Travelling in Europe so a flash blog for a quick energy prices comment and brief company comments. The DEC call is 1600 hrs for me so I will add anything salient from the meeting, which I shall be able to listen into, tomorrow.
Oil & Gas prices were under pressure yesterday for various reasons. Starting with oil where crude is coming off the top which is helpful on a number of levels not least inflation and signs that those who can do stuff are planning to do so. The most interesting one is that the US authorities indicated that they would be prepared to sell stocks from the SPR, usually a last resort and also to be honest a pretty feeble tool. The very fact that the toolbox is out and being threatened means that energy is back high up on the political agenda.
With regard to gas the spotlight was on Europe as Russia came out of its lair and offered to send more gas to Europe. Now to be fair, and usually speaking with forked tongue and always with their own interests at heart that probably means that they’ve got a bit to sell before these prices start to fall. Finally although there has been a useful fall in natural gas prices across the globe but from a very high level and Russia is only part of the problem.
Diversified Energy Company
DEC has announced that it has entered into conditional agreements to acquire certain upstream assets, field infrastructure, equipment and facilities within the Company’s Central Region from Tapstone Energy Holdings, LLC and its related party – KL CHK SPV, LLC . Under the previously announced Strategic Participation Agreement, funds managed by Oaktree Capital Management, L.P. will make a non-operated working interest investment in the Acquisition. Total gross consideration, inclusive of Oaktree’s investment is $419 million (approximately $366 million net of customary purchase adjustments to the 1 August 2021 effective date).
This Acquisition, which represents the third co-investment with Oaktree since May of this year, is strategically aligned with the Company’s prior Central Region acquisitions which included Tanos Energy Holdings III LLC, Blackbeard Operating LLC and Indigo Minerals LLC.
Tapstone Acquisition Highlights – Diversified’s Interest: Gross cash consideration of ~$218 million (~$174 million(a) estimated net after customary purchase price adjustments) funded entirely with cash and debt financing.
This represents a ~1.8x multiple based on net Purchase Price and ~$95 million of estimated Adjusted EBITDA(b) before potential synergies and an 80% increase to the Company’s previously announced anticipated Adjusted EBITDA contribution from the Central Region Acquisitions, bringing the region’s total to approximately $214 million.
The Net Purchase Price approximates a PV27 valuation at the effective date of 1 August 2021 with Proved Developed
Producing reserves of ~35 MMBoe (208 Bcfe) and PV10 of ~$324 million as of the effective date and based
on 28 September 2021 NYMEX strip.
Current production(c) of ~12 MBoepd (~72 MMcfepd) from ~660 net operated PDP wells a ~33% increase to previously announced anticipated Central Region production. Again, and not by accident gas-weighted production (~80% natural gas and NGLs) and commitment to optimise existing assets aligns with Diversified’s ESG strategy.
High cash margins(d) of ~65% reflective of favourable realised pricing benefitting from higher liquids content and a
competitive and scaling cost structure ($11.69/Boe; $1.95/Mcfe). This deal expands the Company’s Central Region footprint into the well-established, operator-fragmented Mid-Continent producing area that broadens the Company’s consolidation opportunities and leaves a Pro-forma Net Debt / Adjusted EBITDA of ~2.1x (e).
Oaktree will acquire 48.75% of the working interest in the Assets for $192 million(a), representing ~50% of the net
total consideration after customary purchase price adjustments and reflective of the 2.5% initial promote.
Oaktree’s third co-investment within Diversified’s Central Region, deploying an aggregate ~$370 million of its $1
Commenting on the Acquisition, CEO Rusty Hutson, Jr. said:
“With a net purchase price of less than two times net cash flow, this acquisition represents another highly accretive, fully balance sheet-financed acquisition that further demonstrates our status as a capable consolidator of producing assets within the Central Region. Our enlarged regional footprint strengthens our portfolio with additional high-quality assets and added scale to drive synergies. We are pleased to once again partner with Oaktree to acquire assets at a compelling multiple and with material upside potential available through asset optimisation.
“Replicating our success in Appalachia, we have quickly established ourselves as a significant operator in the Central
Region, which positions us for additional growth. As we work to seamlessly integrate these assets, we look forward to
welcoming Tapstone’s employees to the growing Diversified family.”
DEC continue to deliver with excellent value acquisitions which fit and adapt to their model and so add value for shareholders. The deal with Oaktree always looked good and gives them heft in making chunky acquisitions that add to DEC in a meaningful way. Expect more of the same and with analysts heading for Houston next month to hear the Capital Markets Day as well as seeing some of the deals done to date it should get more coverage in the near to mid-term.
Payments in July from the KRG were Tawke $13.3m, Tawke override $9.1m, Taq Taq $1.9m, Sarta $2.6m (subject to confirmation of receipt) and receivable recovery of $4.9m making a total of $32.8m.
Following the receipt of the receivable recovery payment, Genel is now owed $132 million from the KRG for oil sales from November 2019 to February 2020 and the suspended override from March to December 2020.
A sort of good news/bad news announcement from Block today, I think the bad news wins…
Block has announced its operations update for the three months ended 30 September 2021. Over 130,000 operational man-hours worked in Q3 2021, with no LTIs, well WR-B1a is undergoing clean-up operations and testing and preparatory work on the second well in the 2021 drilling programme, JKT-01, is progressing well.
Q3 production of 34.6 Mboe (Q2: 42.6 Mboe), Q3 revenue of $901,000 (Q2: $1,165,000), oil revenue of $742,000 (Q2: $960,000) and gas revenue of $159,000 (Q2: $205,000).
During the quarter, well WR-B1a was successfully drilled to a total depth of 2,483m, penetrating 478m in the target Middle Eocene reservoir in the West Rustavi field.
The drilling of WR-B1a benefitted from the partnership with Baker Hughes, signed in June this year, as well as the high-quality 3D-seismic data obtained in 2019. Detailed engineering analysis supported placement of the well to optimise recovery, while reducing execution costs and risk.
The well is currently undergoing clean-up operations to recover drilling mud components from the fractures. Oil and gas have been produced to surface. However, it is believed that well productivity is being restricted owing to the natural fractures being clogged with loss circulation material used to prevent the large drilling fluid losses experienced in our previous West Rustavi wells. A thorough clean-up programme has been designed to dissolve the loss circulation material, requiring chemicals with a 14-day lead time to be sourced from a supplier outside Georgia. The results will be published once the clean-up programme and production testing have been completed.
And here’s the rub…
During Q3, gross production (including the state of Georgia’s share) was 34.6 Mboe (Q2: 42.6 Mboe), comprising 21.0 Mbbls of oil (Q2: 25.7 Mbbls) and 13.6 Mboe of gas (Q2: 16.9 Mboe). The average gross production rate for Q3 was 376 boepd (Q2: 468 boepd), representing a decrease of approximately 19.7%, which is mainly owing to the decline from well WR-38Z.
Block Energy plc’s Chief Executive Officer, Paul Haywood, said:
“The company continues to benefit from production from its core wells, which, with improved oil pricing, led to revenue of $901,000 during the quarter. Well WR-B1a is undergoing clean-up operations and testing. We look forward to providing an update once the planned clean-up programme and production testing have been completed. Preparatory work for JKT-01, the planned next well in the two-well programme, is underway.”
That’s OK then…