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Malcy’s Blog – Oil price, Genel, DGO, Sound. And finally…

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Oil price, Genel, DGO, Sound. And finally…

WTI $37.39 -$2.18, Brent $39.12 -$2.08, Diff -$1.73 +10c, NG $3.00 -2c

Oil price

Genel Energy (LON:GENL)

Genel has announced that DNO as operator has announced an update on the Tawke PSC licence activity.

Production at the Tawke licence ( Genel 25%) increased to 113,700 bopd in the third quarter, reversing declines resulting from a reduction in activity triggered by the instability caused in the wake of COVID-19. Q3 2020 production was split 50:50 between the Tawke and Peshkabir fields. Production was up 12% from the prior quarter following a campaign of quick turnaround, low-cost well interventions and the start-up of the Kurdistan Region of Iraq’s first enhanced oil recovery project.

The company note that as forecast the production performance was delivered with a one-third reduction in 2020 spend versus original budget, which led to fewer drilled wells and instead the launch of a well intervention campaign at Tawke and Peshkabir, with both fields outperforming expectations. Accordingly, DNO expects to exit the year with Tawke licence production at third quarter levels.

In addition to this good news the Peshkabir-to-Tawke gas capture and reinjection project, in operation since mid-year, is continuing to cut gas flaring and greenhouse emissions by half at Peshkabir to 7 kilograms CO2 equivalent for each barrel of oil equivalent produced, while unlocking additional oil at Tawke. By the end of October 2020, two billion cubic feet of gas that otherwise would have been flared was injected into Tawke, already delivering a positive production response at the field, and at the same time reducing field water production.

This is further good news for Genel who can now tick another box as they continue to significantly reduce their CO2 emissions and into the bargain seem to be getting positive operational performance from Tawke via increased production and the reduction in water production.

Finally payments have been received from the Kurdistan Regional Government for oil sales during September 2020. This is the seventh consecutive month of payment receipts under the KRG’s updated payment schedule. The Taq Taq partners have received a gross payment of $4.0 million, with Genel’s net share of the payment being $2.2 million and Tawke partners have received a gross payment of $30.2 million, with Genel’s net share of the payment being $7.4 million.

Diversified Gas & Oil (LON:DGOC)

DGO report a very solid 3Q performance with the dividend up 7% reflecting the company’s model is without doubt delivering the goods for shareholders. 3Q production was 107 MBoepd, up a substantial 17% compared to 3Q 2019 with the highlight being the company’s Smarter Well Management programme continually  successfully offsetting natural production declines. Production from Legacy assets was maintained at 69 MBoepd (415 MMcfepd), delivering a 9th consecutive quarter of consistent production.

This discipline leads to a 52% margin (34% unhedged) consistent with 2Q20 (52%) and 3Q19 (51%) hedged margins, demonstrating very strongly the effectiveness of the Company’s robust and proactive hedging programme. This is emphasised by 3Q20 average realised natural gas price of $2.24/mcf, hedged ($1.58/mcf, unhedged)(2Q20: $2.21/mcf hedged, $1.47/mcf unhedged; 3Q19: $2.28/mcf hedged, $1.91/mcf unhedged).

Finally, the 3Q20 total unit cash expenses of $7.10/Boe ($1.18/Mcfe), in line with 2Q20 and 4% lower than 3Q19
with Base Lease Operating Expense(d) of $2.39/Boe ($0.40/Mcfe) down 7% and 26% vs 2Q20 and 3Q19,
respectively (2Q20: $2.57/Boe; 3Q19: $3.21/Boe) which shows quite how efficiently the DGO machine runs.

The company notes, as do I, that ‘positive sentiment continues to build for natural gas as markets formulate a longer-term view inclusive of continued low oil prices, a post-COVID recovery and moderating supply as drilling-oriented companies voice tempered growth strategies and industry consolidation reduces the number of drillers’.

‘DGO continues to actively manage its hedging program, opportunistically layering on hedges to secure favorable prices, limit downside risk and commodity price volatility. The Company has recently taken advantage of the significant increase in 2021 U.S. natural gas prices by locking in additional fixed pricing, and as such is currently positioned to enter 2021 with ~80%(h) of estimated natural gas hedged through financial contracts at an average NYMEX floor price of $2.66/MMBtu on a consolidated basis, or ~$2.80/MMBtu when excluding long-term hedge structures’. This is another key point to make with regards to the DGO model, its highly efficient hedging programme increases the return and accordingly are able to take advantage of market situations such as exists right now without losing the potential upside.

I hesitate to make the blog any longer but I feel that it is extremely important to quote below the words of the CEO.

Rusty Hutson, Jr., CEO of the Company, commented:
“We are pleased to report another solid quarter as we continue to execute our proven and resilient business model, which remains differentiated in the current climate. Our integration of the assets acquired from Carbon and EQT is progressing nicely while the assets perform in line with our expectations. Our field teams continue to deliver exceptional results, underpinned by our diligent Smarter Asset Management program, evidenced by yet another quarter of consistent production from our Legacy assets. Holistically, across all of our conventional and unconventional assets, the effectiveness of our operating methods is further evidenced by an exceptionally low ~6% corporate decline rate.

“The outlook for natural gas is looking increasingly positive, and while we maintain good visibility of our future cash flows with stable production and a strong hedge position, we continue to monitor the forward price curve and remain opportunistic as we look ahead to further secure and enhance our cash flow profile.

“We are very proud of our continued solid financial performance in what is generally perceived to be the most challenging operating environment in the history of the sector, and our ability to increase our dividend an additional 7% in this climate emphasises the unique strength of our business. Including the increase we delivered last quarter, we have now increased our dividend by nearly 15% this year in an environment where companies across every sector have suspended or significantly reduced their distributions.

Always looking forward to create additional shareholder value, we remain agile in our approach to business development. The recent agreement with Oaktree not only validates our strategy by partnering with an investor of such standing, but demonstrates that we are extremely well placed to capitalise on accretive opportunities. We remain on track to meet full-year expectations and are confident that we will end the year with a strong financial and operational foundation from which we can deliver more growth next year and beyond.”

I reiterate that I think that the DGO models works well, whether in this energy environment or perhaps better in the years to come, slightly hinted at by the rising gas price which I am as readers know looking at in terms of the upcoming new Bucket List. In this respect and with excellent management DGO ticks all of the boxes and should be a high yielding cornerstone of any portfolio.

Sound Energy (AIM:SOU)

Yesterday Sound announced that they have initiated the process to restructure its bonds and that a meeting has been convened to extend the maturity date from 21 June 2021 to 21 June 2025 and reduce the interest rate from 5% to 2%. In addition it would issue warrants to subscribe for equity at 2.125p.

This is an entirely sensible move, if successful it would significantly reduce G&A costs and the company would have three years of cash flow from operations to pay down the bond. Also the warrants are a wise move, bringing in money at the same price as recent placing seems very wise.

Elsewhere I feel that all is going pretty well behind the scenes at Sound with the new management getting stuck into operational matters and looking increasingly likely to deliver the goods for shareholders.

And finally…

Last night in the Champions League Chelski won convincingly away 0-4 at FK Krasnodar and the Red Devils had a 5-0 win over RB Leipzig with man of the moment scoring a hat-trick.

Tonight it’s the Boropa Cup, Spurs are in Antwerp, the Foxes visit AEK Athens, the Gooners host Dundalk and Celtic are at Lille with Rangers hosting Lech Poznan.

Genel Energy says operator DNO highlights production increase at Tawke PSC in Kurdistan

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