WTI (Sept) $90.50 -26c, Brent (Oct) $96.31 -34c, Diff -$5.81. 

USNG ( Sept) $7.83 +20c, UKNG (Sept) 374.99p +43.25p, TTF (Sept)  €196.2 +€6.70.

Oil price

Oil continues to drift, even after today’s better than expected US CPI numbers markets rallied but not the oil price. Maybe as it’s the monthly reporting time that is responsible but I’m convinced that underlying the bulls will out.

The API reported a bigger than expected build in crude stocks so the EIA numbers later will be as interesting as always.

Afentra

Afentra has announce that further to the announcement made on 28 April 2022 regarding the proposed acquisition of interests in Block 3/05 and Block 23  from Sonangol Pesquisa e Produço S.A, an Admission Document in relation to the Acquisition and Notice of General Meeting to approve the Acquisition will be posted to shareholders today and is available to download from the Company’s website.

Following the publication of the Admission Document, the Company anticipates that the suspension of the trading in the Company’s shares will be lifted and that trading in the Company’s Ordinary Shares will recommence at 8.00am BST this morning.

The General Meeting will be held electronically on https://web.lumiagm.com/ at 2pm on 30th August 2022.

Afentra Strategy Overview

·      Launched in May 2021 with strategic intent to:

 support a responsible oil & gas industry transition in Africa

 capitalise on opportunities resulting from the energy transition in Africa

 create long-term value for all stakeholders

·      Announced two strategically consistent and complementary transactions in Angola that:

 deliver a balanced cash flow generative portfolio of assets with significant opportunities for future reserves and production growth

 provide an opportunity to establish a long-term relationship with Sonangol

 enable Afentra to influence a broad and positive ESG impact

 creates a strong foundation for future transactions in Angola

·      Continue to pursue its material growth strategy by:

 actively screening multiple opportunities across the region

 supporting the increasingly pragmatic narrative for a just and responsible energy transition for the African continent

Angolan Acquisitions

·      Provide a foundation for Afentra’s strategy to deliver material value from mature long-life assets with opportunities for low-cost incremental investment

·      Competent Persons Report published, gross 2P reserves increased to 115 million barrels

 Net 2P reserves of 27.7 million barrels

 Net 1H 2022 production of c.4,700 bbl/day net to Afentra

 Core 2P reserves valuation of c.$185 million1 with significant upside potential  

·      Attractive low-cost entry into a positive cash flow asset:

 Implied acquisition cost of c.$3.6/2P bbl2

 Average annual FCF net to Afentra of c.$36 million @ $75/bbl over next 5 years

·      Transactions will be financed through cash on balance sheet and committed five-year RBL and working capital facility with Trafigura

 Up to $75 million RBL facility3; 8% margin over 3-month SOFR

 Up to $30 million revolving working capital facility; 4.75% margin over 1-month SOFR

Re-admission process and key timings

·      Resumption of trading, and commencement of dealings on AIM of the Company’s existing Ordinary Shares expected to become effective at 8:00am  

·      Admission Document available to download from the Company’s website in accordance with the AIM Rules:  https://afentraplc.com/wp-content/uploads/2022/08/Admission-Document-and-Notice-of-General-Meeting.pdf

·      General meeting to approve the Acquisition will be held on 30th August 2022

·      INA deal completion expected Q4 2022 post Government approvals

·      Sonangol deal completion expected Q4 2022 post Block 3/05 licence extension and Government approvals

·      Admission of enlarged group to trading on AIM expected Q4 2022

1)     Valuation is based on NPV10%

2)     Based on the initial consideration

3)     RBL facility is up to $110million of which up to $75million is available for the Sonangol and INA transactions  

Commenting on the update, CEO Paul McDade said:

“We are very pleased to have Afentra’s shares re-admitted to trading after the lengthy suspension period associated with the RTO process. We are emerging from suspension with two complementary transactions that provide a strong growth platform underpinned by robust cash flow and significant upside value. 

Since launching just over a year ago, Afentra has been focused on establishing a profile as a credible and responsible independent oil and gas company with a clear vision to support an effective and just energy transition in Africa. In parallel we have been actively screening opportunities against the strict criteria we established at the outset in terms of asset type, geography and valuation metrics. To support our business development activities, we have also engaged in preliminary discussions with both debt and equity capital markets to ensure we have supportive investors for the deals we bring to market. These transactions are the culmination of all of those aspects and we look forward to demonstrating the value accretive nature as we complete them both in the coming months.

The market drivers that support Afentra’s purpose and long-term growth strategy remain compelling, despite the current impact of a volatile commodity price environment, and we remain highly active and disciplined in our assessment of the opportunity landscape. We view these inaugural deals in Angola as the early building blocks in our long-term growth ambitions and look forward to rewarding our shareholders for their trust and patience.”

In the year or so since Paul Mc Dade and team stepped into what is now Afentra much has been going on, originally we knew what sorts of deals the team were looking at, then the actual deals and now the financing of the transaction and of course the re-admittance of the shares to trading. 

In that financing which is funding the deal to the tune of 75:25 debt to cash, we have a new RBL from Trafigura worth $110m of which $75m is immediately available over 5 years with an 8% coupon. There is also a $30m working capital facility to use for crude liftings which itself is very flexible to compensate for slightly irregular timing of substantial payments. 

Right from the start Afentra had a clear strategy and pursued the opportunities in West Africa that he and the team were particularly experienced in and that has become obvious as the portfolio that they have purchased has been revealed. The team are said to be ‘super excited’ about the assets along with the opportunities and potential that they present, indeed it ticks all the boxes of production with added value over a long period of time. 

With a portfolio that will still be producing meaningful barrels out to at least 2040 it also ticks the box of the mantra that this is ‘just the start’ of building a new, substantial African focused independent oil company. 

More comes today in the form of an updated CPR which more than confirms the sensibly conservative management estimate of 100m bbls as the independent report gives them gross 2P reserves of 115m barrels, a net 27.7m b’s.Thus the core 2P reserves valuation of c.$185m based on NPV10% are very positive, not least as it has significant upside potential and that the 2C and 3C numbers are also higher than estimated. 

Completion of the deal is hoped to be in October 2022 with the delay due to the Presidential elections in Angola which should be resolved by then. In the meantime for guidance purposes the CPR has net 1H 2022 production of c.4,700 bbl/day net to Afentra.

Whilst this is a very good deal indeed, I am still confident that the ambitions of the board and also key shareholders are way beyond this acquisition and that the team are working on other deals where they have ‘ a pipeline of opportunities’. What is more this is not growth for its own sake but growth for value, Afentra is focusing on deals not just geographically but on type of asset and looking at the best that come from a highly competent screening process in Angola and beyond. 

Finally I have been impressed by the small but high quality and experienced management team that Paul has assembled, and that importantly it ticks all the necessary ESG boxes as a  baseline for long term plans in this area.

The shares have returned this morning at 25.5p as I write, up some 75% from the previous pre-suspension quote which looks like a good start to me. Indeed it is worth noting that CEO Paul McDade has notified the company today that he has bought some 821,192 shares at 24.3p to make his holding in the company to 1.4%, a useful, cash commitment which is always impressive. 

At first blush my initial target price is pitched at 40p but once I get a further chance to assess the company in detail I may tinker with that on the upside. 

Kistos/Serica

Kistos plc

Kistos is disappointed that, despite repeated attempts by Kistos, the Board of Serica Energy plc has failed to engage meaningfully either with respect to Kistos’ proposed offer for Serica or the terms of Serica’s offer for Kistos despite the board of directors of both companies acknowledging the industrial logic in combining the portfolios of the two companies. As a result, Kistos today formally announces that it will not make a firm offer for Serica.

The Board of Kistos remains confident in Kistos’ strategic direction and positioning as an independent North Sea gas champion and proactive consolidator in the sector. The Kistos Board remains focussed on delivery of Kistos’ strategic goals.

The Kistos Board will therefore continue to pursue other paths to deliver further on those goals, with the objective of enhancing shareholder value and driving scale and consolidation, as it has successfully done since the Company’s inception in 2020.

Serica Energy plc

Statement of intention not to make an offer for Kistos plc

Further to the announcement made by Serica Energy plc in relation to a possible offer by Serica for the entire issued and to be issued share capital of Kistos plc, Serica confirms that it does not intend to make an offer for Kistos.

Kistos announced on 12 July 2022 that it had rejected a possible offer from Serica on 8 July 2022. Subsequently it has not been possible to reach agreement with Kistos on the terms or structure of a revised possible offer.

Serica will continue to proactively seek opportunities to utilise its strong balance sheet and operating capability to invest in its existing assets and diversify its production portfolio through mergers and acquisitions. The Serica board will maintain a balanced approach to deploying capital, including further capital returns, while factoring in the requirements for the ongoing business and opportunities for profitable asset and corporate deals.

Nothing to add here, two of the biggest and best in the sector and with different approaches to management have decided that locking horns would have been counterproductive. Also advice from shareholders may have prevented a long and expensive hostile campaign by either side. 

Gran Tierra Energy

  • Average Total Production of 30,607 BOPD, Highest since Fourth Quarter 2019
  • Total Average Production Up 4% from First Quarter 2022 and 33% from Second Quarter 2021
  • Generated Net Income of $53 Million
  • Increased Adjusted EBITDA(1) to $140 Million, Up 286% Year-on-Year
  • Grew Net Cash Provided by Operating Activities to $143 Million, Up 285% Year-on-Year
  • Increased Funds Flow from Operations(1) to $104 Million, Up 345% Year-on-Year, Highest since First Quarter 2013
  • Generated Free Cash Flow(1)of $38 Million
  • Credit Facility Repaid in Full
  • As of June 30, 2022, Cash Balance of $109 Million and Net Debt(1) of $491 Million

Gran Tierra has announced the Company’s financial and operating results for the quarter ended June 30, 2022. All dollar amounts are in United States dollars, and production amounts are on an average working interest before royalties basis unless otherwise indicated. Per barrel and bbl per day  amounts are based on WI sales before royalties. For per bbl amounts based on net after royalty production, see Gran Tierra’s Quarterly Report on Form 10-Q filed August 8, 2022.

Key Highlights of the Quarter:

  • Net Income: Gran Tierra generated net income of $53 million, up 275% from first quarter 2022, and versus a net loss of $18 million in second quarter 2021.
  • Diluted Earnings Per Share: Gran Tierra generated earnings of $0.14 per share, up from $0.04 per share in the Prior Quarter and compared to a net loss of $0.05 per share in second quarter 2021.
  • Significant Growth in Net Cash Provided by Operating Activities: The Company realized net cash provided by operating activities of $143 million, up 285% from second quarter 2021.
  • Highest Funds Flow from Operations(1) since First Quarter 2013: Funds flow from operations(1) increased to $104 million, the highest since first quarter 2013, which was up 19% from the Prior Quarter and up 345% from second quarter 2021. On a diluted per share basis funds flow from operations was $0.28, which was up from $0.06 per share in second quarter 2021 and up from $0.23 per share in the Prior Quarter.
  • Strong Free Cash Flow(1): Gran Tierra generated free cash flow(1) of $38 million while completing the majority of the Company’s development programs in Acordionero and Costayaco.
  • Rapid Debt Reduction: Gran Tierra has repaid its credit facility. In only two years, Gran Tierra fully paid down its credit facility balance from $207 million to zero, which demonstrates the Company’s commitment to rapidly reduce debt with its free cash flow(1). As of June 30, 2022, the Company had a cash balance of $109 million and net debt(1) of $491 million. The Quarter’s net debt to annualized EBITDA(1) ratio was below 1.0 times and the Company is targeting a long-term net debt to EBITDA ratio of under 1.0 times at an assumed $60/bbl Brent oil price.
  • Annual Production Growth: Production was in-line with the budget and averaged 30,607 BOPD, up 4% compared to the Prior Quarter and 33% from second quarter 2021.
  • Additional Key Financial Metrics:
    • Capital Expenditures: Capital expenditures of approximately $65 million were higher than the Prior Quarter’s level of $41 million, as the majority of Gran Tierra’s capital programs in both Costayaco and Acordionero were completed during the Quarter.
    • Increased Oil Sales: The Brent oil price averaged $111.98/bbl, up 14% from the Prior Quarter and up 62% year-on-year. Gran Tierra generated oil sales of $206 million, up 18% from the Prior Quarter and 113% from the second quarter of 2021. The significant annual increase in oil sales was driven by the Company’s 33% increase in quarterly production year-on-year, combined with the increase in the Brent oil price over the same period.
    • Strong Operating Netback(1)(2): The Company’s operating netback(1)(2) of $59.62/bbl was the highest netback since third quarter 2014, and was up 14% from the Prior Quarter and up 81% year-on-year. This strong annual increase was driven by Gran Tierra’s 33% rise in quarterly production year-on-year and the strong growth in the Brent oil price.
    • Operating Expenses: Compared to the Prior Quarter, Gran Tierra’s operating expenses increased 8% to $14.38/bbl, up from $13.34/bbl, due to higher workover and power generation costs. Compared to the second quarter of 2021, operating expenses increased by 12% on a per bbl basis, primarily as a result of workover costs.
    • Other Expenses:
      • The quality and transportation discount increased 3% to $13.00 per bbl, compared to $12.57 per bbl in the Prior Quarter, because of widening Castilla and Vasconia oil price differentials to Brent.
      • General and administrative expenses before stock-based compensation were $2.86 per bbl, down from $2.97 per bbl in the Prior Quarter and $3.49 per bbl in second quarter 2021. This decrease was driven by the Company’s higher sales volumes in the Quarter.

Message to Shareholders

“Gran Tierra has had another strong quarter where we were able to deliver on our development campaigns in both the Acordionero and Costayaco fields, while continuing to make progress on drilling exploration wells in both Ecuador and Colombia,” commented Gary Guidry, President and Chief Executive Officer of Gran Tierra. “In this high oil price environment and with our high-quality asset base, we were able to reduce net debt(1) by $298 million or 38% over the past two years. We also generated our highest quarterly funds flow from operations(1) since the first quarter of 2013.

With our credit facility now paid off, we plan to maintain a cash balance in excess of $75 to $100 million in order to maintain liquidity. We plan to deploy excess cash over and above our targeted cash balance to strengthen our balance sheet, buy back shares and pursue accretive opportunities to continue to strengthen our portfolio.

As we look forward to the third quarter of 2022, we are excited about spudding exploration wells in Colombia and Ecuador and increasing production in our core assets.”

This is a very good quarter from GTE and deserves to have had better recognition from the share price but it won’t be the only company which the market hasn’t appreciated enough in recent weeks. Having said that it has paid down the debt and is building cash balances so I’m sure that shareholders will be looking forward to a long awaited distribution…