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Market Update: Tuesday 15 December 2020


Gulf Keystone Petroleum (LON:GKP): Operations update, KRG implements repayment proposal


Mosman Oil & Gas* (AIM:MSMN): Falcon-1 commences commercial production


San Leon Energy (AIM:SLE): Further extension to Decklar financing


Petroneft Resources (AIM:PTR): Extension to Petrograd loan facility




Energy Prices


Brent Oil US$50.2/bbl vs US$49.4/bbl yesterday


WTI Oil US$47.8/bbl vs US$46.9/bbl yesterday


Natural Gas US$2.66/mmbtu vs US$2.69/mmbtu yesterday




Oil Price News


Oil prices remain fairly volatile yet above the US$50/bbl Brent threshold as concerns about oversupply battled with positive sentiment on vaccine roll outs and hope of a return of demand


Brent crude finished up slightly at $50.29/bbl at the close of yesterday’s session as positive vaccine news overpowered negative sentiment on inventory builds and tightening of lockdown restrictions


Libyan oil production has increased from 1.25MMbopd in late November to 1.28MMbopd according to a National Oil Corporation source


Widespread lockdowns in Europe have begun to curtailing demand which had showed signs of bouncing back, London is set to join many other areas of the UK under tier 3 restrictions while, France plans to delay easing of its restrictions and Germany looks set to tighten measures


The Netherlands has moved into its strictest lockdown since the pandemic began and Turkey has announced a 4-day lockdown over New Year


The US began its vaccine rollout on Monday starting as healthcare workers began receiving the Pfizer vaccine


The US follows the UK which began rolling out the Pfizer vaccine last week and Canada which has begun its rollout


Vaccination improves the medium-term demand outlook with hopes of a return to normalized demand in H2’21


20m doses are expected to be administered in the US by Christmas with 100m vaccinated by March


A blast in the Saudi port of Jeddah is being reported as a terrorist incident after an oil tanker was hit which led to a fire


The port has been closed while the incident is investigated


OPEC has postponed it Joint Technical Committee and Ministerial Monitoring Committee meetings until Jan 3 and 4


The group has also revealed its expectations of a slower demand recovery than originally expected, lowering its forecasts by 350,000bopd for 2021


The group cited persistent impact of the pandemic as the reason for this more bearish stance but did say a rapid roll-out of vaccines in major economies would provide upside to these estimates


Expectations are for an increase in inventories from the API later today and the EIA tomorrow


Analysts expect the data to show inventories increasing by 1.6MMbbls and for distillate inventories to be up by 400,000bbls


US shale output is expected to decline by 136,000bopd in January to 7.44MMbopd according to the EIA




Gas Price News


Natural gas prices edged higher in New York on expectations of colder temperatures than initially expected over the next 2 weeks in the US and record LNG exports


Output from the lower 48 US states averaged 90.8Bcf/day so far in December


Prices in Asia continue to move higher, congestion in the Panama Canal, supply outages and colder weather forecast for China, Japan and South Korea has seen the JKM move above US$8.075/mmbtu


Demand in Asia is helping to support prices in Europe as supply gets redirected. European storage drew by 146Bcf last week, above average for this time of year (108Bcf)





Company News


Gulf Keystone Petroleum (LON:GKP): Operations update, KRG implements repayment proposal


Share Price: 103.8p, Market Cap: GBP218.4m


A comprehensive update from GKP outlines the Company’s operational and financial progression against a challenging YTD.


Following on from the work over of the SH-12 well, the Company has progressed the previously announced low-cost, high-impact investments to further increase field production.


The SH-9 well, on which activity was suspended in March 2020, has now been tied-in to PF-1 and is on production. PF-1 is now operating at its current maximum processing capacity of c.27,500bopd.


Debottlenecking activities at PF-1 remain on-track to further increase production capacity to over 30,000bopd during Q1 2021.


Gross Shaikan production is currently at c.42,000bopd, c.20% above the November 2020 average rate.


Average gross production for the year is expected to be at, or slightly above, 36,000bopd, the top end of the guidance range.


From a financial standpoint, the Company has adopted a prudent approach to capital discipline and remains on track to achieve targeted G&A and Opex savings of at least 20% compared to 2019 and 30% on a run-rate basis.


Net capex for 2020 is expected to be at or slightly exceed the top end of the guidance range of US$48m, following the US$3m investment in high-impact projects.


Encouragingly, the KRG has maintained regular payments for eight months, including the recent October receipt.


GKP has also taken the decision to extend its hedging programme, establishing a H1 2021 floor price of US$35/bbl on c.60% of production, based on current production levels.


As at 14 December 2020, the Company had a cash balance of US$142m.


In terms of outlook, with completion of the debottlenecking of PF-1, GKP is expected to deliver a further increase in production in Q1 2021.


In line with the KRG’s commitment to review the outstanding November 2019 to February 2020 invoices totalling US$73.3m (net) when oil prices reached US$50/bbl, GKP has received proposal to repay the arrears.


Management has reconfirmed that GKP is well positioned to restart its drilling programme to achieve 55,000bopd when circumstances permit.


Our take: With the Company’s ongoing prudent approach to managing its financial position and the decisive measures taken to reduce its cost structure to preserve liquidity, GKP remains financially resilient to manage through the current macro environment in our view. The Company has also successfully executed low-cost, high-impact investments that have so far increased gross production to 42,000bopd, in excess of the initially targeted increase of 5,000 bopd. The recent repayment cycle from the KRG is a positive initial step for GKP but more detail around payment amounts and timing will be key for investors in our view.




Mosman Oil & Gas* (AIM:MSMN): Falcon-1 commences commercial production


Share price: 0.16p, Market Cap: GBP4m


Yesterday Mosman conformed that the Falcon-1 well at the Champion Project in East Texas commenced commercial production on Friday 11 December 2020.


Underlining the swift lead times in executing this high impact project, The Company confirmed in October the completion of drilling.


In November flows tests were conducted, and the production facilities were installed.


The well has been tied into new production facilities consisting of a separator and tanks.


Oil will be sold from the tanks and gas sold via an existing pipeline.


In addition, a gas Marketing Contract and a Gas Transmission contract have been signed recently.


The Company has confirmed that actual production rates will be reported once stable oil and gas rates are established.


Our take: Mosman continues to advance what has already been an active year for the Company with admirable field operations at its Champion Project. The Company continues to focus on its production led growth strategy with further development upside possible given recent analogous success. With the highly encouraging drilling and production results at the Falcon-1 well on the Champion project, the Company’s anticipated transition to higher equity in larger prospects accelerates Mosman’s strategy in our view.


*SP Angel acts as Nominated Advisor and Broker to Mosman Oil & Gas




San Leon Energy (AIM:SLE): Further extension to Decklar financing


Share price: 22.6p,Ene Market Cap: GBP102m


Further to its previous announcements regarding the Company’s proposed investment in Decklar Petroleum and the Oza Field in Nigeria, San Leon announces that the parties have agreed to extend the completion date to early in the new year.


As expected, restrictions put in place in response to the Covid-19 pandemic have slowed the logistical process in concluding the conditions precedent in the Subscription Agreement.


Nevertheless progress continues to be made and the trading subsidiary of a major oil company, which along with a local Nigerian bank, is to provide a five year term debt to Millenium Oil and Gas, Decklar’s local partner, has provided a further written confirmation of its support of the transaction.


Decklar intends to fast-track the initial development of the Oza Oil Field including a re-entry on the existing Oza-1 well, anticipated to test three oil bearing zones and place the well into production from two of the three zones tested.


The drilling rig is expected to then be skidded on the same location as Oza-1 to a new drilling slot and a development well is expected to be drilled horizontal into the third zone tested in the Oza-1 well re-entry.


The Oza-1 well and new horizontal development well are anticipated to generate significant production levels and cash flow in an abbreviated time frame.


The Oza Oil Field development is anticipated to then continue with one or two more existing well re-entries and additional development drilling with the potential for eight to ten wells being drilled in total for the full field development.


Additional early production and central processing facilities will be added as required to accommodate additional production levels from the Oza Oil Field’s development activities.


Decklar estimates that first production will be three to four months following the drawdown of the financing described within this announcement.


Decklar holds a Risk Service Agreement with Millenium Oil and Gas on the Oza field in Nigeria.


Until the loan and its interest are repaid, 100% of the available funds that can be distributed from Decklar ‘ s RSA proceeds will be paid to San Leon in satisfaction of those payments.


San Leon will also subscribe for a 15% equity interest in Decklar.


In addition, Millenium has entered into a non-binding term sheet with a local Nigerian bank and the trading subsidiary of a major oil company for up to US$33m in a five year term debt that provides a use of proceeds of US$22m to refinance existing debt of Millenium and US$11m for development activities on the Oza Oil Field, based on entering into a crude sales and purchase contract.


Decklar is expected to provide a corporate guarantee as part of this US$33m term debt facility.


If San Leon subscribes for the Option Loan Notes then, together with the amount subscribed under the Loan Notes, upon completion these arrangements will represent new funding for Decklar of up to US$26m.


On an operational level, Decklar intends to fast-track the initial development of the Oza Oil Field including a re-entry on the existing Oza-1 well, anticipated to test three oil bearing zones and place the well into production from two of the three zones tested.


The drilling rig is expected to then be skidded on the same location as Oza-1 to a new drilling slot and a development well is expected to be drilled horizontal into the third zone tested in the Oza-1 well re-entry.


The Oza-1 well and new horizontal development well are anticipated to generate significant production levels and cash flow in an abbreviated time frame.


The Oza Oil Field development is anticipated to then continue with one or two more existing well re-entries and additional development drilling with the potential for eight to ten wells being drilled in total for the full field development.


Additional early production and central processing facilities will be added as required to accommodate additional production levels from the Oza Oil Field’s development activities.


Decklar estimates that first production will be three to four months following the drawdown of the financing.


Our take: The transaction has been understandably delayed until next year given well known logistical challenges. Nevertheless, on completion the deal will see San Leon further diversifying and consolidating its asset portfolio in Nigeria. The structure of the transaction, which sees San Leon provide a repayable loan at an attractive interest rate and with an additional significant equity kicker, could provide a long-term cash generative dividend to the Company.




Petroneft Resources (AIM:PTR): Extension to Petrograd loan facility


Share Price: 0.625p, Market Cap: GBP5m


The Company has reached an agreement with Petrograd to extend the loan facility initially extended to US$2.5m in 2019 with potential entitlement bonus payments of US$2.5m per license of either or both License 61 or 67 are sold prior to 31 December 2022.


The new terms include:


Maturity extension to 15th December 2021 at the same interest rate.


10% of the loan amount to be repaid in six equal instalments from July to December 2021.


A further extension possible out to 15th December 2022 on payment of a further 10% of outstanding loan amount by 15th December 2021.


Extension to the bonus payments timing by up to two years to 31st December 2024.


Our take: The loan extension further enables the Company to continue to focus on improving performance of its assets, particularly at a time when Licence 67 is transforming from an exploration to a production asset which will deliver cash flow to the business in the near term.




Research – Oil & Gas


Sam Wahab – 0203 470 0473 / 0784 385 5037


[email protected]




Sales


Richard Parlons – 020 3470 0472


Abigail Wayne – 020 3470 0534


Rob Rees – 020 3470 0535


Grant Barker – 020 3470 0471




SP Angel


Prince Frederick House


35-39 Maddox Street London


W1S 2PP




+SP Angel employees may have previously held, or currently hold, shares in the companies mentioned in this note.




Sources of commodity prices




Oil Brent, WTI


– ICE


Natural Gas


– NYMEX






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Recommendations are based on a 12-month time horizon as follows:




Buy – Expected return >15%


Hold – Expected return range -15% to +15%


Sell – Expected return < 15%

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