WTI $68.15 -$2.41, Brent $70.38 -$2.03, Diff -$2.23 +38c, NG $4.16 +13c, UKNG 105.0p -1.93p

Oil price 

The duty traders took a look at the Delta variant numbers from China yesterday and panicked, nappies full they headed for the exits and I’m sure that when the grown-ups come back from their holidays a slightly more longer-term approach may be taken. If however the Delta variant is really taking charge then demand will see another push-back, the inventory stats from the EIA certainly don’t show problems in the US.

Those stats did show a bigger than expected build in crude stocks of 3.6m barrels mainly due to higher imports last week, as the product numbers were totally different. Indeed gasoline drew by 5.3m b’s, with a refinery rate of 91.3% up slightly and demand of 9.8m b/d out of a product consumption figure of over 21m b/d that comes as no surprise. The figures were completed by a modest build of 832/- b’s of distillates.

Diversified Energy Company

Diversified Energy Company has announced its Interim Results for the six months ended 30 June 2021 and other recent highlights, they include a declared 2Q21 interim dividend of $0.0400 per share (2Q20: $0.0375 per share, +7%). Record average net daily production of 106 MBoepd (11% vs 1H20: 95 MBoepd) with an exit rate of 116 MBoepd is very impressive showing the effects of recent deals. 

1H21 Hedged Adjusted EBITDA of $151 million ( +3% vs 1H20: $146 million) generating Free Cash Flow of $117 million with Cash Margin of more than 50% also showing how positive the DEC model is in action.  Net Income & Adjusted Net Income (which excludes $278 million ($371 million, pre-tax) of non-cash hedge valuation losses) gives a net loss of $84 million or $0.11 per fully diluted share (1H20: +$18 million, +$0.03/share) or adjusted Net Income of $204 million or $0.28 per fully diluted share (1H20: +$112 million, +$0.17/share). It should be noted that Net Income includes an estimated $81 million tax credit earned on wells producing >90 Mcf/day.

In the period the company made a strategic decision to move into a new producing area and made three separate acquisitions valued in total at $342m as follows. Indigo Minerals LLC at a  ~2.9x multiple producing 8 MBoepd (net) in the Cotton Valley (closed May 2021), Blackbeard Operating LLC at a ~3.5x multiple producing 16 MBoepd (net) producing in the Barnett shale (closed July 2021) and Tanos Energy Holding III LLC at a  ~2.8xmultiple producing 14 MBoepd (net) in the Cotton Valley and Haynesville Shale (expected to close mid-August 2021).

DEC has always wanted financial partners in its projects and Oaktree Capital Management L.P. co-invests in the geographically overlapping Indigo & Tanos packages while contributing 2.5% of its working interesting as an up-front promote to DEC shareholders.

Despite this substantial activity DEC has preserved a healthy balance sheet and financing capacity and optimally positions the company for additional non-dilutive growth using organic cash flow and financing capacity following a successful $225 million (gross) equity raise to part fund the acquisitions.

This acquisition policy is quickly building scale to drive synergies; 27% of the Company’s consolidated production will come from the Central Region pro forma for closing the three acquisitions with successful integration underway on Indigo and Blackbeard assets as well as implementing Smarter Asset Management programmes historically incredibly successful for DEC. 

Elsewhere unsurprisingly, the company has made significant ESG progress which included a published 2020 Sustainability Report with expanded disclosure of ESG performance including TCFD reporting also having created an executive management position to enhance accountability and drive ESG and Sustainability efforts.

These include improved emissions monitoring and reporting through significant progress on data warehouse and asset inventory, they have established an internal team dedicated to permanently retiring wells, reducing reliance on third-party services and driving further process quality and efficiencies. 

Part of the package included permanently retiring 14 wells in West Virginia at an average cost per well of ~$19 thousand, 25% below typical third-party costs and also permanently retired 65 wells in Appalachia at an average cost of ~$19 thousand per well which represents > 80% of annual state agreement required retirements.

Further detail on the financial front include stakeholder distributions, including $62 million of dividends and $34 million of debt repayments, which give a leverage ratio of 1.9x at 30 June 2021 (Net Debt of $633 million). The company’s lenders back the board, in April (Spring redetermination): Unanimous 16-bank Credit Facility syndicate vote to fully reaffirm the $425 million borrowing base with no changes to terms and in August (Special post-acquisition redetermination): Lead lenders within the Credit Facility conditionally committing to increase the Facility’s borrowing base to $625 million (+$200 million) following completion of Central Region acquisitions and satisfactory diligence.

Perhaps more importantly than anything else is that a significantly improved pricing outlook for natural gas has created an opportunity to hedge at levels that support higher cash operating margins. Thus disciplined hedging strategy protects cash flows and provides dividend and debt repayment stability and the hedges in place are as follows. 

~90% of 2021 natural gas production protected by hedges, with current forward hedge positions including, ~90% of 2H21 natural gas hedged at a weighted average price of $2.98/Mcfe5 ($2.76/MMBtu) and ~67% of 2022 natural gas hedged at a weighted average floor price of $2.91/Mcfe5 ($2.69/MMBtu). I copy this data as it is a most important part of how the DEC model works successfully. 

Commenting on the results, CEO Rusty Hutson, Jr. said:

“I am thrilled with the progress we made in this active first half of 2021, successfully delivering on a number of key strategic initiatives in line with our long-term growth strategy. Our entry into a new operating region complements our continued focus in Appalachia and introduces a geographic diversity capable of providing improved margins from higher realised pricing and a significant new runway for further value accretive and synergistic opportunities. With a business model centred on an asset profile rather than a defined geologic region, we are confident in our ability to replicate our Appalachian success in the Central Region by delivering the same operating efficiencies and cost controls that result in strong margins and consistent shareholder returns. Of course, we remain committed to tangible shareholder returns, and are delighted to once again declare an additional $0.04 dividend of the second quarter, which will add an additional ~$34 million to the already more than $62 million we have paid so far this year.

“As we step into a new region that presents significant consolidation opportunities, we welcome Oaktree’s participation in both the Indigo and Tanos acquisitions. Not only does their investment validate our views of the asset quality within the Central Region, it affirms their belief in the Diversified strategy grounded in stewardship, as we continue to focus on accretive, responsible growth and operatorship of primarily natural gas assets. Our balance sheet remains healthy as we continue into the second half of 2021 with ample financing capacity to consider further complementary growth opportunities.

“We have already delivered significant progress in the second half of the year by the closing of Blackbeard, announcing the Tanos acquisition and our near-term focus on the seamless integration and optimisation of all the Central Region acquisitions. Simultaneously, we are making great progress on a number of ESG initiatives as we strive to establish our baseline for emissions reporting, expand our TCFD disclosure efforts and define our path to a net zero carbon position by 2050 or sooner. To that end, I am pleased to announce our plans to host a Capital Markets Day in October when we will continue to provide greater detail about both our short and longer-term ESG efforts while also highlighting the importance in our growth strategy and Central Region integration and operations. We will provide additional details in the coming weeks, including a specific date, and hope you will join us.”

I have listened to the conference call and the company are rightly full of confidence, in my view they tick all the boxes needed to satisfy the sophisticated and demanding investor. An acquisition focus in an area where prospects abound and with a funding partner that shares their model of making money for investors. The business throws off cash and has a very pleasing adjusted EBITDA margin of some 50% that could even increase if current gas prices remain high and their continued reduction of unit-level costs continue.

The midstream assets are a premium, they determine their own pricing to a large degree as they can determine which markets to serve and with their control over gas pipelines. I havent mentioned hedging but this is an important part of the model and while the company dictum is always to protect the near-term at the moment the longer strip is incredibly strong for such work.

The final part of the jigsaw is that for all these business protocols the most important part of the management jigsaw is ensuring a return to shareholders and today they added to it with another 7% dividend increase. I’ve said it before but an investment in DEC gives high quality management, a return on investment in capital and income terms and plenty of upside and growth from organic and inorganic growth, what’s not to like.

Petro Matad

Petro Matad has announced that the Open Offer raised $76,000 and dealings commence tomorrow.

At the EGM to be held today, Mike Buck, the Company’s CEO, will make the following EGM statement:

“We are pleased to have completed a capital raise swiftly following the award of the Exploitation Licence for the Heron discovery. This allows us to secure long lead time items in anticipation of commencing oil production as soon as next year, and strategically puts us in control of our goal to deliver transformational value to all stakeholders through production and low-cost exploration.

While we have much to achieve, we start the next chapter of the Company’s development from a position of strength and independence. As Mongolia’s leading exploration company with proven operatorship capability, we are well capitalised for the next phase of activity. In addition, we continue to hold an excellent relationship with the Mongolian government, which is committed to developing the country’s upstream oil industry, building a domestic oil refinery and enhancing the country’s energy independence.

SDX Energy

SDX has announced the spudding of the Hanut-1 exploration well (“HA-1X”), the second well in the Company’s 2021 two-well drilling campaign in South Disouq following the successful IY-2 well announced in July.

The HA-1X exploration well on the Hanut prospect spudded on 4 August. HA-1X is targeting a Basal Kafr El Sheikh prospect at approximately 5,200 feet TVDSS. The Hanut prospect is estimated to contain gross unrisked mean recoverable volume of 139bcf (23.2 million boe) with a 33% chance of success. SDX has a 55% working interest in the well and the Company’s audited working interest 2P reserves as at 31 December 2020 equated to 11.1 million boe. The well is expected to take approximately one month to drill, and the Company will update the market on completion of drilling (and if successful, testing) operations.


Mark Reid, CEO of SDX, commented:


“After our previous successful campaigns at South Disouq where we have achieved six discoveries from eight wells drilled, most recently at IY-2, I am excited to announce the spudding of the potentially transformational HA-1X exploration well on our Hanut prospect. With gross unrisked mean prospective resources of 139bcf (23.2 million boe) it is significantly larger than previous prospects and has the potential to materially increase the reserves of the Company if successful. We look forward to updating the market further as the well progresses.”

And finally…

A quieter day in Tokyo, Matt Wall takes a gold in the cycling Omnium and Liam Heath gets a bronze in the canoe sprint.

As I write England have taken four Indian wickets for 125 including Kohli for a golden duck.