WTI (Sep) $80.39 +$1.01, Brent (Oct) $84.12 +67c, Diff -$3.73 -34c.

USNG (Sep) $2.62 +3c, UKNG (Sep) 94.0p +2.1p, TTF (Sep) €36.805 -€0.84.

Oil price

Oil mounted a modest rally yesterday, partly due to a weak greenback. and partly as Chinese leaders at a Summit pledged strong support for the economy. This merely prompted Nomura to say that China is in a ‘downward spiral’ and people headed for the doors.

Southern Energy

Southern has announced its second quarter financial and operating results for the three and six months ended June 30, 2023. Selected financial and operational information is outlined below and should be read in conjunction with the Company’s unaudited consolidated financial statements and related management’s discussion and analysis for the three and six months ended June 30, 2023, which are available on the Company’s website at www.southernenergycorp.com and have been filed under the Company’s profile on SEDAR+ at www.sedarplus.ca. 

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

SECOND QUARTER 2023 HIGHLIGHTS

·    Generated $0.2 million of adjusted funds flow from operations[1] in Q2 2023, excluding $0.5 million of one-time transaction costs and general and administrative costs

·    Net loss of $3.8 million in Q2 2023 ($0.03 net loss per share basic and diluted), compared to net earnings of $2.8 million in Q2 2022

·    Petroleum and natural gas sales of $3.7 million in Q2 2023 and $8.9 million for the six months ended June 30, 2023

·    On June 1, 2023, Southern completed a strategic and highly synergistic acquisition in Gwinville of approximately 400 boe/d (99% natural gas) for cash consideration of $3.2 million (the “Gwinville Acquisition”)

·    Q2 2023 average production of 15,907[2] Mcfe/d (2,651 boe/d) (96% natural gas), an increase of 12% from Q2 2022. Current field sales production is approximately 2,900 boe/d (96% natural gas), with four new horizontal wellbores awaiting completion operations. Once Southern commits to completing these two padsites, it is expected that all four wells could be on production within approximately eight weeks

·    Average realized natural gas and oil prices for Q2 2023 of $2.18/Mcf and $72.83/bbl compared to $7.53/Mcf and $109.01/bbl in Q2 2022. The current NYMEX strip price forecast for the remainder of 2023 is averaging approximately $3.10/MMBtu, a 47% increase compared to the benchmark price in Q2 2023

Ian Atkinson, President and Chief Executive Officer of Southern, commented:

“Our focus for Q2 2023 was primarily on completing and integrating the Gwinville Acquisition. We have started and will continue, to maximize operational synergies of the assets, as well as position the Company for the return to growth as commodity prices continue to improve. In addition to considerable synergistic value and high-quality drilling inventory, the Gwinville Acquisition provides Southern with access to sell gas into the Florida Gas Transmission system where, similar to Transco Zone 4, we are realizing continuous premium pricing to the NYMEX natural gas price. As the warm summer temperatures in the southern U.S. have elevated natural gas power demand and we now head into a period of slowing production growth due to lack of capital spending by the industry and incremental demand from additional LNG export capacity, we are encouraged by the outlook of supply and demand dynamics for U.S. natural gas. Southern is well positioned to capitalize on natural gas prices with production behind pipe which can be brought on stream in a short time frame.

We remain committed to reaching our goal of 25,000 boe/d and continue to assess opportunities to grow inorganically further building shareholder value as commodity prices continue to recover to a point where we plan to re-launch our organic growth program.”

Whilst Southern has had to cope with the current weak natural gas price it has capably moved to plan B and production has grown to 2,651 b/d in Q2 2023 from 2,607 b/d in Q1 2023 which is expected to rise once the Gwinville acquisition that closed on 1 June 2023 fully kicks in. 

I have mentioned this before and it has been crucial as a strategic part of the long term plan to de-risk the portfolio with its synergistic qualities. Production is rising to some 2,900 b/d before adding four new wellbores which will add production around 8 weeks. 

The company has spent heavily on Capex which gears the company to future gas prices, indeed at present, future strip prices for 2H 2023 are at a premium of nearly 50% to the first half of this year. Exposure to Florida has meant a premium too, as CEO Ian Atkinson mentions above as seasonal temperatures have ‘elevated power demand’. 

Southern are still committed to the 25,000 b/d of production and continue to assess inorganic growth opportunities whilst prices are weak but will re-launch its organic growth programme when recovery permits. A combination of these strategies will inevitably see significant price recovery which will be fully deserved.

Financial Highlights

 

Three months ended June 30,

Six months ended June 30,

(000s, except $ per share)

2023

2022

2023

2022

Petroleum and natural gas sales

$        3,741

$         10,311

$      8,930

$       16,236

Net (loss) earnings

(3,767)

2,838

(4,887)

983

Net (loss) earnings per share

 

 

 

    Basic

(0.03)

0.03

(0.04)

0.01

    Fully diluted

(0.03)

0.03

(0.04)

0.01

Adjusted funds flow from operations (1)

(366)

              3,590

1,379

5,824

Adjusted funds flow from operations per share (1)

 

 

 

    Basic

(0.00)

0.04

0.01

0.07

    Fully diluted

(0.00)

0.04

0.01

0.06

Capital expenditures and acquisitions

5,292

10,104

40,184

16,976

Weighted average shares outstanding

 

 

 

    Basic

139,039

83,302

138,816

80,742

    Fully diluted

139,039

101,011

138,816

91,796

As at period end

 

 

 

Basic common shares outstanding

139,041

89,537

139,041

89,537

Total assets

104,075

58,347

104,075

58,347

Non-current liabilities

20,961

10,013

20,961

10,013

Net debt (1)

$      (26,158)

$    (12,814)

$      (26,158)

$    (12,814)

Note:

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

Gwinville Development Update

As previously reported in the Company’s announcement on May 30, 2023, the Company concluded operations on the latest drilling campaign which included seven new horizontal wells into three separate productive horizons from three distinct padsites in the Gwinville Field. The program added three Upper Selma Chalk wells, two Lower Selma Chalk wells and two City Bank wells. The drilling campaign was initially planned for 13 horizontal wells, but the Company paused the capital program in response to the weaker natural gas pricing that has persisted throughout Q2 2023. Of the seven wells that were drilled, only the three wells from the 18-10 padsite were completed with the other four wells (two on the 14-06 pad and two on the 13-13 pad) remaining as uncompleted, waiting on more supportive natural gas prices.

The four wells that are awaiting completion include the first two Lower Selma Chalk laterals, along with the second City Bank lateral and one of the Upper Selma Chalk laterals. These four wells are some of Southern’s longest laterals to-date. They were drilled with an average lateral length of approximately 5,400 ft and were steered within the high-graded intervals for an average of 95% of the wellbore length. The two padsites can be brought on production within a matter of weeks once completion operations are resumed. At current strip pricing, Southern will consider commencing completion operations in Q4 2023.       

The Company continues to flow back its first City Bank horizontal well at Gwinville 18-10 #1, with load fluid recovery of approximately 20%. The well was brought on-line in late February 2023 with gas rates increasing to approximately 600 Mcf/d and having remained flat for the past few months.  The Company believes that the most plausible explanation for the lower than expected gas rate is due to fracture communication with an offset well which had previously been produced from the deeper Tuscaloosa formation from the 1940′-1960’s.  It is expected that production will remain flat and/or increase as more load fluid is recovered and bottom hole pressure can be decreased, and that the overall recovery from the well should not be materially impacted. In future operations in City Bank horizontal wells, Southern will likely choose to create a buffer zone around the vintage abandoned Tuscaloosa wells by eliminating proximal frac stages to avoid any potential communication. The Company is very excited to complete the 13-13 City Bank horizontal well where it does not foresee any of these potential issues.

Remediation plans for the 18-10 #3 Upper Selma Chalk well that experienced a mechanical integrity issue with the production casing during completion operations have been finalized and services contracted to commence operations in late Q3 2023. The 18-10 #3 well was drilled to a total lateral length of 5,091 ft, achieved 80% of the lateral placed in the targeted porosity zone and was successfully completed in 44 stages prior to the mechanical issue.

Gwinville Acquisition Integration

Southern has been very successful in quickly integrating the acquired assets in Gwinville over the first few months following closing of the transaction on June 1, 2023. Immediate cost savings in the form of labour and supervision redundancies, as well as reduced maintenance contracts have been realized. Southern is currently in the process of installing the necessary pipeline infrastructure to consolidate the two gathering systems, allowing the Company to run one central compressor station versus the five that were running before the transaction. These synergies will not only remove costly rental compression and allow us to monetize spare owned compressors but will also eliminate approximately 250 Mcf/d of fuel gas and associated emissions and add this gas directly to sales volumes.  The Company expects this field work to be completed by the end of Q3 2023. 

The Company plans to workover a number of acquired wellbores that have significant upside production potential, also expected to be completed by the end of Q3 2023.

Additionally, marketing arrangements assumed from the previous operator have given Southern access to the Florida Gas Transmission Zone #3 that was not previously available. During Q3 2023, Southern has thus far been able to sell as much as 4,000 MMBtu/d into the system, which has had an average premium to Henry Hub/NYMEX over that period of approximately $0.40 – $0.60/MMBtu. The Company will continue to maximize our exposure to this sales delivery point as much as possible to optimize our field netbacks.      

Outlook

Southern has four high-impact, uncompleted wells (“DUCs”) that can be quickly completed and brought online through Southern’s 100% owned equipment at higher natural gas prices, greatly improving per Mcfe operating expenses, expected in Q4 2023. This will allow Southern to react quickly to changing commodity prices to maximize returns. Additionally, The Company currently has $11.5 million of unused capacity on its senior secured term loan (the “Credit Facility”), which can be utilized to complete the DUCs at supportive natural gas prices.

As part of its risk management and sustainability strategy, Southern continuously monitors both the price of NYMEX as well as the basis differentials in order to mitigate some of volatility of natural gas prices. Southern’s current commodity hedge program includes:

·    Fixed basis swap on 1,000 MMBtu/d at a $0.32/MMBtu premium to NYMEX from April 1, 2023 to October 31, 2023

·    Fixed price swap on 1,000 MMBtu/d at a price of $3.88/MMBtu from January 1, 2024 to December 31, 2025

·    Costless collar on 2,000 MMBtu/d with a floor of $3.00/MMBtu and a ceiling of $3.98/MMBtu from September 1, 2023 through March 31, 2024

Southern will continue to monitor NYMEX prices and the basis differential prices and is prepared to hedge additional volumes in a tactical manner going forward.

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

Beacon Energy

Beacon has announced an update on the Schwarzbach-2(2.) (“SCHB-2(2.)”) well.

Summary:

·   The SCHB-2(2.) well has encountered good quality oil-bearing reservoirs in the Meletta-Schichten sandstones and the Pechelbronner-Schichten  sandstones within the Stockstadt Mitte segment of the Erfelden field.

·   An electric wireline logging programme has been completed and initial analysis shows good quality oil-bearing reservoirs with porosity ranges above pre-drill expectations.

·   Initial evaluation of the logs over the PBS indicates a 34-metre gross interval containing 28 metres of oil-bearing net reservoir, with porosities averaging 18% and up to 28%, all of which significantly exceed pre-drill estimates.

·   These oil-bearing reservoirs were encountered approximately 25 metres higher than prognosis with oil observed on the shale shakers and in the mud pit whilst drilling these intervals.

·   No water-bearing sands were encountered in the Meletta or the PBS intervals.

SCHB-2(2.) electric wireline well logging results

The SCHB-2(2.) well reached total drill depth of 2,255m metres (1,717 metres True Vertical Depth) on 13 August 2023. This well was drilled to target hydrocarbons in the undeveloped Stockstadt Mitte segment of the Erfelden field, with 2P oil reserves of 3.784mmbbls assigned to this segment from the independent Competent Person’s Report (“CPR”) published by the Company in December 2022.

The electric wireline well logging has now been conducted in the well and is interpreted to have encountered good quality oil-bearing reservoir in the Meletta and the PBS reservoirs with porosity ranges above pre-drill expectations.  The initial evaluation of the logs over the PBS indicates a 34-metre gross interval containing 28 metres of oil-bearing net reservoir, with porosities averaging 18% and up to 28%, all of which significantly exceed pre-drill estimates.

The target reservoirs were encountered approximately 25 metres higher than prognosis and oil was seen on the shale shakers and in the mud pit whilst drilling these intervals. No water-bearing sands were encountered in any of the target reservoirs.

The thicker oil-bearing net reservoir and higher range of porosities are better than pre-drill expectations and, in combination with the shallower target depth, have positive implications for both the reserves description and the future cash generative potential of this segment of the Erfelden field.

The operating team will now undertake reservoir clean-up, production testing and install the production liner to bring the SCHB-2(2.) well into production through the existing Schwarzbach facilities which are owned and operated by the Company. The expectation is that this production will be brought onstream over the next month.

The Company expects to provide a further update on progress of the SCHB-2(2.) well after undertaking the reservoir clean-up operation and production testing.

Beacon Energy Chief Executive Officer, Larry Bottomley commented:

“The SCHB-2(2.) well has now been safely, effectively and successfully drilled and logged, a testament to the quality of the Rhein Petroleum operating team who delivered a positive outcome despite encountering certain technical challenges through the drill. The well has encountered oil bearing reservoir in the Meletta and PBS sandstones, both shallower than predicted with the PBS being a thicker interval with more sand and of better quality than pre-drill estimates. These results imply significant upside to the reserve range assigned to the Stockstadt Mitte segment in the CPR published by the Company in December 2022, and this will be the focus of one of the post-well projects.

“The electrical wireline logs demonstrate that this well has the capacity to materially increase the Company’s production and revenue as the well is brought onstream through our wholly-owned and operated existing facilities. This is a very important step in the Company’s aspiration to build a self-funding platform for growth.

“In addition, the data provided from the SCHB-2(2.) well will help to de-risk the 2C contingent resources of 2.4mmbbls assigned to the adjacent Schwarzbach South segment which will be targeted during the further development of the Erfelden field.

“The operations team will now focus on completing the well for production and we will update the market as appropriate”.

So the SCHB-2(2) well has eventually been drilled and logged despite substantial operational hurdles which meant that the well took a great deal longer than planned. But the results are excellent and success in finding oil in the Meleta and PBS sandstones reservoir, with both being shallower than predicted and the latter being a thicker interval was better than pre-drill estimates. 

Accordingly the CPR will be updated and of course once flow rates have been established the well can be brought onstream. When visiting the site recently we were able to view the extensive on site facilities with the capacity needed to take Beacon to the next level. 

As they say in Germany ‘Aller Anfang ist schwer’ so after this start things are clearly set fair for Beacon. After a 25% rise on Wednesday and a 35% rise today the foundations for the company going forward are sound. 

And finally…

The Prem fixtures start tonight with the Blades at Forest and tomorrow sees a London derby with the Cottagers hosting the Bees. The Cherries go to Anfield, Wolves entertain the Seagulls, the Red Devils are at White Hart Lane and the Noisy Neighbours host the Bar Coders.

On Sunday Villa host the Toffees and Chelsea go to the Hammers.

At 1100 hrs England’s Women play in the World Cup Final against Spain.

Plenty of rugby as a myriad of pre RWC friendlies take place. Wales play the Springboks at 15.15, Ireland will destroy England starting at 1730, Italy V Romania is the same time and France host Fiji at 20.05.