The Pay Zone – Oil price, Challenger, Scirocco. And finally…

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Oil price, Challenger, Scirocco. And finally…


WTI $67.54 +$1.90, Brent $71.05 +$2.30, Diff -$3.51 +40c, NG $3.90 -5c, UKNG 114.6p +7.4p


Oil price


My comments yesterday on the vaccine, Mexico and the weaker dollar all contributed to another big up day in the oil market one could also say that traders are reluctant to take on MbS in the market.


More importantly I would like again to point out just how strong the natural gas price is at the moment, the USA led the way, but right now, and as I have been pointing out for some months, it is the European price that is the leading indicator and as above is right now 115p with 120p in the near future strip.


Why this is happening is causing some concern but it really is markets which I don’t think that even the Russians can fix. Sure they are rumoured to be cutting supplies to Europe down, maybe to blackmail potential users of Nord Stream 2 but more likely through a combination of a colder than usual summer up north, creating demand for storage and regular summer maintenance. If you don’t believe all that then just say that Russia may have discovered a value over volume strategy….


This really is Christmas come early for the gas producers and whilst they have differing agendas, such as Diversified Energy enjoying nearly $4 Henry Hub, President in Argentina and Savannah Energy in Nigeria the home beneficiaries are really making out like, well, not before shall we say. Other beneficiaries are led by Serica where Mitch Flegg must be overjoyed, Kistos who are already producing from the Tulip deal, IOG where first gas from their Phase 1 SNS project is imminent and of course all of those hoping that their major gas projects in Morocco come good such as Chariot, Predator and Sound as well as others.


Challenger Energy Group (AIM:CEG)


Challenger has provided an update in relation to ongoing production testing of the Saffron-2 appraisal well. A commercial production rate (81 bopd) has thus far been established at Saffron-2, from approximately 66 feet of Middle Cruse reservoir units; produced oil is already being sold and generating immediate revenues for the Company.


To maximise near-term production income additional clean-up, testing, and optimisation of producing zones is currently underway; the Upper Cruse reservoir units also remain to be perforated and produced while the Lower Cruse reservoir units exhibited good pressure and produced high-quality oil (480 API), but testing of these zones was halted due to the impact of mobile shales on the well bore.


These lower zones have been isolated from the currently producing horizons, capable of being re-entered for future remedial actions in support of production and meanwhile well data and projection of aggregated well performance is being used to reassess overall Saffron field resources and economics, with work underway to determine the optimal forward plan for development of the Saffron project as a whole.


Eytan Uliel, Chief Executive Officer, commented:


The Saffron-2 appraisal well was successfully drilled and completed in early July 2021 – Challenger Energy’s first operated drilling onshore Trinidad. We have since perforated various reservoir horizons and run production tests.


Pleasingly, testing in the Middle Cruse has resulted in an economic level of production thus far being achieved, and we are working to increase production further. We are already selling the oil being produced, so for the immediate future the plan is to maximise production revenues from those Middle Cruse units, as well as bringing on additional production from the as yet unperforated Upper Cruse units, in due course.


Production tests have also proved the ability to flow high-quality hydrocarbons from the Lower Cruse reservoir at Saffron, but we did not achieve sustained production from these zones due to technical and mechanical issues encountered during those tests. That said, the Saffron project is in a tectonically active province, so challenges are to be expected, and each well builds on the learning from the previous wells. The key point is we have shown that there are moveable hydrocarbons in the Lower Cruse, and we believe that issues encountered can be addressed, such that the Lower Cruse can ultimately contribute meaningfully to production. We have preserved the ability to re-enter and produce the lower zones of Saffron-2 in the future, and we are incorporating the knowledge gained into the design of future Saffron wells.


Focus now turns to integrating what we have learned from this well, to updating our resource estimate accordingly, and to defining the best way forward for the project as a whole – building production and cashflow remains our overarching strategic imperative. We will keep shareholders appraised of material developments.”


Saffron is looking to be an exciting play and with so much more to play for in the area I’m not surprised that the Challenger team are taking it carefully to begin with. I’m meeting with CEO Eytan Uliel this week so will enjoy having a detailed update from him about his plans.


Scirocco Energy (AIM:SCIR)


Scirocco has announced, further to its 9 July 2021 RNS, the completion of its investment into Energy Acquisitions Group Ltd (“EAG”), a specialist acquisition and operating vehicle in the sustainable energy sector, and in which Scirocco will hold 50% interest.


By creating a joint venture platform alongside EAG, Scirocco Energy will leverage EAG’s strong network and industry leading expertise to gain access to a pipeline of already identified acquisition opportunities within the anaerobic digestion and biogas market, and to jointly explore other opportunities within our broader sustainable energy and circular economy target markets.


Initially EAG will use the funds to acquire 100% of Greenan Generation Limited (GGL) and its 0.5MWe Anaerobic Digestion (AD) plant in Northern Ireland which is a good starting point for Scirocco. GGL is a cash generative, operational AD plant which the EAG team believe can be optimised to enhance EBITDA margins and free cash flow and EAG anticipates initial annual turnover of c. GBP1.1m from GGL.


The investment into EAG has been funded by cash on the Scirocco balance sheet and the EAG team has identified further opportunities to invest in a pipeline of AD plants in the UK totalling c. GBP30 million in value. This aligns with the new strategy, approved by Scirocco Energy’s shareholders on 9 July 2021, to deliver value through acquisitions in the European sustainable energy and circular economy markets. Finally, as part of this transaction, Scirocco Directors, Tom Reynolds and Muir Miller, will join the board of EAG.


Tom Reynolds, CEO at Scirocco Energy, comments:


“I am delighted to announce the completion of this transaction today, marking an important milestone in Scirocco Energy’s new strategy to target assets within the European sustainable energy sector.


The initial investment provides an entry point into the rapidly growing UK Biogas market, and provides a platform that will allow us to capitalize on the significant pipeline of opportunities in this sector in collaboration with the highly experienced and well-networked EAG team.


While the initial acquisition of GGL – which is expected to complete very soon – is relatively small in size, it is strategically important in terms of delivering immediate cash flow which can be re-invested into a compelling pipeline of complementary opportunities alongside our new partner.


We also believe that the addition of activities, which benefit the UK’s net zero target, will make Scirocco’s investment proposition more attractive for investors due to the growing importance of ESG considerations, and will ultimately lead to a re-rating of the Company over time.”


Chris Kerr, Managing Director, EAG added: “We are thrilled to complete the establishment of this JV, creating a platform that benefits from the complementary expertise of Scirocco Energy and EAG. Our extensive experience and understanding of the AD market, and pipeline of near-term opportunities uniquely position this joint venture to take advantage of the growing Biogas market and contribute positively to the de-carbonisation of challenging sectors in industry such as heating, transport and agriculture where demand is growing strongly.


Our initial acquisition of GGL provides the template of the opportunities that we will be targeting given its proven operational status and material scope to enhance free cash flow and EBITDA margins through plant optimisation techniques.”


I think that whilst there are inevitably some investors who caution that SCIR does not have a clear path ahead of it may be wrong and that EAG will become an important part of its near and long term future. It has made it clear that the recent news from Ruvuma makes it simpler to get the sale process fully underway and its sometimes criticised strategy on HE1 has so far, with an average exit price of some 20p per share, to be smarter than most thought at the time.


I remain positive for this long term, potentially substantial move into the sustainable energy sector, to be one shareholders will come to appreciate.


And finally…


I didn’t spot any major upsets in the EFL Cup last night, tonight the Magpies host Burnley, the Saints go to Newport and how will the Gooners fare at the Baggies after a slow start to the season?


The 3rd test starts today at Headingly in a series that India are up 1-0 in so far.


Team GB are on the board already in Tokyo with a gold for Dame Sarah Storey and with several silvers and a couple of bronze medals it looks good already.

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