Oil price, DEC, Challenger, Eco Atlantic, Block. And finally…

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WTI $75.16 -7c, Brent $76.17 +33c, Diff -$1.01 +40c, NG $3.70 +4c, UKNG 89.5p +0.87p


Oil price


Hold the press…


Opec is not meeting again today and if I am correct they don’t have anything in the book for a change in supply after July, if this is the case, and there isn’t a meeting put in the diary yet then prices will go only one way…


Unusually the Opec+ meeting was stalled when it looked like it was about to go through without any major dispute on Friday. And it was the UAE, not often among the naughty boys who caused the grief but I would be surprised if it caused much trouble when the meeting reconvenes later today.


The UAE had thought that although they had agreed to the previous agreement their quota was set too high and agreeing to it for what might have been until December 2022 was just too much to take. I expect a modest adjustment, after all there are so many uncertainties in both the quota numbers where whole countries such as Nigeria, Libya and of course Iran are known unknowns as well as the demand numbers can find a way out of this.


Diversified Energy Company


DEC has announced the conditional acquisition of certain Cotton Valley and Haynesville upstream assets and related facilities in the states of Louisiana and Texas from Tanos Energy Holdings.


Concurrently, Oaktree Capital Management, will co-invest in the Acquisition under the joint participation agreement announced on 5 October 2020, marking Oaktree’s inaugural participation in a transaction with Diversified and affirming their confidence in the Company’s recently defined Central Regional Focus Area. Total cash consideration for the Acquisition is $308 million.


Importantly, Oaktree will also co-invest in the assets Diversified recently acquired from Indigo Minerals to more fully align both parties as working interest partners in assets located in the Cotton Valley/Haynesville region given the contiguous nature of the assets Indigo Minerals.


Diversified are paying gross cash consideration of $154 million (~$118 million net at closing), equal to 50% of the total cash consideration as per the Oaktree joint participation agreement and will fund its portion entirely with cash on hand and existing credit capacity. The top line price assumes certain below-market natural gas hedge contracts through 2023, valued at ~$24 million as of 25 June 2021.


Net Purchase Price represents a 2.8x multiple on ~$51 million of estimated next twelve months’ adjusted EBITDA before potential synergies. Diversified receives 51.25% working interest in the Assets inclusive of Oaktree’s initial 2.5% working interest promote and their working interest increases to 60% once Oaktree achieves a 10% unlevered internal rate of return on its investment.


Diversified’s share of the NTM Adjusted EBITDA is 17% accretive to the Company’s 2020 reported Hedged Adjusted EBITDA and with key Proved Developed Producing reserves of ~40 MMBoe (241 Bcfe) and PV10 of ~$201 million. Current production of ~14 MBoepd (~82 MMcfepd) with 92% from ~390 net operated wells and favourable Gulf Coast pricing underpins more than solid >65% cash margins. Post-transactions with Oaktree participation leverage ratio (2020YE pro forma) of ~1.9x.


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


“When we announced our strategic entry into the Central RFA, we expected to quickly build scale as a capable buyer with a proven track record in a region with ample opportunity. Just over two months later, we are excited to deliver results and build momentum with the addition of geographically proximate assets that represent the next step in achieving that goal and replicating our historical successes in Appalachia. Once complete, our Central RFA acquisitions will contribute over 30% of our production and Adjusted EBITDA. I would like to welcome the Tanos operations personnel who service the assets into the Diversified family, and I look forward to working with them to build value for our stakeholders.


“We are excited to partner with Oaktree in the Cotton Valley/Haynesville area, which I believe will be the first of many opportunities to partner in the region. Oaktree’s participation not only demonstrates the attractive nature of these acquisitions, but also affords Diversified additional liquidity and line of sight to identify and pursue opportunities while continuing to maintain a strong balance sheet. Together, we will responsibly grow our Central RFA footprint, build scale and drive operational synergies.”


This is another excellent deal from Diversified and is transformational in that it brings in Oaktree into the process, indeed they have been invited to co-invest in the recently acquired assets from Indigo Minerals in the Cotton Valley/Haynesville as mentioned above. Much more importantly this is a highly accretive deal with plenty of upside, indeed the company talk about ‘no absence of opportunities’ in East Texas. Other advantages including that of scalability is of course is that Oaktree have clearly ‘got’ the DEC model which gives many further opportunities to drive further ‘non-dilutive growth’.


I could go on as I am impressed by the exposure to natural gas, which has been a very strong market lately, also it has huge local infrastructure owing to its proximity to the Gulf of Mexico and of course its LNG exposure. Also the estimated cash operating costs of $1.16 ($/Mcfe) leads to an ‘Estimated Hedged Adjusted EBITDA Margin ~65%’ which is most impressive.


Few opportunities exist to invest in such a growth story that is Diversified and now that it has identified the Central Regional Focus Area I foresee more deals, even though this deal already represents the Company’s third acquisition in just over two months and demonstrates its significant momentum consolidating high quality assets within its newly defined area. And there is no way that they need to stop here, the partnership with Oaktree is just kicking in, the company is only 1.9x leveraged and has that strong balance sheet and extensive synergies to utilise.


With these acquisitions, and I noted the completion of the Blackbeard deal in a separate RNS today, Diversified are in a very strong position continue to grow and now with Oaktree signed up to the model I can only expect more of the same, shareholders should be delighted this is a magnificent pool of value being created.


Challenger Energy Group


Challenger has provided an update on progress of the Saffron-2 appraisal well as part of the Saffron Project. The drilling phase of the Saffron-2 well has successfully concluded, with the well fully cased and cemented to a depth of 4,567ft. The well is now being readied for production testing which is expected to commence in the next three weeks.


The company say that data recorded in final sections of the well suggests similar sand intervals to hydrocarbon bearing zones encountered in Saffron-1, with a full suite of logging to be conducted over the coming week across each of the lower Middle Cruse and Lower Cruse reservoir sections of interest.


Eytan Uliel, Chief Executive Officer, commented:


“I am pleased to advise that the drilling phase of Saffron-2 has been successfully completed at a depth of 4,567ft, and the well has been fully cased and cemented. We thus have a well to planned target depth intersecting all Upper, Middle and Lower Cruse reservoir units of interest, safely behind pipe and capable of being progressed to production. That is the core objective from the Saffron-2 well: to gain an understanding of production potential, which in turn will guide how we plan, execute and fund a broader development of the Saffron field. Logging will now be conducted to define the specific sands and oil zones in the recently drilled sections of the well, and we will provide a further update once this is completed. In parallel, the well is being readied for production, which we expect will commence around 23rd July.”


It is an exciting few days and weeks coming up at Saffron as the logs are done in the key zones of the well ahead of production. Saffron offers significant potential for the generation of Challenger and its portfolio, CEO Eytan Uliel is sensibly biding his time and it won’t be long before all is revealed.


Eco (Atlantic) Oil & Gas


Eco has received a detailed update from JHI with regard to the the Exxon operated Jabillo-1 well in the Canje Block, offshore Guyana. It reached its planned target depth and was evaluated but did not show evidence of commercial hydrocarbons. It should be remembered that this well was drilled at no cost to JHI or Eco and was completed on a full carry basis and as a part of Eco’s recent buy-in to JHI.


The Jabillo-1 well was drilled to test Upper Cretaceous reservoirs in a stratigraphic trap. The well was positioned offshore Guyana, approximately 265 km northeast of Georgetown, in 2,903 meters of water and was safely drilled to a total depth of 6,475 meters.


The Stena DrillMax Rig is currently operating in the ExxonMobil Operated Stabroek Block and is expected to move on to drill the Sapote-1 well, in the eastern portion of the Canje Block. The Sapote-1 Well is expected to be spud in mid-August 2021 with an estimated drilling time of up to 60 days.


The Sapote-1 prospect is located in the south eastern section of Canje, and is a separate and distinct target from Jabillo. Sapote-1 lies approximately 100 km southeast of Jabillo and approximately 50 km north of the Haimara discovery in the Stabroek Block which encountered ~207 feet (63 meters) of high-quality, gas-condensate bearing sandstone reservoir and approximately 60 km northwest of the Maka Central discovery in Block 58 which encountered ~164 feet (50 meters) of high-quality, oil-bearing sandstone reservoir.


Gil Holzman, Co-Founder and Chief Executive Officer of Eco Atlantic, commented:


“While today’s update from JHI is disappointing, this is the nature of oil exploration. Our stakeholders continue to support our exploration efforts and look for us to continue to define these near term high impact opportunities. Our next focus is the Sapote-1 prospect to be spud in the upcoming weeks which brings us another opportunity to share in what we hope to be another major ExxonMobil led discovery. JHI was carried on the Jabillo-1 well and this is just the first in a series of exploration wells that Eco expects to be involved in this year and next. Guyana has proven to be one of the most prolific hydrocarbon regions on the globe and the high discovery ratio continues and the Company continues to be excited about its near-term future prospects on both the Orinduik and the Canje Blocks.


“The next well in the program, Sapote-1, is located adjacent to existing discoveries and it is expected to be spud in mid-August 2021. The targets in the region have proven to hold some hundreds of millions of barrels of oil and oil equivalent and we look forward to similar scaled results from this upcoming well.


“I am happy that we managed to become a part of JHI and the Canje Block exploration program in time that offers our stakeholders a stream of high impact catalysts and an ongoing drilling program operated by ExxonMobil. I have a great confidence that our Canje Block exposure will yield great returns and oil discoveries as it also paves the way to a broader exposure and collaboration in the Guyana-Suriname Basin.”


Clearly this is a disappointment to Eco but buying into JHI was not only sensible but gives them a crack at the much more interesting and upcoming Sapote well, the two wells came as a package and who knows what would happen if reversed. It is a profound credit to the Eco management that they got on and did this deal, others would still be waiting for others to shape their future and given what I have heard about Exxon’s private thoughts about Sapote I know where I would rather be.


Block Energy


Last week I noted that at the AGM there was a 44% vote against the re-election of the Chairman of the Board of the company which by any standards is making a point. Today there have been a number of announcements, it is noted that Chris Brown, an independent non-Executive Director has resigned and will leave the board at the end of his contract.


The second said ‘Block Energy announces that, on 2 July 2021, it received a letter from Forest Nominees Limited, which is the legal holder of 31,308,000 ordinary shares, representing 5.01 per cent of the issued ordinary share capital, in the Company as nominee for G.P. (Jersey) Limited.


The Letter requests the Company to convene a general meeting of the Company’s shareholders pursuant to section 303 of the Companies Act 2006 and consider and, if thought fit, propose resolutions to remove Philip Dimmock from office as a director of the Company, and to appoint current non-executive director, Chuck Valceschini, as Chairman of the board of directors of the Company.


Over the last few months it has been obvious that there have been storms brewing over Block and the natives were becoming somewhat restless, this announcement shows that it looks like the phoney war is over and in three weeks time the Chairman will find out whether it was wise to take on all comers, does he feel lucky…


And finally…


So, on Friday night the Switzerland and Belgium exited the Euro 2020 competition and on Saturday night the Czech Republic and Ukraine joined them, we now head for the semi-finals.


The final ODI was a washout at Bristol yesterday but Sri Lanka would have been grateful for that after a dismal tour on and off the pitch.


Max won at the Red Bull circuit which is no surprise, with Lando Norris having another great day and a podium place. Lewis has signed a new, two year contract with Mercedes and it is clear that something is not right with his car and I have heard it said that they are waiting until next season to bring out the new model for title No 8.

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