Morning View . Oil prices retreat from three-month highs

Oil & Gas Daily Flow

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

Market Update: Friday 10 January 2020 

(): Production up 15%

Lekoil (): Site Survey commenced on OPL 310, Nigeria

Energy Prices         

Brent Oil US$65.3/bbl vs US$66.0/bbl yesterday

WTI Oil US$59.4/bbl vs US$60.1bbl yesterday

Natural Gas US$2.14/mmbtu vs US$2.16/mmbtu yesterday  

Oil Price News

• Oil prices continue to retreat from three-month highs as tensions between the US and Iran continue to ease following comments from Senior Iranian Commander Hajizadeh confirming that the aim of the missile strikes was to cause damage to US military architecture and not to target the lives of US servicemen
• Hajizadeh added that expelling US troops was the appropriate revenge for the killing of General Soleimani
• These comments have served to tone down the revenge rhetoric that came from top members of the Iranian regime and appear to have cooled the markets.
• The global inventory indicator reported a build of 50MMbbls of oil for Q418, while the last quarter came it at only 9MMbbls, indicating that the market is tighter on a fundamental with regards to the supply/demand dynamic
• Brent futures were down 0.7% to $66.3/bbl, whilst WTI futures were down 0.9% to US$60.2/bbl

Gas Price News

• US natural gas prices remain steady despite a smaller than expected draw in natural gas inventories as reported by the Energy Information Administration yesterday
• The weather is expected to remain colder than normal in the west and warmer than normal in the east of the US during the next 6-10 days
• The 8-14 day forecast is showing cooler air moving into down from Canada which is the first sign of a ridge trough pattern that could take prices higher

UK Sector Backdrop

• We enter 2020 with renewed optimism over the small-to-mid cap E&P space following a year of significant volatility
• 2019 saw the majors and independents curtail upstream investment relative to historical levels against a challenging macroeconomic backdrop
• Nevertheless, we have seen a shift in sentiment over the course of the year, with access to capital improving, and importantly, more generalist institutions returning to the sector
• UK equities in the Oil & Gas sector finished 2019 up 4.2% (2018: -16%)
• AIM Oil & Gas indices were flat in 2019 despite some volatility, yet stabilising 2018’s 13% decline
• These indices have largely tracked the oil price, and with the futures market also suggesting further upside and that current geo-political risk has not been fully priced in
• What does this mean for 2020? Significant volatility in commodity prices has given rise to unique investment opportunities in our view
• The small/mid cap constituents of the sector are due to engage in an active year of operational activity in 2020, with a number of high impact drilling catalysts including UJO LN**, ECO LN, RRE LN, SDX LN, HUR LN
• See our take on 2020’s outlook at: https://www.proactiveinvestors.co.uk/companies/news/909122/sp-angel-s-sam-wahab-discusses-hurricane-energy-eco-atlantic-tullow-and-union-jack-oil-909122.html**

** SP Angel acts as Nominated Advisor and Broker to Union Jack Oil

Company News

Regal Petroleum (RPT LN): Production up 15%

Share price: 24p, Market Cap: £72.1m

• Regal has provided an update of its operational activities in Ukraine, where it operates the Mekhediviska-Golotvshinska (MEX-GOL), Svyrydivske (SV) and Vasyschevskoye (VAS) gas and condensate fields.
• Overall production volumes in Q4 2019 increased by 15% compared with Q4 2018, having received a significant boost in October 2019 from the commencement of production from the MEX-119 well in the MEX-GOL fiel.
• However, a decline in production rates from the VAS 10 well impacted overall production at the VAS field during the quarter, and management has confirmed that work is currently underway to install compression equipment designed to increase production from this well, with a longer-term plan to undertake a workover of the well to access an alternative reservoir horizon.
• At the MEX-GOL and SV fields, drilling of the SV-54 well is continuing, with the well having reached a depth of c.4,600m.
• The target depth is 5,320m and drilling operations are scheduled to be completed by the end of the second quarter of 2020, and, subject to successful testing, production hook-up is anticipated during the third quarter of 2020. 
• The well is a development well, with its primary targets being the B-22 and B-23 horizons in the Visean formation. 
• Following hydraulic fracturing operations on the MEX-120 well, the well was lifted using coiled tubing, though only modest flows of gas and condensate have been recovered and the well is now under observation.  
• Planning continues for a further well in the SV field to be spudded later in the year.
• Regal’s liquidity position remains strong with US$63.0m on the balance sheet at year end.

Conclusion: Regal has reported a robust year of operational progress in 2019, yielding strong production from its fields, a solid result from the MEX-119 well in October 2019, impressive financial performance and an upgrade to the reserve base at the VAS field announced in August 2019. 2020 will likely see a greater focus on the company’s VAS field, with interpretation of the 3D seismic data acquired last year completed and integrated into the geological model for the field. Planning is continuing for a new well to explore the material Vvdenska prospect within the VAS licence area.

Lekoil (LEK LN): Site Survey commenced on OPL 310, Nigeria

Share price: 9.7p, Market Cap: £53.1m

• Lekoil has that the site survey on OPL 310, Nigeria, has commenced.
• Following on from the drilling of Ogo-1 and Ogo-1 ST in 2013 which encountered hydrocarbons within the SynRift and PostRift, the partners (Opimum and Lekoil) are planning a two-well programme with the objective of obtaining dynamic flow data from well testing while preserving the drilled wells as producers.
• In terms of timing, the first well spud is planned for the second half of 2020, with the company having secured US$184m (gross) funding for the appraisal drilling and initial development programme activities on the Ogo field.
• In conjunction with this appraisal drilling plan, the site survey is required for the assessment of top-hole drilling, jack-up rig and potential platform foundation hazards and any seabed obstructions.

Conclusion: Following a number of years of absent activity on OPL 310, and with legal issues surrounding Ministerial Consent, 2020 could represent a transformational year for Lekoil with two fully funded wells planned. Initially owned by the now defunct Afren, Ogo is a large discovery located in shallow water offshore Lagos. Ogo lies in the prolific Keta-Togo-Benin Basin and yielded a P50 reserves estimate of 770MMboe, well in excess of the 2012/13 pre-drill 200MMboe estimate, and will be a key area of sector focus this year in our view.

Research – Oil & Gas

Sam Wahab – 0203 470 0473

[email protected]

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