seagulls win the English Riviera derby at the Saints, the Foxes put 5 on manager less Blades, the Gooners won the North London derby beating Spurs 2-1 and the Red Devils beat the Hammers 1-0. Tonight Wolves take on Liverpool.
And Lee Westwood comes second two weeks in a row, each time from a winning position.