WTI $112.12 +$7.42, Brent $115.62 +$7.69, Diff -$3.50 +27c, NG $4.90 +4c, UKNG 226.0p -10.0p

Oil price

Today was an even more odd day in oil markets even by recent standards. First thing, oil was motoring and after yesterdays 7% was up another 5% with Brent nudging $20, by mid morning it was all over and oil was back to below last nights close.

What was going on? Firstly it looks like Germany are vacillating about joining in the EU leaders agreement to boycott Russian oil, along with Hungary it appears that they are not sure about who to support in this process. I have already pointed out that Russia is yet to notice the sanctions, if Germany dont partake then whither NATO and even Ukraine?

Another problem is afoot, the Houthi rebels, backed by Iran have been over this last weekend been attacking Saudi oil installations something that unsurprisingly hasn’t gone down well in Riyadh. This is remarkably important as to what is going on in the Middle East and something that Sleep Joe may not be taking into account. In short, Saudi needs some security guaranty, formerly something the USA would be able to do but not any longer, indeed the White House, in an attempt to get gasoline prices down and still cross with the KSA have hitched their wagon to Iran and the 1m b/d that should emerge along with the permission to enrich uranium…

As for retail gasoline prices in the USA, last week Exxon will rush you an average of $4.239 which actually is down 7.6c w/w, up 70.9c m/m and up 1.374 y/y.

Diversified Energy Company

Diversified has announced its annual results for the full-year ended 31 December 2021. 

Key Highlights

•     Full-year production up 19% to 119 MBoepd (711 MMcefpd) (2020: 100 MBoepd) and December exit rate production(a) up 35% to 139 MBoepd (833 MMcfepd) (2020: 103 MBoepd)

•     Peer-leading ~9% consolidated corporate annual decline rate(b) underpins durable dividends

•     Consistent Cash Margins(c) of ≥50% in 2021 and 2020

•     Hedged Adjusted EBITDA(d) up 14% y/y to $343 million (2020: $301 million)

•     Net loss of $325 million (2020: net loss of $23 million) inclusive of $485 million (2020: $181 million) tax-effected, non-cash unsettled derivative fair value adjustments

•     Adjusted Total Revenue(e) up 24% to $687 million (2020: $553 million) net of $321 million commodity cash hedge payments (2020: included $145 million of commodity cash hedge receipts)

•     Total Revenue up 147% to $1 billion (2020: $409 million)

•     Dividends per share up 8% to $0.1650 (2020: $0.1525); Total dividends paid up 31% to $130 million (2020: $99 million)

•     Recommending a final quarterly dividend of $0.0425/share up 6% over final 2020 dividend of $0.0400/share

•     Adding hedges in improving commodity price environment positioning for margin expansion; recent 2022 and 2023 NYMEX hedges added at an average floor of $4.55/Mcf(f) and $3.71/Mcf(f), respectively, representing a 50% premium and 30% premium, respectively, to the Company’s portfolio as at 31 December 2021

•     Adjusted G&A(g) per unit down 9.0% to $1.21/Boe ($0.20/Mcfe) (2020: $1.33/Boe)

•     Pro forma year-end liquidity(h) of >$400 million, adjusted for two successful Asset Backed Securitisation refinancing’s of Credit Facility borrowings with fixed rates <5%; Available for significant non-dilutive growth

•     Net Debt(i) of $1,010 million resulting in Net Debt-to-Pro Forma TTM Hedged Adjusted EBITDA (“Leverage”) of 2.1x(i) at 31 December 2021

ESG Highlights

•     Revised 2020 reported methane emissions intensity downward 62% to 1.6 MT CO2e/MMcfe using refined measures from extensive well reviews and physical measurement vs. previous reporting primarily using theoretical factors(k)  (Prior 2020:4.2 MT CO2e/MMcfe)

•     2021 methane emissions intensity, inclusive of Central Regions assets, down 6% to 1.5 MT CO2e/MMcfe (Revised 2020: 1.6 MT CO2e/MMcfe)

•     Deploying 600 handheld leak detection devices, enhancing our ability to identify and remediate emissions as part of our Smarter Asset Management programmes

•     Progressing light detection and ranging (LiDAR) flights to detect and drive emission reduction, particularly related to compression and midstream assets

•     Achieved a 10% reduction in average well retirement cost (136 wells averaging ~$22,500 per well) underpinned by a ~30% reduction in the average well retirement cost when using our retirement crews and equipment

◦     The Company now has six well retirement crews with an ability to plug an estimated 200-250 wells per year

•     Progressed our Climate-Related Financial Disclosures (TCFD) report with enhanced disclosures and analysis included within our Annual Report available on our company website

•     Expect to publish our 2021 Sustainability Report in early April 2022

Significant 2021 & Recent Acquisition Activity

Acquired and integrated several Central Region acquisitions and an Appalachian well retirement company:

•     Indigo Minerals LLC (“Indigo”) for cash consideration of $117 million(l);

•     Blackbeard Operating LLC (“Blackbeard”) for cash consideration of $171 million;

•     Tanos Energy Holdings III, LLC (“Tanos”) for cash consideration of $116 million;

•     Tapstone Energy Holdings LLC (“Tapstone”) for cash consideration of $177 million; and

•     Next LVL Energy, an Appalachian Basin plugging company headquartered in Pennsylvania.

Oaktree Capital Management L.P. (“Oaktree”) significantly co-invested in Indigo, Tanos and Tapstone under the previously announced Joint Participation Agreement.

Recent Financing Activity

•     Completed two leverage-neutral, liquidity-enhancing, sustainability-linked ABS transactions in February 2022 for $525 million ($501 million net of a certain transaction costs and $16 million restricted cash interest reserve for the notes)

•     Weighted-average fixed coupon of 4.9% (issued at par)

•     Fully amortising over ~9 years and underpinned by long-term hedge protection

•     Proceeds used to reduce borrowings on the Company’s Credit Facility

◦     Borrowing base revised from $825 million to $500 million (reduction of $325 million vs. the $525 million of ABS gross proceeds)

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

“I’m pleased to report another year of consistent operational excellence amplified by the strategic expansion of our low-risk, long-life, low-decline asset acquisition model into the Central Region through four accretive, complementary acquisitions and an acquisition of an established Appalachian well plugging company that significantly increases our well retirement capacities. These transactions enhanced our scale, enlarged our portfolio of Smarter Asset Management opportunities and created strategic optionality across our expanded operations. Our 2021 results reflect record average production through the year of 119 MBoepd and an exit rate of 139 MBoepd that generated Hedged Adjusted EBITDA of $343 million, 14% above the prior year. Our differentiated and value focused business model once again delivered an exceptionally strong free cash flow of $252 million, representing a robust 40% free cash flow margin(m) and an impressive 20% free cash flow yield(n) supporting our durable dividend. Our teams across all areas of our company performed very well in 2021, and I continue to be grateful and impressed with their diligence and focus on delivering exceptional results for all stakeholders.

“To protect our profitability and dividend payments through commodity price cycles, we employ disciplined operational excellence to maximise revenue and reduce expenses while using long-term hedging to limit our exposure to price risk. This strategy once again served us well, delivering yet another year of 50% Cash Margins and supporting the steady cash generation that underpins our ability to insulate the dividend from commodity price swings. We distributed $130 million to shareholders in the period, up more than 30% from 2020 and 8% on a per-share basis, with the per-share quantum positioned to increase in 2022 due to the full-year contribution from our recent Central Region acquisitions.

“We also elevated our ESG strategy this year culminating in our commitment to accelerate our Net Zero(o) target by 10 years to 2040, with an interim commitment to reduce our 2030 Scope I methane emissions by 50% from revised 2020 levels.  To support these initiatives in 2022, we are investing $15 million in high impact projects to solidify our emissions reduction trajectory that our Smarter Asset Management programmes, enhanced by investments in emissions-detection technology, will drive to achieve our stated goals.

“We also progressed our Asset Retirement commitments by retiring a record number of wells, leveraging our investment in vertical integration to reduce our average plugging costs by 10%, and more significantly, by 30% in West Virginia thanks to the impact of using our internal teams. Building on this success, we are adding crews to our internal teams with an eye towards using the excess capacity to retire wells for third parties, diversifying our business with the potential to offset the near-term cash costs to retire our own wells. Our acquisition of Next LVL Energy positions us to partner with U.S. state governments to plug orphan wells.

“As we look ahead, the macro environment continues to improve, which we proactively capture by adding to our hedge portfolio, increasing the downside commodity price protection. We have hedged approximately 90% of our 2022 production volumes, giving strong visibility into our free cash flow generation that positions us for meaningful non-dilutive growth in a target-rich environment. Higher commodity prices often motivate sellers to transact, so I’m encouraged by the PDP-heavy opportunities before us across an enlarged operating footprint and surrounding territories. With over $400 million in liquidity following our ABS transactions, we are well positioned to enlarge the Company’s long-life, low-decline asset base without the need for additional equity at a time many quality assets are coming to market.

“I am excited about our prospects in 2022 and beyond as we evaluate strategically-aligned opportunities while remaining firmly grounded in our commitment to protect our strong balance sheet underpinned by low leverage with ~90% of our borrowings in fully-amortising structures that provide for systematic debt repayment. Well positioned, we remain ever focused on creating long-term value for our shareholders and other stakeholders.”

Wherever you look within these numbers DEC has beaten its own targets and then some. The production record which leads onto breaking cash and EBITDA numbers is impressive and indeed the company concentrate heavily on reference to the efficiency of free cash generation and the 20% ‘industry leading’ free cash flow yield. 

The overall concentration is not surprisingly on ESG and the company has initiatives such as the reduction of Scope 1  methane emissions where it has an intermediate goal of 30% Reduction by 2026 and the 10-year reduction from Diversified’s original 2050 ambition to 2040. 

All these things and many more such as Smarter Asset Management and financial tightening (do read the 200+ pages in the annual report…!) reduce borrowings and allow a comfortable 6% increase in the final, making an 8% annual increase. 

Finally it would be wrong to overlook how important hedging is to DEC, adding hedges in these markets made a huge difference in achieved gas prices and made for even more margin expansion, consistently 50% or more with the 40% free cash flow margin leading to the 20% free cash flow yield. 

I would expect more from the company on acquisitions and the team will continue to deliver every inch of the way, whilst with them in November it was even more obvious that they work from the top down to keep costs under control and this is clear in today’s figures, the shares remain a favourite on quality grounds along with capital and income growth into the bargain. 

Longboat Energy

Longboat has announced its full-year results for the period ended 31 December 2021.


Operations Summary

Three bilateral transactions executed in June 2021 to farm-in to seven, near-term material exploration wells on the Norwegian Continental Shelf

Four wells drilled to date with three discoveries:

Egyptian Vulture: material discovery, significant upside potential

Rødhette: potential commercialisation via existing infrastructure

Mugnetind: sub-economic discovery

Ginny/Hermine: dry well (completed post period)

All four wells were delivered safely on time and budget

Financial Summary

Remains fully-funded to complete its ongoing committed drilling programme and to pursue its business development activities

Cash reserves of ~£26.3 million as at 31 December 2021 and a tax rebate receivable of £8.1 million (31 Dec 2020: £7.7 million)

Exploration Finance Facility for £50 million (NOK600m) available for 2022

Loss after taxation of £(4.7)million which includes write down of Mugnetind well


Three high-impact exploration wells over the next ~6 months

targeting 69 mmboe (net) and total upside of 254 mmboe (net)

primarily gas prospects (83%)

Result of the Kveikje exploration well targeting 36 mmboe (gross) expected in coming days

Proposed Norwegian tax changes will lower breakeven commodity prices and increase returns for non-sanctioned projects allowing the Company to consider acquiring development as well as production assets

Currently participating in a number of processes where we have specific knowledge and can take advantage of the continuing market dislocation

In the short term, the spike in commodity prices will make the M&A market challenging but the move away from Russian oil and gas will further strengthen the strategic case for Norwegian resources  

Longboat is well positioned to pursue the expected forthcoming transactional opportunities, guided by a management team with a strong track record of delivering value through M&A

Helge Hammer, Chief Executive Officer of Longboat Energy, commented:

“Longboat remains well-positioned having made one material discovery and another with commercialisation potential from our first four wells.  In the next six months, we will have results from three further exploration wells, each of which could be transformational for the business.

“Furthermore, we continue to leverage our excellent industry relationships and are currently participating in a number of M&A processes.”

I remain very happy with Longboat as it gains momentum into this increasingly important drilling season. Drilling so far has been good with the one meaningful result at Egyptian Vulture, progress is now subject to the Equinor programme which may drag a bit but that is the price of success. 

With three exploration wells upcoming, success with the drill bit is of course crucial but I am increasingly of the view that the M&A processes mentioned by Helge above would be very important in taking LBE to the next base. Buying production would mean that the Vulture timetable is less dependent on Equinor and should any of the the upcoming three wells come in there would also be cover for that possible eventually. Also given that it is a replica of Faroe it will need significant production and as they said in the con call ‘we are using our discoveries as swap currency’. 

Of course more exploration would also be more than helpful, at least to the higher beta investors so part of that M&A has got to be getting more wells on the books especially if you are going to trade out any discovery that you make. Longboat remains a favourite for its top quality management and is bringing a very good portfolio of exploration assets together, to me I think it needs a deal sooner rather than later to rubber stamp all those qualities. (Oh and a webcast that works)

SDX Energy

SDX has announced a gas discovery at the SD-5X exploration well which targeted the Warda prospect in the South Disouq development lease.

SD-5X (SDX:36.85% WI) spudded on 4 March and reached TD at 7,855ft MD on 16 March which was on time and within budget. The primary basal Kafr El Sheikh target was encountered at 6,973ft MD and discovered 55.5ft of net pay gas sand with an average porosity of 26.3%, all of which were in line with pre-drill estimates. SD-5X will now be completed, tested and tied-in via the existing SD-4X flow-line to the CPF and it is estimated that the well will be on production in June 2022. An announcement concerning the results of the testing of SD-5X will be made in due course.

With the completion of SD-5X, the rig will now move to the second well in the three well campaign, SD-12-East on the Sobhi Field (planned spud of mid-April). The third well in the campaign will be the MA-1X well targeting the Mohsen prospect (planned spud of mid-to-late May).

Mark Reid, CEO of SDX, commented:

“I am very pleased to announce the success of the first well in the South Disouq 2022 drilling campaign, and, that the SD-5X well aims to contribute to production by June 2022. Our production guidance issued earlier this year did not reflect success at this well and as a result we will be providing updated guidance once the well is connected and producing. The three well campaign aims to further exploit the potential that we see in the South Disouq area. I look forward to updating the market further on the results of the SD-5X well-test and as the 2022 campaign progresses.”

This is undoubtedly more good news for SDX with the drill bit and when fully updated the South Disouq area should be good for SDX shareholders. Talking of shareholders SDX has an eclectic mix of investors the like of which is rarely if ever seen around these parts.

Firstly and I apologise for repetition, I would be interested to know what the stance of WAHA is especially after management changes, maybe time to a jump on a plane to the Middle East. Also on those eclectic shareholders, adding the top 7 of them gets you to nearly 60%, I wonder what their view about an investment that has gone from 18.3p to 8.3p a share in a year when hydrocarbon prices have roofed it. Don’t get me wrong, these shares are incredibly undervalued it’s just that I’m not sure right now what will trigger the necessary market reaction…