Oil price, Diversified Energy Company, Arrow Exploration. And finally…

WTI (Feb) $73.96 +83c, Brent (Mar) $76.51 +58c, Diff -$2.55 -25c.

USNG (Feb) $3.36 -30c, UKNG (Feb) 123.05p -1.52p, TTF (Feb) €49.0 -€0.78.

Oil price

Oil is looking pretty well set right now and with natural gas firm in both the USA and Europe for various reasons the energy background is feeling confident. The attacks over the last few days in Ukraine and Gaza have tightened geopolitics and with tight stocks, particularly at Cushing, the Saudis have even raised prices for February to Asian, European and Mediterranean customers.

And to add to that in the gas markets the cold snap forecast in the US keeps natural gas high over there and with no Russian gas passing through Ukraine things will inevitably tighten here as well. Finally in another last minute attempt to dictate policy Sleepy Joe has issued a ban on new oil drilling in a vast stretch of US coastal waters. 

Diversified Energy Company

Diversified has announced the acquisition of operated natural gas properties and related facilities located within Virginia, West Virginia, and Alabama from Summit Natural Resources. 

Transaction  Highlights  

•     Purchase price of ~$45 million, to be fully funded through cash on hand and current liquidity

•     Current net production of ~12 MMcfepd (2 Mboepd)^(a)

•     PDP Reserves of 65 Bcfe (11 MMBoe) with PV-10 of ~$55 million^(b)

◦     Purchase price equivalent of ~PV-16^(b)

•     Estimated 2025 Adj. EBITDA of ~$12 million^(b)

•     Existing Coal Mine Methane (“CMM”) volumes with opportunities to extend future production

•     Appalachian assets overlap existing operations providing synergies for increased cash margins

•     Strategic midstream pipeline growth facilitating capability to route additional produced volumes to premium sales points

•     Expected closing of the Acquisition during the first quarter of 2025

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

“This asset package is strategically located within our existing southern Appalachia operations and is uniquely positioned to benefit from the operational expertise of our field teams. Additionally, with this strategic acquisition, we anticipate capturing additional revenue from the sale of incremental environmental credits with our growth in the production of coal mine methane. The acquisition is anchored with stable production and strategic midstream assets, which provide optionality for existing production volumes to move to premium-priced markets. This bolt-on package will provide additional opportunities for us to drive improved margins through our Smarter Asset Management programs that continue to be a foundation and support for our consistent cash flows.

We continue to believe there is a sizeable backlog of organic Coal Mine Methane cash flow growth within our current Appalachian portfolio, and this acquisition highlights our ability to leverage existing capabilities, assets, and intellectual capital to grow this segment of our revenue stream inorganically. As we kick-start 2025, we are committed to our strategic imperative of “Energy-Optimized” and our unique solutions-based approach to improving operational and emissions performance of acquired assets while expanding margins and continuing to create long-term value for our shareholders.”

Readers who go back a long way with me will know why I absolutely love this deal, not just because it is a handy, accretive bolt-on acquisition, or that it strategically adds production within the existing portfolio, not even that it adds a fantastic midstream package that is bound to increase margins by attacking premium markets but that it brings the organic Coal Mine Methane potential in a big way.

The Environmental Credits, which are at present only partially being claimed could be one way of increasing revenues and adding yet more to the accretive nature of the deal, even the US Treasury has provided the 45V credit guidance details for the CMM. With the increase in margins thanks to the Midstream cash flows leading to higher revenues, maybe to the tune of some $15m and also helped by the Smarter Asset Management ethos that continues to deliver across the DEC board. 

For 3.75 x EV/EBITDA is a steal and yet again the DEC team have delivered an excellent acquisition, lots of revenue with margin upside and exposure to the Coal Mine Methane business which I think has legs. Ahead of the bucket List DEC looks nailed on for capital and income gains and a first class management team that are yet again delivering the goods.

Upside Potential for Coal Mine Methane Revenues

The Acquisition includes wells that qualify for Alternative Energy Credit (“Environmental Credit”) generation through the production of Coal Mine Methane (“CMM”, together with the credit “CMM Revenues”) and expands Diversified’s ability to generate CMM Revenues. Additional CMM Revenue potential will be assessed following the close of the Acquisition.

Bolt-On Assets Expected to Benefit from Considerable Scale and Consolidation Experience

The Acquisition includes 300 net producing wells that are located within Diversified’s operational footprint in the Appalachian states of Virginia and West Virginia (~60% of Acquisition production), where personnel will quickly evaluate and deploy Diversified’s Smarter Asset Management practices as the Assets are integrated into existing operations.

Additionally, the Acquisition includes 265 net producing Coal Mine Methane wells located within Alabama (~40% of Acquisition production) that are highly proximate to Diversified’s corporate headquarters in Birmingham, Alabama. The Company looks forward to establishing an operating presence in the region and implementing processes and field operations that build on Diversified’s significant platform of best practices, field expertise, and technology.

Footnotes:

For Company-specific items, refer also to the Glossary of Terms and/or Alternative Performance Measures found in the Company’s  2024 Interim Report dated June 30, 2024 and Form 20-F for the year ended December 31, 2023 filed with the United States Securities and Exchange Commission.

Arrow Exploration

Arrow Exploration has provided an update on the operational activity at the Alberta Llanos field on the Tapir Block in the Llanos Basin of Colombia where Arrow holds a 50 percent beneficial interest.

AB-1

The AB-1 well was spud on November 30 2024, and reached target depth on December 13, 2024. AB-1 was the first well drilled into the Alberta Llanos field and results from this well have confirmed the productive potential of the multi-pool field. The well was drilled to a total measured depth of 9,960 MD feet (8,846 feet true vertical depth) and encountered multiple hydrocarbon-bearing intervals.

On December 24, Arrow put the AB-1 well on production in the Ubaque formation which has approximately 62 feet of net oil pay. The pay zone is a clean sandstone exhibiting an average porosity of 25% with high resistivities. An electric submersible pump (ESP) was inserted in the well after perforating.

The well was put on production to allow the well to clean-up and conduct proper water cut evaluation. Currently, the well is operating at a pump frequency of 33 Hz and a choke aperture of 34/128.

Average initial production for the first seven days was 658 BOPD gross (329 BOPD net) of 13.8° API oil with a 49% water cut (completion fluid and formation water).  These results are in line with expectations.

Initial production results are not necessarily indicative of long-term performance or ultimate recovery.

AB-2

The AB-2 well was spud on December 25, 2024 and reached target depth of 10,795 MD feet on January 1, 2025. Logs and potential productive sands are being evaluated. AB-3 will be drilled immediately upon completion of the AB-2 well.

Operations Update

Production

Total corporate peak production in December, inclusive of contribution from AB1, was 5,175 boe/d with an average for the month of 4,899 boe/d, in line with the Company’s expectations.

East Tapir 3D Seismic Program

The East Tapir 3D seismic acquisition program is progressing on schedule with camps and equipment being mobilized to the field.  The Company expects that the seismic shoot will begin in March.

Cash Balance

On January 1, 2025, the Company’s cash balance was US$19.1 million.

Marshall Abbott, CEO of Arrow commented:

“Initial production from the AB-1 exploration well is an exciting event for Arrow. In addition to the thick pay zones encountered in the Ubaque formation, additional pay zones currently behind pipe, the C7, Gacheta and Guadalupe, provide further opportunities for production and reserves increases.”

“The Alberta Llanos discovery is material to Arrow and we are looking forward to the results of the AB-2 and AB-3 wells which will help to determine the size and extent of the pools and the potential reserves additions.  Initial results indicate that the Alberta Llanos discovery will result in another core area for Arrow and set up parameters for future horizontal development drilling.”

“We look forward to providing further updates on this low-risk development drilling program.”

“2024 was a fantastic year of growth and infrastructure development for the business.  I wish to thank the entire the Arrow Team and their families for the tireless work and dedication to the growth of the Company and creating shareholder value.”

As per the company’s TD announcement before Christmas, the AB-1 exploration well has indeed come in, it had targeted a large, three-way fault-bounded structure with multiple high quality reservoir objectives, and has  encountered four main hydrocarbon bearing reservoirs with a total true vertical depth value of 121 feet, including the C7, Gacheta, Guadalupe, and Ubaque.

Today Arrow announce that initial production in the first week was 658 b/d gross, 329 net and with a 49% water cut in-line with pre-drill estimates but perhaps more importantly, in addition to the thick pay zones encountered in the Ubaque formation, additional pay zones currently behind pipe, the C7, Gacheta and Guadalupe, provide further opportunities for production and reserves increases.

Things move fast here, the AB-2 well is already at TD and logs are being evaluated, after which the AB-3 will drill and interestingly both wells are going to evaluate the Guadalupe formation, potentially another core area for Arrow but again, more interestingly ‘set up parameters for future horizontal development drilling’. 

The idea of another horizontal development drilling area is very exciting for Arrow and to a large extent answers one of the key questions as to how to top what was an incredible year for the company in 2024. A substantial drilling programme has been announced for the coming months and I am very excited about its potential, I’m probably even more keen to sit down with the management on what I hope is an imminent visit.

So with the publishing of the 2025 Bucket List around the corner I am confident that 75p TP will be revisited, Arrow is still amongst the favourites in the sector with a huge amount of upside.

And finally…

News today that the Hammers have parted company with their current manager and that Graham Potter has been approached…

And in the Prem there were wins for the Magpies, the highflying Cherries, Villa, the Noisy Neighbours and the Bees whilst Chelsea, the Gooners and indeed Liverpool all dropped points, the latter unable to beat the Red Devils…