OGV Energy Oil and Gas mid-week update

Valeura’s Q2 2020 results underline a challenging period for the Company from a financial standpoint with production revenues falling 21% from the same period last year to US$1.9m, and a decrease of 32% from Q1 2020.

Valeura Energy: Q2 2020 results underline challenging market backdrop

Energy Prices

Brent Oil US$44.9/bbl vs US$45.2/bbl yesterday

WTI Oil US$42.0/bbl vs US$42.2bbl yesterday

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

Oil Price News

Oil prices continue to hold up with another large inventory draw reported by the API yesterday afternoon

The API estimate a 4.401MMbbl draw for the week ending 7 August

This has come in ahead of consensus for the third week in a row with analysts predicting a modest inventory draw of 2.875MMbbls

Last week the API reported a considerable draw in crude oil inventories of 8.587MMbbls, after analysts had predicted a draw less than half that size

Elsewhere, the API reported a draw of 1.310MMbbls of gasoline for the week ending 7 August, compared to last week’s 1.748MMbbl draw

This week’s draw compares to analyst expectations for a 674kbbl draw for the week

Distillate inventories were down by 2.949MMbbls for the week, compared to last week’s 3.824MMbbl build, while Cushing inventory was the only build this week, gaining 1.073MMbbl

Despite oil prices starting well in early trading yesterday, WTI was trading down in the afternoon before the API’s data release

Prices remain rangebound as OPEC’s cut delivers, but the demand picture remains shrouded with uncertainty, even as the number of new coronavirus cases in the US is now falling

Oil production in the US now appears to be levelling off after falling from 13.1MMbopd in March to 11MMbopd in July  

Gas Price News

Natural gas futures trading higher yesterday afternoon but settled even in reaction to overnight forecasts calling for slightly more heat than originally expected

There were no major shifts in the weather outlook, but just enough to curtail some of the selling pressure left over from Monday’s rout

There is one disturbance in the Atlantic that has a 60% chance of becoming a tropical cyclone according to the NOAA hurricane centre

Hedge funds significantly reduced short-positions in futures and options in the latest week which likely led to the short-squeeze in prices

EPA to ease regulations on US Oil & Gas industry

As a welcome boost to the US E&P space, the EPA are expected to confirm new rules by Friday on methane emissions and detection

It would no longer be mandatory for oil and gas producers to have systems in place to monitor methane pipeline leaks. The regulations would apply to wells drilled after 2016

It has been argued the change is required to ease pressure on the oil and gas industry which has been hit hard by the virus pandemic

The changes are a result of a directive from President Trump to ease restrictions on the industry

Small and mid-size firms are in support of the changes as they claim the regulations made drilling unprofitable

The majors however are suggesting the move is a step back for the industry and prospects of natural gas being a safe and clean energy source

The EPA sided with the small-mid sized firms however, arguing the Obama administration did not follow procedures and processes to determine the impact of the oil and gas industry on methane and other pollutant emissions

EPA regulatory impact analysis last year estimated the proposed amendments would save the oil and gas industry US$17-19m a year

Company News

Valeura Energy: Q2 2020 results underline challenging market backdrop

Share price: 20.1p, Market Cap: 18.9m

Valeura’s Q2 2020 results underline a challenging period for the Company from a financial standpoint with production revenues falling 21% from the same period last year to US$1.9m, and a decrease of 32% from Q1 2020.

The decrease reflects the combined impact of lower production during the quarter and reduced gas price realisations, when expressed in US dollars.

Exploration and development capital spending was US$1.7m during Q2 2020 comprised primarily of costs associated with drilling two shallow exploration commitment wells, Kuzey Atakoy-4 and Bati Sariyer-1 resulting in spending which was 8% less than the prior quarter.

Valeura's reported average operating netback in Q2 2020 was US$15.27/boe, which reflects the inclusion of one-off costs for production testing of the Devepinar-1 well as an operating expense (a requirement due to the well having associated proved plus probable (2P) reserves).

If the one-off costs for testing Devepinar-1 were removed from operating costs, the Q2 2020 average operating netback would have been US$18.33/boe, which is 14% lower than Q2 of 2019, and 27% lower than Q1 2020, largely driven by the reduction in the realised price.

Cash at the end of June remains strong at US$30.5m compared to US$32.6m at the end of March with the fall due to capital expenditure incurred in connection with drilling two shallow exploration commitment wells.

Operationally it was an active period for the Company relative to the challenging backdrop with average Q2 2020 production of 561boepd which increased to at exit rate of 672boepd.

Realised prices were unchanged on a Turkish Lira basis, equating to US$6.24/Mcf.

The Company completed a thorough desktop study of opportunities in the Company's conventional gas production business, with a development drilling programme expected to commence late 2020/early 2021.

In addition, Valeura extended three exploration licences at Banarli and West Thrace until the end of June 2022, whilst also appointing Stellar Energy Advisors with a mandate to secure a partner for the deep tight gas play.

Our take: Whilst a challenging period for the Company, Valuera’s robust financial position has ensured the Company successfully navigated Q2 relative to its peers. Shareholders will be encouraged that the Company exited the quarter with its conventional gas production business ramping back up to volumes in the range of 672Mcf/d, and fresh extensions to key exploration licenses.

Read the latest issue of the OGV Energy magazine HERE.