Oil price, Southern, Kistos, Coro, Petrofac. And finally…

WTI (Jan) $80.04 -7c,  Brent (Jan) $87.45 -17c, Diff -$7.41 -10c. 

USNG (Dec) $6.77 +47c, UKNG (Dec) 268.27p -1.73p, TTF (Dec)  €116.1 -€3.39.

Oil price

As long as China continues to suffer from this resurgence of Covid and more deaths have meant more lockdowns across the country the zero tolerance policy is not exactly the magic weapon it was promised to be. Indeed, yet again I agree with Jim O’Neill, who on CNBC today suggested that the only way for China to sort this out would be to get the cheque book out and buy in a few billion decent vaccinations…

Southern Energy- Gulf Coast gold

Southern has announced the release of its third quarter financial and operating results for the three and nine months ended September 30, 2022. 

All figures referred to in this news release are denominated in U.S. dollars, unless otherwise noted.

THIRD QUARTER 2022 HIGHLIGHTS

·    $8.3 million of adjusted funds flow from operations[1] in Q3 2022 ($0.06 per share basic and diluted) compared to a loss of $0.2 million in Q3 2021 ($0.00 per share basic and diluted) and $14.1 million for the nine months ended September 30, 2022 ($0.14 per share basic and $0.13 per share diluted), an increase of 907% from the same period in 2021

·    Net earnings of $6.6 million ($0.05 per share basic and $0.04 per share diluted) and $7.6 million ($0.08 per share basic and $0.07 per share diluted) for the three and nine months respectively ended September 30, 2022 as compared to net earnings of $4.3 million ($0.10 per share basic and $0.07 per share diluted) and $6.8 million ($0.18 per share basic and $0.15 per share diluted) in the same period of 2021, an increase of 53% and 12% as compared to the prior periods, respectively

·    Petroleum and natural gas sales of $19.2 million in Q3 2022, an increase of 268% from the same period in 2021

·    Q3 2022 average production of 20,449 Mcfe/d[2] (3,408 boe/d) (96% natural gas), an increase of 67% from the same period in 2021

·    Average realized natural gas and oil prices for Q3 2022 of $10.00/Mcf and $91.93/bbl, respectively, reflecting the benefit of strategic access to premium-priced US sales hubs in a geographic region with strong industrial and power generation natural gas demand

·    On July 7, 2022, successfully closed a $17.5 million bought deal prospectus offering in Canada and a $13.5 million placing in the UK, raising aggregate gross proceeds of $31.0 million

·    Exited Q3 2022 with a Net Debt Surplus¹ of $20.4 million

·    Successfully renegotiated an increase of $25.0 million borrowing capacity (currently undrawn) with its current lender in respect of its senior secured term loan to increase the total Credit Facility to $35.0 million (details of which are provided within the MD&A and Financial Statements)

Ian Atkinson, President and CEO of Southern, commented:

“Our Q3 results have displayed that with a strong underlying production base and exposure to high prevailing commodity prices, and in particular the $10.00/Mcf our gas production has achieved, our business can provide significant cash flows and valuable capital to further our ambitious growth plans.   Our recent equity financing and credit facility expansion will allow us to accelerate the organic growth strategy portion of our goal to reach 25,000 boe/d. The success of the first three wells at Gwinville has already increased our corporate production by over 100% and we remain truly excited at the future potential of this asset.  We now look forward to beginning a long-term development drilling program, starting in Q4 2022, to unlock shareholder value due to the significant reserves, production and cashflow growth in Gwinville. This upcoming program will utilize the learnings from the three well program in Q2 as well as drill horizontal lateral lengths of up to 6,500 ft in length.  The vast company owned infrastructure at Gwinville allows for quick conversion from capex to cashflow in this next phase of development which will support our fundamental strategy of both organic and inorganic growth of natural gas weighted assets in the Gulf Coast area of the United States in a timely fashion. We look forward to updating the market once we have results from the initial phase of our development plan which we expect will act as a significant catalyst to unlock the value in the current share price.”

Financial Highlights

Notes:

⁽¹⁾          See “Reader Advisories – Specified Financial Measures”.

Capital Budget

Based on the success of the initial three well appraisal program at Gwinville, Southern’s Board of Directors has approved a capital budget of $78.1 million for the first half of 2023.  Due to a delay in receiving the drilling rig from the previous operator, resulting in a later start to the Q4 drilling program, $11.4 million of the previously approved $34.4 million second half 2022 capital budget has been deferred into 2023 and is included in the $78.1 million first half 2023 program.  The current Gwinville development program will consist of the drilling, completion and equipping of up to 13 horizontal wells, as well as the necessary compression additions, pad construction, in-field pipelines and water disposal well conversions that will service the next few years of Gwinville development.  Major services and equipment have been secured for the development program to optimize capital and operational efficiencies. The approved drilling program will target multi-zone horizontal potential in the Upper Selma, Lower Selma and City Bank formations.  

Operations Update

Q3 2022 represented the first three months of full production addition from the three well appraisal program in the Gwinville field. The three well pad site contributed approximately 1,546 boe/d (9.3 MMcfe/d) – an increase of more than 80% to Southern’s base production in the quarter.  All three horizontal wellbores targeted the Upper Selma Chalk formation, highlighted by the 19-3 #2 well achieving an average initial production rate over the first 30 days (“IP30”) of 6.5 MMcf/d.  After the first 120 days of production (“IP120”), the wells have averaged 533 boe/d (3.2 MMcfe/d).  When these appraisal rates are normalized for a horizontal lateral length of 5,500′ – i.e. the length of the average lateral planned in the upcoming program – the IP120 rate per well is approximately 900 boe/d (5.4 MMcfe/d).  The wells are continuing to perform as expected based on preliminary estimates, and Southern will likely be installing tubing strings into each of the laterals in the next few months to optimize flow efficiency.

Based on these successful production results and supported by the $31.0 million equity financing and $25.0 million increase to the Company’s existing borrowing capacity, Southern began preparations for a multi-well, long-term re-development program in the Gwinville field. The drilling rig moved to the Company’s 18-10 padsite and on November 20, 2022 spud the first of the three planned horizontal wells.  The 18-10 padsite will feature two Upper Selma Chalk horizontal wells, along with Southern’s first City Bank horizontal appraisal well.  The program will also include the first horizontal evaluation of the Lower Selma Chalk formation.  Southern is in the process of constructing five separate padsites for multi-well pad drilling to support a long-term drilling program.       

Outlook

Southern has recently spud the first well in the next phase of the drilling program at Gwinville, with all major services and equipment procured for safe and efficient operations.  Southern intends to strategically and efficiently deploy cash from the recent equity financing and increased borrowing capacity from the Credit Facility to capitalize on the strong natural gas pricing in the Southeastern U.S. and strong economics at the Gwinville field, to materially grow the Company organically over the coming years. As Southern refines its drilling techniques on subsequent Gwinville wells and increases its average horizontal wellbore length, management are confident that the economics of the wells will be further increased reducing payback time significantly.

Natural gas pricing has remained strong in the Southeastern U.S. spot and forward basis markets highlighted by the August 2022 settlement price where a portion of Southern’s natural gas sold for approximately $5.00 per MMBtu premium to NYMEX.  The futures markets continue to indicate premiums to NYMEX extending out to 2026.  At current pricing the Company’s average horizontal well at Gwinville is expected to payout in less than 12 months.  The Company continues to monitor these premium prices and is prepared to hedge additional basis exposure at these elevated basis premiums.

Calvin Yau, Chief Financial Officer of Southern, commented:

“Q3 was a strong period for Southern with the quarter representing the first full period of cash flow from our successful Gwinville appraisal programme. Our strong production along with the continued strength of natural gas spot and basis pricing premiums to NYMEX in Southeastern U.S. has put the Company on a strong footing as we embark on further drilling. This long-term drilling program will add new unhedged production allowing Southern and its shareholders to realize significant additional value, from sales made at premiums to NYMEX. From a balance sheet perspective our $31.0 million equity financing and $25.0 million increase to the Company’s existing borrowing capacity means that we are able to fund a capital programme that allows us a level of cashflow which we can recycle into further development of our asset base, increasing cashflows further.”

The Company’s long-term strategy remains consistent, with an unwavering commitment to environmental, social and governance principles that support the continued development and consolidation of prolific reservoirs that are outside of the more expensive shale basins. Cost savings and financial discipline will remain a priority through the continued enhancement of operations and the ongoing evaluation of opportunities to reduce operating and capital costs.

Southern thanks all of its stakeholders for their ongoing support and looks forward to providing future updates on operational activities.

I have been a huge fan of Southern since it came to the London market last year and time after time the company has delivered solid results and this announcement is no exception. It really does tick all the boxes, production of 3,408 boe/d gives strong revenues, growing net profits and strong free cash flow deliver a healthy cash balance and all at premium prices. 

One of the key differences that makes SOUC a standout in the sector is the pricing it achieves, average realised natural gas and oil prices for Q3 2022 of $10.00/Mcf and $91.93/bbl, respectively, are quite astonishing and delivered due to strategic access to premium-priced US sales hubs in a geographic region with strong industrial and power generation natural gas demand.

Next up is the top of class total process costs, running at some 65 cents per mcfe which is genuinely outstanding in the sector. Even the super-majors who should be much cheaper with their vastly larger throughputs are well over $1 per mcfe, the answer is partly in the much cheaper transportation by Southern and partly due to the high quality infrastructure particularly in the Gwinville where the Selma and City Bank formations are key.

All these mean that when the wells start to come into their prime in around February there should be a number of producing sites and the company will have a pretty good idea of production for 2023. Also worth noting is that early next year the company will be drilling longer laterals of 5,500-6,500 feet which should translate into improved well performance and further cost efficiencies.

All these mean that when the wells start to come into their prime in around February there should be a number of producing sites and the company will have a pretty good idea of production for 2023. Also worth noting is that early next year the company will be drilling longer laterals of 5,500-6,500 feet which will be in the reservoir for most of that time.

So, to sum up Southern does indeed tick all my boxes, plenty of wells ensuring growing production which get premium pricing and at the lowest costs possible. The company will therefore produce low cost, high margin gas with massive potential upside, what’s not to like? With a target price of 150p before looking at the longer term upside a place in the Bucket list is a given for Southern. 

Kistos

The board of directors of Kistos has announced that a court meeting will be held on 14 December 2022 at 10.30 a.m. and a general meeting of the Company shall occur thereafter at 10.50 a.m. on 14 December 2022.

The Board further announces it is pursuing a scheme of arrangement under Part 26 of the Companies Act 2006, as amended following which the Group will interpose and maintain a new non-operational entity, Kistos Holdings plc, which will become the holding company of, and the provider of working capital to, the Group.

A circular in relation to the Scheme containing notices of Court Meeting and GM and associated forms of proxy. Copies of the Circular will today be sent to the shareholders of the Company and will be available for inspection on the Kistos website: https://kistosplc.com/investors/circulars/. 

The Board views the Scheme as the most effective and appropriate way to structure the Group and, ultimately, to restructure the Group’s debt facilities on a more efficient basis. The rights of Shareholders will remain unchanged following the Scheme and Shareholders will be able to trade their holdings in Kistos Holdings plc Ordinary Shares as they were able to do in relation to Kistos plc Ordinary Shares.

Kistos is following in well trodden footsteps by going through the process of restructuring the company to make it possible for it to be able to distribute profits to shareholders and give it flexibility to reward shareholders when appropriate. 

The company has a clear policy of acquiring underperforming assets, turning them round and returning money to shareholders when appropriate. This action should be seen in that light but it might also be worth noting in London and The Hague that making life difficult to operate under high fiscally demanding regimes will force them away or even to distribute its assets.

My own view is that companies like Kistos, for whom part of their raison d’etre is by buying assets and growing them, may find that doing so in the UK or the Netherlands will only be possible to offset and minimise tax obligations. Accordingly with fewer opportunities, companies may either invest elsewhere or distribute assets to shareholders. 

Coro Energy

Coro has confirmed the resumption of production at the Bezzecca gas field in Italy, to provide an update on stabilised production rates from Bezzecca.

Production commenced on 8 November 2022 and was initially constrained by the Company at lower rates which were increased gradually to keep the Water to Gas Ratio under control, with the plan to reach a stabilised production plateau following the best practices of reservoir management. The well has been producing at a stabilised rate of 15,000 scm/day since 18 November 2022 with very good pressure support giving good indications for the long term field performance.

James Parsons, Coro’s Chairman, commented:

“I am delighted to announce that after having reached the stabilised rates in Bezzecca our total production in Italy has reached 21,000 scm/day from 3 fields which, combined with current gas prices, is providing very favourable cash flow generation.

Several options to resume production from Sillaro are still under review and further updates will be made, as appropriate, in due course.”

Little to add here, excellent news from Coro where increased, high revenue production from Italy is providing extra cash flow. 

Petrofac

Petrofac announces today that Sami Iskander, Group Chief Executive, will leave the business at the end of March 2023 in order to pursue other interests.

Tareq Kawash will be appointed Group Chief Executive from 1 April 2023, following an orderly handover. Tareq will also be appointed as an Executive Director to Petrofac’s Board of Directors at that time.

Chairman René Médori commented:

“Sami’s contribution to the Company over the last two years has been invaluable. Having overseen the resolution of the SFO’s historic investigation and led a comprehensive refinancing programme, Sami has reshaped the business and put it firmly on a path to growth. On behalf of the Board and the Company as a whole, I extend my heartfelt thanks to Sami for his unwavering energy, decisive leadership, and passionate ownership of Petrofac’s strategy.

“We are delighted that Tareq Kawash has agreed to join the Board as our new Group Chief Executive. Tareq joins us from McDermott, where he was most recently Senior Vice President of its Onshore and Offshore Business Lines, and a member of McDermott’s Executive Committee. With 30 years’ international EPC leadership experience, and an impressive business development track record, Tareq is exceptionally well placed to build on the foundations laid by Sami. We look forward to welcoming him to Petrofac.”

Tareq Kawash said:

“I have known Petrofac throughout my career and have always admired its unique execution capability. I look forward to leading the team in the next stage of its journey back to growth and leadership in the sector, building on the excellent progress Sami has made.”

Group Chief Executive, Sami Iskander, commented:

“I joined Petrofac with the task of setting the business on the right course for sustainable growth, resolving historic issues and positioning the Group for the future. After an intense period, Petrofac is today in a stronger position. I am grateful to the people of Petrofac for their support, without which none of these achievements would have been possible. My heartfelt thanks go to all of them.  I will sincerely miss them.”

It seems like a short stint for Sami as CEO after only two years but things change and the market has reacted with some caution, previously change has been after longer stints in these roles perhaps?

I’m still very keen on PFC for the long term but with no news on contracts in recent months I suspect things are moving to the right and next year might see more of the order book filling that I was expecting 2H this year. 

And finally…

Yesterday in the World Cup after the England 6-2 win over Iran, Senegal 0-2 Netherlands and Wales 1-1 USA .

Today has seen one of the most amazing shock results of all time as Saudi Arabia beat Argentina 1-2. Denmark drew 0-0 with Tunisia. As I write Mexico and Poland are 0-0 and tonight France play Australia.