WTI $71.67 +73c, Brent $75.15 +73c, Diff -$3.48 u/c, NG $3.93 +11c, UKNG 293.15p +32.7p

Oil price

Their appears to be a dichotomy between those who would shut down world economies on the back of Omnicron and those who feel that its a bit of flu and let’s put up with it. Never as easy as that though so expect some turbulence over Christmas and the New Year.

The rig count on Friday showed a rise of 7 units overall to 576 but oil were up only 4 to 471 which shows that still there is no great encouragement to fulfil hopes from The White House for more domestic production.

Challenger Energy Group

Challenger has provided the following update on its balance sheet restructuring, licence renewal process, and general operational matters.

Balance Sheet Restructuring

The Company has now largely completed a comprehensive balance sheet restructuring process. The previously reported aggregate balance sheet payables, debts and potential liability exposure of US$22 million is expected to be reduced to approximately US$2.5 million in total. Details are:

Perseverance-1 creditors: all remaining creditors from the drilling of the Perseverance-1 well in The Bahamas in early 2021 (approximately US$11.3 million) have agreed to be settled for total payment of approximately US$2.0 million in cash, of which approximately US$0.6 million has been paid to-date, with the remaining balance of approximately US$1.4 million payable by 31 January 2022, to reduce the total of remaining Perseverance-1 creditors to nil.  Payment of this remaining balance is to be funded from new capital to the business, which is in the process of being sourced by the Company (refer further below);

Trinidad payables and creditors (both Saffron-2 and legacy): approximately US$3.0 million of payables and legacy creditors in Trinidad have agreed to be settled for total payment of approximately US$1.0 million in cash, of which approximately US$0.6 million has been paid to-date, and approximately US$0.4 million remains to be paid during Q1 2022 (payment of this remaining balance to be funded from new capital to the business, which is in the process of being sourced by the Company – refer further below). This will reduce remaining payables and legacy creditors in Trinidad to approximately US$1.5 million. In respect of these, all are at the level of Trinidadian subsidiary entities with no recourse to the Company. Work is ongoing to further reduce or agree further deferrals of these remaining payables. However, even at the current reduced level the remaining balance is well below historic in-country creditor levels, of a quantum that is expected can be satisfied in the ordinary course of business over the next 18 months (on the basis of the increased production assumed – see below in “Operational Matters”);

Claims, legacy licencing payables and potential exposures in Trinidad: the previously reported approximately US$6.5 million of legacy claims, licencing payables and potential financial exposures in Trinidad are expected to be reduced to less than US$1.0 million at nil cash cost. The residual amount has been rescheduled on the basis of various agreed deferral and payment plans, and is expected to be eliminated in the ordinary course of business over the next 18 months;

Convertible notes: approximately US$0.7 million of outstanding convertible notes (inclusive of accrued coupon) remain owing by the Company, albeit those notes are not due to be repaid until December 2023. The Company expects in the near term to agree commercial terms with noteholders as to the basis on which those notes might ultimately be converted into equity (formal documentation is currently being finalised), thereby eliminating this long-term liability at nil cash cost; and

Well control insurance balancing payment: as a result of the ultimate cost of the Perseverance-1 well, a “top-up” premium amount may be sought by insurers in relation to the final overall cost of the insurance. This matter remains subject to negotiation with the insurers given that the well was completed safely and without incident almost 12 months ago.

Therefore (assuming the above, and subject to the above-noted payments of final agreed settlement amounts, and eventual conversion of the outstanding convertible notes) the previously reported aggregate payables, creditor, liability and other potential financial exposures on the balance sheet – of approximately US$22 million – will be reduced to approximately US$2.5 million. No material payables or creditors will remain at the Company level, with all residual amounts at the level of Trinidadian operating subsidiaries, and non-recourse to the Company. As noted above, this remaining position is expected to be managed out by the Trinidadian subsidiary entities over the next 18 months, including on the basis of various agreed deferrals and payment plans.

The cost cutting program embarked on in July 2021 is now also substantially complete. The Company’s ongoing cash-burn has been reduced from a high of US$700k per month in February 2021 to less than US$200k per month currently. The Company’s current cash balance is US$1.5 million, and the Company is presently evaluating various funding alternatives to secure additional capital – both to enable timely payment of the final agreed creditor settlements in Q1 22 (for which approximately $2 million will be required), as well as to provide sufficient working capital thereafter, including to enable progress of a defined, production-focused work programme in Trinidad and Suriname over the balance of 2022 (for which a further minimum of $4 million is estimated to be required). Further updates will be provided as appropriate.

Licence Renewals

The South Erin licence in Trinidad has been renewed on agreed terms, and the commercial framework for the renewal of the Innis-Trinity licence has also been agreed with the renewal process for that licence expected to be completed shortly. This successful renewal process provides clarity on tenure for all key Trinidadian production assets (Goudron, South Erin and Innis-Trinity) and defines the minimum work program in 2022 and beyond. This work program has been formulated with a view to maintaining and increasing production.

Operational Matters

At the Trinidadian operating level, various cost saving measures have now also been implemented, such that at present (based on current production, sales volumes and oil price), the operations in Trinidad are largely self-funding. To the extent production can be increased by approximately 15% – 20% (as is anticipated from work planned for 1H 2022) the Company expects that cashflows generated from operations in Trinidad will be more than sufficient to cover all in-country operational costs and group corporate overheads.

Consequent on operational changes implemented over recent months, the size and cost of the Company’s executive has been significantly reduced. A number of executives will thus cease employment with the Company during January 2022. It is also intended that certain changes to the composition of the Board are implemented in the same time frame. In this regard, the Company has identified new Board members and new senior personnel for key executive roles, those identified individuals having considerable experience in mature field operations, production enhancement and maximisation. Appointments are expected to take effect on completion of the restructure and recapitalisation process, with further detailed announcements to be made at that time.

Eytan Uliel, Chief Executive Officer, commented:

“At the start of November, when advising of Challenger Energy’s financial results for the first half of 2021, I observed that technical results below expectation and substantial cost increases on two successive wells in The Bahamas and Trinidad, coupled with inherited legacy liabilities, had placed the Company in a stressed financial position – one where aggregate payables, creditors, liabilities and potential financial exposures on the balance sheet substantially exceeded the Company’s cash resources.

Since then, we have engaged in a comprehensive, Company-wide balance sheet restructuring process, whereby the stressed financial position has been dealt with by way of agreed settlements with creditors, as well as various other agreed payment deferrals and similar actions. The result is that the previously reported total of payables, creditors, liabilities and potential exposures, of approximately $22 million, is expected to be reduced by approximately 85% by the end of Q1 2022 – with almost none of the residual being at the parent company level. Work is continuing to reduce this even further. Once this process is complete, the balance sheet of the Company will have been substantially repaired.

In parallel, we have completed our cost reduction program, with corporate overheads now reduced by more than 70% across the business. The Trinidadian business is operating on a break-even basis, and we have successfully progressed the renewal process for all core producing licences in Trinidad.  A significant organisational restructuring is also underway, and as part of this we have made some painful but necessary reductions and changes to the executive and staff base. I’d like to take this opportunity to thank those leaving the Company for their service and valued contributions over the years, and I’d like to thank all of our continuing staff for their patience and steadfast commitment while we complete the work on this restructuring process.

With this body of work largely behind us, attention is now focused on a recapitalisation – the last remaining step in what might best be described as the “clean-up” program intended to place this Company back on a firm financial footing for the future. This is needed both to enable final creditor settlement payments to be made, but more importantly, to fund production accretive work going forward. Thereafter, I hope that 2022 can become a year focused on restoring value, and for which we have a full work program planned, focused directly on maximising cashflow from existing producing assets. Further updates as to our progress will be provided.”

Well, this is surely a work straight from the business school archive and CEO Eytan Uliel certainly deserves to be lauded for what has clearly been one of carrot and stick. True it wouldnt have been done without the support of the whole team but I was totally convinced he would do it although he was right to observe at the time that it might have been borderline. 

Things are different around Challenger now and as the CEO says, 2022 can be one of maximising assets. The team will change somewhat and I suspect the portfolio maybe slightly different than previously expected but probably more balanced and one that can make a decent return. I will do more in due course once I have spoken to Eytan but for now shareholders can rest  assured that their company is in good nick. 

Advance Energy

Advance has provided the following update on the Buffalo project offshore Timor-Leste (the “Buffalo Project”) ahead of the drilling of the Buffalo-10 well. The Operator of the Buffalo Project, Carnarvon Petroleum Timor, Lda., has been advised that the Valaris JU-107 jack-up rig is completing its final operation with another operator, with rig handover now expected to occur in late December 2021, instead of mid-December as previously guided.

The Company notes that the delays are not related to the performance of the rig or preparation by the Operator. The Buffalo-10 well is designed to test the presence of a significant attic oil accumulation that remains after the original development was closed-in and convert the 2C certified resources of 34.3 MMstb to 2P (proved plus probable) reserves following re-certification.

A further update will be provided upon mobilisation of the drilling rig to the Buffalo Project location.

Leslie Peterkin, CEO of Advance Energy, commented:

“These delays are part and parcel of the industry, and we look forward to a successful handover in late December. Our excitement for the well continues to grow as we get closer to unleashing the value of the Buffalo Project.”

I am very much looking forward to this well and smart investors have been adding to holdings of Advance ahead of drilling at Buffalo. It could potentially add a great deal of low cost barrels and I would expect a significant increase in valuation assuming as I am that it comes in. 

Rockhopper Exploration

Rockhopper has announced that Stewart MacDonald has informed the Board of his intention to step down from his role as Executive Director and Chief Financial Officer, effective 31 January 2022, to take up a senior leadership role with another company. 

William Perry, Rockhopper’s Financial Controller since 2011, will lead the Company’s finance function following Mr MacDonald’s departure, although it is not intended that he will join the Board in the immediate future.

Stewart MacDonald, CFO commented:

“I have very much enjoyed my near eight years as Rockhopper’s CFO but have decided that the time is right for me to take on a new role. I will leave the Company with the Sea Lion project entering a new chapter with the proposed farm-out to Navitas. Navitas brings significant, proven capital raising expertise and, through the proposed farm-in, they will take primary responsibility for financing the Sea Lion project going forward.”

Samuel Moody, CEO, commented:

“I would like to thank Stewart for all of his hard work since he joined the Board in 2014.  He leaves us having agreed what we believe is a positive and exciting framework with Navitas that sees us fully aligned and committed to bringing Sea Lion to production.”

I don’t often comment on the movers and shakers in the  murky world of oil industry CFO’s but this one demands a quick word. Stewart is an excellent CFO and Rockhopper have been lucky to have had him for so long, I don’t know his destination but I’m sure it will be adding value. 

On his watch, along with Sam and the team there has been a surprisingly large amount of different work to do and he leaves at a time when Rockhopper is back in the South Atlantic and raring to go, I wish him well. 

And finally…

Every so often a name comes up and you know that it will go down in history as one that will be associated with an event where the official becomes better known than whatever happened on the day. When the official craves the publicity that should belong to the professionals that people pay to watch it is a travesty in itself, that happened yesterday…