OGV Energy Mid-Week Update

Oil & Gas Daily Flow

Non-Independent Research; Marketing & Sales Commentary – MiFID II exempt information – see disclaimer below

Market Update: Friday 27 March 2020

Cairn Energy: Production and development expenditure reduced; exploration deferred

Parkmead Group: LNG oversupply hits cash flows

Bowleven: Interim results, sufficiently funded to reach FID at Etinde

Energy Prices

Brent Oil US$25.8/bbl vs US$26.4/bbl yesterday

WTI Oil US$22.7/bbl vs US$23.6bbl yesterday

Natural Gas US$1.63/mmbtu vs US$1.66/mmbtu yesterday

Oil Price News

Oil prices are trading down again this morning as Saudi Arabia fails to relent to pressure from the US to reduce oversupply slated for next month

With the oil price war between Saudi Arabia and Russia showing no signs of relenting, analysts are now warning that the standoff could extend into 2021

Saudi Aramco announced earlier this month that it would ramp up oil production to 12.3MMbopd in April, a record amount, after Russia refused to cut production. Moscow has also vowed to increase its output.

Saudi policy now appears to revolve around inflicting pain on both OPEC and non-OPEC producers over the short term, with a long-term view to returning to its former role as the swing producer and price setter

The market collapse has led to a cut of tens of billions of dollars in capex (see below) and is threatening to force as many as 70% of US shale drillers into bankruptcy

Global Energy companies cut FY20 spending

International benchmark prices have more than halved since the start of the year, falling to below US$30/bbl

In response, the broad majority of listed companies have cut forward spending budgets:

BP – will reduce capital and operational spending, which was about c.US$15bn last year

CHEVRON – will trim spending and lower oil output in the near term. 2020 organic capital expenditure guidance had been US$20bn

DNO – will cut its FY20 budget by 30% or US$300m and lower its dividend for the first half of the year

ENERGEAN – cut its investments by US$155m in Greece and Israel and could reduce its budget for Egypt by another US$140m if needed

ENI – cancelled share buyback of €400m until Brent is at least US$60/bbl

ENQUEST – cutting operating costs by 30% to US$375m and investment will be lowered by US$80m to US$150m

EQUINOR – suspended its ongoing US$5bn share buyback programme

EXXONMOBIL – TBC but confirmed significant cuts to spending. It had previously budgeted US$30bn to US$33bn for projects in FY20

GENEL -reduce investments to US$60m this year, but expected the number to be US$100m

KOSMOS ENERGY – dividend suspended, will reduce FY20 capex by 30%

OIL SEARCH – cutting FY20 investment by 38% and capital spending by 44%

PREMIER OIL – identified at least US$100m in potential savings on its FY20 capital spending plans

SAUDI ARAMCO – will cut capital spending for FY20 to between US$25bn – US$30bn, compared with US$32.8bn in FY19

ROYAL DUTCH SHELL – cut FY20 capex by US$5bn and suspended the next tranche of its share buyback plan

TOTAL – cut capex by 20% and find additional cost savings of around US$400m this year

TULLOW OIL – cut capex by US$350m this year and reduce exploration spending by 50%

WINTERSHALL – 20% cut in capex to at least US$1.3bn

Gas Price News

Natural gas prices edged lower following yesterday’s inventory report, however projections are that demand is set to rise slightly in regional hubs driven by gains in the power sector

According to the EIA, total US consumption of natural gas rose by 3% compared with the previous report week

Natural gas consumed for power generation climbed by 8% week on week in the low natural gas price environment

Industrial sector consumption increased by 1% during the week, whilst in the residential and commercial sectors, consumption declined overall by 1%

Natural gas exports to Mexico also increased by 1%

Company News

Cairn Energy: Production and development expenditure reduced; exploration deferred

Share price: 82.8p, Market Cap: £487m

In line with the broad majority of its peers, Cairn has revised its FY20 capex programme to preserve its cash position given the subdued commodity price environment.

Planned FY20 capital expenditure on the UK producing assets is expected to be below US$45m, reduced from the original forecast of US$65m as a result of cost savings identified and the deferral of certain activities planned for the Catcher fields.

In terms of development expenditure, the Sangomar joint venture partnership is working collaboratively to assess several substantial initiatives to reduce and re-phase capital expenditure on the Sangomar Development Project.

At this stage, based on initiatives already identified, Cairn’s expectation is that net capital expenditure on Sangomar in 2020 will be below US$330m, reduced from the original forecast of US$400m.

All forward capital expenditure on exploration and appraisal activity is now deferred with the exception of ongoing operations on the Eni operated Ehecatl well in Mexico.

Capital expenditure on exploration in 2020 is now anticipated to be c.US$100m, reduced from the original forecast of US$150m.

The Company’s current cash position is c.US$255m and cashflows from UK production, which is expected to be in the range of 19,000-23,000bopd in 2020 with 36% of mid case production hedged at US$62/bbl Brent and a targeted all-in production cost of below US$20/boe.

Cairn also has an undrawn US$575m reserves-based lending facility, which includes an option to increase lending commitments by up to an additional US$425m on the inclusion of Sangomar in the borrowing base assets.

Our take: Given unprecedented market conditions, we are not surprised that Cairn has elected to reduce its financial exposure to exploration activities to preserve its cash position. The Company’s hedging profile looks sufficient for the time being, however, the strain on cash flows will become more pronounced if commodity pricing remains at current levels towards the end of 2020 in our view. Nevertheless, the Company remains well capitalised and will look to exploit material reductions in service costs this year.

Parkmead Group: LNG oversupply hits cash flows

Share price: 25.3p, Market Cap: £27m

During the six-month period to 31 December 2019, Parkmead generated revenues of £2.1m (1H18: £5.3m).

The reduction was mainly a result of the considerable fall in gas prices. Gas prices have fallen from highs of approximately €25.7/MWh in October 2018 to lows not seen in over a decade of around €8.6/MWh in February 2020 due to the oversupply of LNG into the European market.

Gross profit for the period was £0.8m (1H18: £3.8m).

Detailed technical work undertaken across the wider Parkmead portfolio has allowed the Company to release non-core acreage, such as licence P.2218, considerably reducing licence costs.

The release of this acreage led to a non-cash impairment charge of £1.3m which contributed to the net loss of £1.7m for the period (1H18: £2.2m profit).

Despite low commodity pricing, 2H19 was a strong period of operational progress for Parkmead. Exit gross production at the Company’s Netherlands assets averaged 39.9MMcf/d (c.6,868boepd) for December 2019.

The Company also maintained its robust 2P reserve base of 45.7MMboe as at 1 March 2020 (46.0MMboe as at 1 March 2019).

The Company remains well capitalised cash balances of £25.9m as at 31 December 2019 equivalent to 23.9p/share.

In September 2019 the Company issued 9.7m new ordinary shares as part of the renewable energy acquisition of Pitreadie Farm Ltd.

One of the large areas of land acquired by Parkmead lies adjacent to the Mid Hill Wind Farm which encompasses 33 Siemens wind turbines with a generating capacity of around 75MW.

Parkmead’s early commitment to building a balanced energy business through its focus on gas, widely seen as the primary transition fuel, pre-empted the recent energy transition debate.

Our take: Whilst oversupply of LNG has materially impacted Parkmead’s financial position in 2H19, the Company has successfully developed and diversified its asset base, whilst maintaining a healthy balance sheet. We are particularly encouraged by the move into renewables to complement its European gas strategy. Through September’s strategic acquisition, Parkmead is evaluating a number of renewable energy opportunities which includes a large wind farm project. In addition, the depressed environment will likely yield further low cost, value accretive opportunities for cash-rich operators in the region in our view.

Bowleven: Interim results, sufficiently funded to reach FID at Etinde

Share price: 2.7p, Market Cap: £8m

Bowleven reported a loss of US$1.4m (1H18: US$1.4m loss) for the six months ended 31 December 2019.

The Company’s G&A charge was US$2.4m compared to US$2.1m for the equivalent period last year, which included US$1.3m of G&A costs relating to the Etinde project (1H18: US$1.2m) charged by the Operator.

At 31 December 2019, Bowleven had a debt free cash position of US$10.9m of cash (1H18: US$70.1m cash) plus US$0.5m of bank deposits relating to security for bank guarantees issued in respect of the Bomono licence (1H18: US$0.5m).

The primary reasons of period on period reduction was the US$63.1m special dividend paid in February 2019 alongside the amounts incurred on Bowleven’s operating costs and capital expenditure relating to the Etinde project.

Under the terms of the Etinde farm-out transaction in March 2015, Bowleven also has access to a further US$25m which is receivable on achieving Etinde FID. This is held as a contingent asset pending further clarity around Etinde project sanction.

In terms of outlook, during the remainder of 2020, management expects to continue to work alongside the other Etinde JV partners, exploring both commercial opportunities and related development engineering designs and costs, with a view to having sufficiently detailed, costed development plan to reach FID.

The level of capital expenditure relating to FEED related pre-development activities is expected to increase significantly from the second half of this financial year onwards.

Our take: Bowleven benefits from a robust financial position, with in excess of US$10m of cash on the balance sheet and no debt. Coupled with the Company’s low-cost base, Bowleven is well funded to reach FID, after which it will receive US$25m from its JV partners.

Research – Oil & Gas

Sam Wahab – 0203 470 0473

sam.wahab@spangel.co.uk

Sales

Richard Parlons – 020 3470 0472

Abigail Wayne – 020 3470 0534

Rob Rees – 020 3470 0535

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

Source: proactiveinvestors.co.uk

Published: 27-03-2020

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