Today's Oil & Gas Update - Genel Energy, Enquest, 88 Energy and more...

Genel Energy: Strong FY19 results, dividend maintained EnQuest: Highly leveraged and under-hedged SDX Energy: Encouraging well result in Morocco 88 Energy: Production hole at Charlie-1 commences

Oil & Gas Daily Flow

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

Market Update: Thursday 19 March 2020

Genel Energy: Strong FY19 results, dividend maintained

EnQuest: Highly leveraged and under-hedged

SDX Energy: Encouraging well result in Morocco

88 Energy: Production hole at Charlie-1 commences

Jadestone Energy: FDP delay allows redirection of capital

Hurricane Energy: Impressive FY19 results

Energy Prices

Brent Oil US$26.5/bbl vs US$28.3/bbl yesterday

WTI Oil US$23.0bbl vs US$26.2bbl yesterday

Natural Gas US$1.67/mmbtu vs US$1.67/mmbtu yesterday

Oil Price News

Despite a fall from yesterday’s open, oil prices ticked up this morning as investors tried to assess the impact of massive central bank stimulus in putting a floor under plummeting fuel demand from the coronavirus pandemic

However, the gains are likely to be temporary as the market suffers not only a demand shock but also a supply jolt, with the collapse of the OPEC+ agreement this month

Over 3MMbopd is expected to flood the market from the beginning of April as Saudi and the UAE ratchet up production

Current market consensus sees oil prices breaking through the US$20/bbl resistance unless there is an intervention from the major producers

Gas Price News

Natural gas prices held steady in early trading today as warmer than normal weather expected to cover most of the US did not materialise

The drilling rig count in natural gas fell one rig in the latest week

Net withdrawals of stockpiles are expected to continue to ease less than normal which could generate headwinds for prices

Company News

Genel Energy: Strong FY19 results, dividend maintained

Share price: 56.9p, Market Cap: £160.8m

Genel’s FY19 results saw a 6.2% increase in revenues to US$377.2m following a 7.5% yoy increase in average production to 36,250bopd.

This led to FY19 FCF of US$99m in 2019, pre dividend payment, this increases to US$153m (FY18: US$173m), or US$0.55/share, taking into account the receipt of US$54m in payments from the KRG, due in 2019 and subsequently received in January 2020.

The Company ended 2019 with a cash position of US$391m (US$334m at 31 December 2018), and net cash of US$93m (net cash of US$37 million at 31 December 2018)

Importantly in light of the recent fall in oil prices, Genel’s average production cost was US$2.9/bbl in 2019

In terms of outlook, today’s statement confirms that the Company resilient to an oil price of US$30/bbl, as low-cost production, a flexible capital structure, and robust balance sheet allows the payment of a material dividend, and the retention of a material net cash position at year-end 2020.

Capex guidance can be reduced to as little as US$60m in 2020, with an expectation that it will be around US$100m at the prevailing oil price, covering maintenance expenditure across our producing licences and investment at Sarta.

Genel will sanction activity relating to the expenditure covered in the original $160 million to $200 million guidance range, as and when the external environment improves

Given the current market conditions, coupled with the delay in payments from the KRG, drilling activity at the Tawke PSC has been scaled back

Due to the delayed expenditure, 2020 net production guidance of close to Q4 2019 levels of 35,410bopd is expected to be impacted, with the reduced producing asset work programme increasing cash flow generation in 2020 at the prevailing oil price, although a lower exit rate production will impact 2021

The Qara Dagh-2 well, which was set to spud in Q2 2020, is now likely to be delayed

Operating cash costs are guided to be US$3/bbl, amongst the lowest in the industry, fitting into a world of fewer and better natural resources projects

Given the resilience of the business, the Board has recommended a final dividend of US$0.1/share (2019: US$0.1/share), a distribution of c.US$27.8m, with a view to increasing the 2020 interim distribution should market conditions improve.

Our take: Whilst Genel has reported a robust set of figures for FY19, we are conscious that FY20 will looking markedly different for the Company and its peers in our view. Payments for production in October and November 2019, due in January and February 2020, have not been received. The KRG continues to state the importance of ongoing payments to oil companies. Confirmation of the full dividend is a deviation from the strategy adopted from many of the Company’s peers and will be viewed as a sign of optimism on behalf of the Board.

EnQuest: Highly leveraged and under-hedged

Share price: 7.5p, Market Cap: £127.3m

Ahead of EnQuest's 2019 full year results announcement scheduled for 26 March 2020, the Company has provided the market with an operations update given the recent volatility.

The Company has reviewed each of its assets and related spending plans in light of the current lower oil price environment, and its updated working assumption is not to re-start production at the Heather and Thistle/Deveron fields. Total combined production from these fields in 2019 was c.6,000boepd.

At the same time, the Company is implementing a material operating cost and capital expenditure reduction programme. This will significantly lower EnQuest's cost base, with free cash flow breakeven targeted at c.US$38/boe in 2020 and US$35/boe in 2021.

Current production is averaging c.65,500boepd, with Kraken in particular performing ahead of expectations at c.39,000bopd (gross).

As a result of the field shutdowns, FY20 production guidance is now expected to be in the range of 57,000 - 63,000boepd. Kraken forecast gross production remains unchanged at 30,000 to 35,000boepd.

For FY20, EnQuest is targeting base operating expenditure savings of c.US$150m, which would lower operating costs by c.30% to c.US$375m.

The Company is guiding FY21 unit operating expenditures of c.US$15/boe, driven primarily by cost savings at Heather and Thistle/Deveron, but also through the removal of non-critical and discretionary operating expenditures and support costs.

FY20 cash capital expenditure is also expected to be reduced by c.US$80 million to c.US$150m.

The majority of the Company’s 2020 programme relates to the recently concluded drilling programme at Magnus and the two-well programme now underway at Kraken, with c.US$50m of 2020 cash capital expenditure relating to the phasing of cash payments into 2020.

EnQuest has confirmed cash and available facilities of US$268.2m at 28 February 2019, and there are no further repayments of the Company’s senior credit facility due in 2020, with the facility maturing in October 2021. Net debt was US$1,367m at the end of February 2020.

EnQuest has hedged c.20% of 2020 entitlement production with c.2.9MMbbls of oil at an average floor price of c.US$65/bbl and, in accordance with the Sculptor Capital facility agreement, c.1.1MMbbls hedged at an average floor price of c.US$52/bbl.

Our take: Whilst the Company has no further debt repayments due in 2020, Enquest’s material leverage position will become more pronounced given that only 20% of its entitlement production has been hedged above the current oil prices in our view. Even a relatively small FY20 capex spend of US$50m will have a material reduction on available liquidity, and the Company will require commodity pricing to double to become cash flow positive

SDX Energy: Encouraging well result in Morocco

Share price: 12.3p, Market Cap: £25.2m

In Morocco, SDX has confirmed that the LMS-2 well (SDX 75% working interest) has been drilled to a measured depth of 1,190m, and preliminary analysis has confirmed a 10.6m net gas reservoir with 30.9% porosity has been encountered on prognosis at the base of the H9/Srafen formation.

Unlike previous gas discoveries in the south of the acreage, analyses while drilling indicated that the different thermogenic composition of the gas suggests that it is from a new and likely deeper source rock.

The well has been cased and completed and, when changes to Covid-19 restrictions make it possible to bring a well testing crew into the country, it will be perforated and tested to determine its potential.

In Egypt, the SD-12X (Sohbi) well at South Disouq in Egypt (SDX 55% working interest, 100% working interest in this well) has commenced drilling operations.

Sohbi is expected to a reach its targeted depth of approximately 2,300m in late April and is targeting gross P50 unrisked prospective resources of c.33Bcfe, as estimated by management.

Sohbi's primary target is in the same Kafr el Sheikh formation that the Company's existing Ibn Yunus well is already producing from.

If successful, the Sohbi well would be tied into an existing flow-line connects to the South Disouq Central Processing Facility.

On a gross basis, this tie in cost is estimated at US$3.5m and the 33Bcfe gross P50 unrisked resource targeted by Sohbi would potentially only require one further development well.

Our take: A very encouraging update from SDX today, especially given that regional Moroccan gas prices are significantly above the prevailing Henry Hub, and production is profitable in the country. The well will need to be perforated and tested before the full potemtial of this result can be understood however signs are positive in our view. Success in Egypt has the potential to extend the current plateau production of 50MMcf/d to 2024.

88 Energy: Production hole at Charlie-1 commences

Share price: 0.6p, Market Cap: 113.8m

88E has provided a much antcitpated update regarding the Charlie-1 appraisal well, which is currently being drilled.

After a minor delay, mainly due to weather, surface casing has now been set and cemented. A mandatory test of the Blow Out Preventer system was also completed successfully, which will now be followed by a Formation Integrity Test. Drilling will then proceed in the 8.5" production hole.

The results from the Logging While Drilling phase of the program are expected to be announced after total depth has been reached and initial analyses have been completed, scheduled for early April.

The Company has also confirmed that COVID-19 has had no impact on the program to date and appropriate measures have been put in place to ensure that any potential impacts are being proactively addressed.

Our take: This is a company making prospect for 88E in our view. The total Gross Mean Prospective Resource across the seven stacked targets to be intersected by Charlie-1 is 1.6Bnbboe (480MMboe net to 88E), therefore representing one of the largest small cap Company wells to be drilled in 2020.

Jadestone Energy: FDP delay allows redirection of capital

Share price: 29p, Market Cap: 134.1m

Jadestone has confirmed that the Company is reviewing its 2020 capital programme.

In the absence of the receipt of Vietnamese Government approvals of the FDP the Nam Du and U Minh gas field developments, Jadestone has decided to delay this project.

The Company will therefore remove substantially all capital spending which had been planned for the project in 2020, resulting in a 50%, or circa US$90m reduction to its 2020 capex guidance for the year, which is now expected to be US$80-95m.

This decision is not just a recognition of the impact of new measures to conserve the Company's capital resources but focuses on the largest and longest element of the Company's 2020 capital programme, and one which would not have contributed cash flow before Q4 2021.

The remaining 2020 capital programme largely comprises infill drilling at Montara and Stag, and remains entirely discretionary.

As the end of January 2020, Jadestone had an unaudited cash balance of US$116.0m, including restricted cash of US$10m and gross outstanding interest-bearing debt of US$50.1m.

The Company expects to remain operating cash flow positive even at oil prices below US$30/bbl, owing largely to downside price protection through hedging and significant pricing premia on oil from its producing assets in Australia.

The mark-to-market value of the hedge as at 28 February 2020 was over US$18.0m in favour of the Company.

Our take: The delay in the FDP approval has counter-intuitively come at an opportune time for Jadestone in our view. There is now a short-term option for us to defer spending commitments on the project. Vietnam currently has the potential to take temporarily cheap competitor piped gas, which is oil price linked and benefitting from the current market dislocation, and the Nam Du and U Minh fields can be developed when investment conditions improve.

Hurricane Energy: Impressive FY19 results

Share price: 9.6p, Market Cap: 185.4m

Despite the Company’s share price performance, its FY19 results underline a transformational year for the Company.

FY19 revenues were US$170.3m (2018: nil), generating a profit after tax of US$58.7m (FY18: loss after tax of US$60.9 million).

The Company ended 2019 with an unrestricted cash position of US$156.6m (FY18: US$83.0m).

In terms of outlook, guided production rate of 18,000bopd (which includes a 90% uptime assumption) remains robust especially given the cash operating costs of c.US$17/bbl.

The Company also holds significant cash balances (US$164.3m of unrestricted cash as at 18 March 2020) which is forecast to be sufficient to meet all obligations and committed costs as they fall due.

Our take: As expected, a very impressive set of FY19 figures released by Hurricane today. Clearly the prevailing market conditions will have a significant impact on the Company’s forward capex programme and this will be an area of focus for the market in our view. Low margin barrels will be avoided in favour of the GLA development which benefits from comparatively low operating costs.

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.