The Oil Man: Echo Energy, Zenith Energy, Savannah Petroleum

WTI $57.30 +26c, Brent $62.23 -8c, Diff -$5.93 -34c, NG $2.61 -7c

For a benchmark crude that is facing 2/3 weeks of production down by around 450,000 barrels per day, Brent is surprisingly flat. It probably gives off warning signs that the market feels that any temporary shortage of supply can be handled from existing resources.

This is not brilliant news for bulls in the market as in the New Year there will have to be an iron discipline to even mark time. Having said that, the very fact that around 20x 450,000 isn’t coming into the market has got to help. With Christmas, month, quarter, half and full year periods coming up there is little for traders to get overly brave about.

Echo Energy

Echo (ECHO) has confirmed its Argentine deal and announces a placing, Open Offer and the suspension of its shares lifted this morning.

The deal is as it was first announced on November 1st as a “compelling blend of multi TCF exploration potential, appraisal and production”.

This is almost an oven-ready, de-risked E&P company that can deliver to shareholders from a standing start. Indeed, I expect drilling and seismic work to be under way early in the new year.

Newsflow will not be a problem and looking at what must be conservative numbers neither will be the size of the prospects.

The company are raising £6.4 milliom via a placing of 36.4 million shares at 17.5p, which was the pre-suspension price and existing shareholders will get an Open Offer in January to subscribe for another £2 million worth of stock at the same price.

I have written up the deal at length in previous blogs and think that this is an interesting opportunity in a country that is very much a hot destination in the industry.

Zenith Energy

I mentioned last week that I had been to visit Zenith Energy (ZEN) and spend some time with senior management in Azerbaijan. ZEN is a low-cost onshore producer in this mature but substantial oil province.

Zenith has production of around 350 barrels per day with impressive plans to substantially increase this number through development and using technological expertise, and has plans to get to 3,000 barrels per day by 2020.

The company has very low costs and thus these cash generative assets can work at oil prices significantly lower than those of today.

I visited the Muradkhanli oilfield which was discovered in 1971 and has produced over 16 million barrels of oil to date, and saw the wells M-63, M67 and M87, all of which are being worked over.

The company has decided that there is a need here for electrical submersible pumps and are sourcing these at the moment.

The wells have a high water cut, but the field performance has so far been predicated on such behaviour and, once up and running, will be very profitable and close to a pipeline.

I also visited the Zardab field where well 2-28 has a high impact workover under way and also well 2-21 which had a freak blow out in October.

Pressure here continues to rise and is being monitored before being reentered. The field shows scope for sand management to avoid build up and could become very profitable indeed.

At present, Zenith is concentrating on workover of these wells and achieving cash flow from them, in due course ambitions are much higher, with the opportunity to get ahead with an infill drilling programme that could make serious inroads into the substantial reserve base.

This will be helped by the fact that Zenith is in the process of buying its own new rig which, when on site, will make a significant difference.

That reserves figure of 2P proved and probable is 32.1 million in a CPR this year and it carries a NPV of $435 million (£324 million) at a 10% discount. You wouldn’t have to make many inroads into that to make the company look extraordinarily cheap.

Despite publicised difficulties with old Russian wells looking like a fly tipping operation, staff on site are confident of ultimate recovery.

I met with Mike Palmer, COO who is very impressive and also a number of other senior geologists who are amongst a number of highly respected operators in the region.

Senior management, including Andrea Cattaneo the CEO, are clearly not averse to working on site and pooling intelligence in order to improve operational results.

Zenith has a good management team, strong enough finances and a very substantial reserve base, all of which give the company substantial growth potential. Very much one for the watch list…

Savannah Petroleum

Savannah (SAVP) has announced that it has put in place a strategic partnership with ASMA Capital Partners, who manage the Islamic Development Bank’s IDB Infrastructure Fund II.

The partnership also comes with an equity investment of up to US$90 million, of which US$30 million will be done initially.

With announcements on the price and the re-emergence from suspension expected very soon it is a busy time for SAVP but it all looks highly promising, and looks like a vote of confidence in their deal to have a long-term developmental institution getting involved in the Savannah story.

Hunting

A trading statement from Hunting (HTG) this morning, unsurprisingly trading is “in line with expectations” and EBITDA is towards the upper end thanks to Hunting Titan in the second quarter.

This perforating business is at the heart of the high end onshore service offering and pretty much my favourite part of Hunting.

Elsewhere, a bit mixed but heads above water, and you can see the company working hard to strengthen the balance sheet probably with an eye to a return to the dividend list some time next year.

Ophir Energy

A pre-Christmas Fortuna update from Ophir (OPHR) who announce that they are ‘prioritising’ one of the alternative funding solutions after the disappointment of the Chinese. This time it is a ‘leading asian bank’ for the order of $1.2 billion, but the bad news is that it won’t happen until the new year.

And finally…

In haste, the gutless spineless English cricketers, who spend more time in the bar or in the nick than they do at the crease, surrendered the Ashes this morning. Never one to complain about losing fair and square, but this was a pathetic capitulation that was almost entirely avoidable…

In the footy, the Noisy Neighbours devoured Spurs 4-1, whilst the Red Devils saw off the Baggies 1-2. Chelski beat the Saints 1-0 and the Gooners did the Magpies by the same score.

With the Cherries conceding four against the HubCap Stealers and Stoke three against the Hammers there were plenty of goals around.

Malcolm Graham-Wood is an independent oil industry expert and freelance contributor, not a direct employee of Interactive Investor.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Source.