The Oil Man: Savannah Petroleum, Upland Resources

WTI $57.47 -89c, Brent $62.45 -$1.28, Diff -$4.98 -39c, NG $2.98 -8c

Yesterday was a little bit like the day after the Lord Mayor’s Show. After the OPEC meeting and the rollover of the agreement, there was a bit of profit taking and for once Brent was hit harder than WTI.

That has put the differential back below $5, but that may be because there were more net long positions in Brent.

The only comment that might have affected the market came from Falih himself, as in a speech yesterday he said that “supply curbs would continue through 2018 even though countries may start discussing when to raise output in the June meeting”.

I think he is saying that it will take more than half a year to reduce stock levels back to five-year averages, especially as the demand next year as being forecast to be 32.65 million barrels per day in the seasonally weak first half, but up to 34.24 million barrels per day in the second half.

Savannah Petroleum

Savannah Petroleum (SAVP) announced an update on the Seven Energy proposed acquisition and its financing.

They are intending to raise up to $250 million (£186 million) to fund the cash consideration of the transaction and expansion of the drilling campaign in Niger.

The placing, to be done by way of a placing with institutional, is imminent and will be done in two tranches, one using existing AGM permission and the second after a General Meeting has been held.

Readmission is expected this month and the placing is expected to be completed in January and, for the transaction as a whole, completion should be in the first half of 2018.

As a reminder, SAVP is acquiring 40% of the Uquo and 51% of the Stubbs Creek onshore producing oil and gas fields, plus a 20% interest in the Accugas midstream business. Interestingly, the company has agreed and has a term sheet for, a private equity fund investment for the remaining 80% of Accugas, led by AIIM and with the IDB Fund 11 who will pay $60 million for that stake and carry SAVP for its 20% interest, which will also carry options to acquire more of the midstream business.

This is a most interesting deal. Having the stake in the company gives SAVP “visibility of key end customers for its gas” and these infrastructure funds will become valuable partners. So, aggregate consideration and acquisition enterprise value will be of the order of $270 million.

“This represents an acquisition cost of US$2.9/2P boe and an overall acquisition EV/capital invested in the assets to be acquired to date of c.35 %”, which seems very attractive to me.

Lloyds Register has certified 2P reserves and 2C resources to be 92 mmboe and 44 mmboe respectively for the two fields, at which 2018 production will be in excess of 20/- boe/d. Net free cash flow attributable to SAVP in the years 2018-22 of $88 million p.a. plus an NPV10 of $548 million.

Other notable features from the announcement include a stepping up of the Niger drilling programme from three to five wells, starting in 1Q 2018 targeting >250 million barrels of prospective oil resources. The board is being beefed up as well with a new CFO and three high profile industry players joining the non-exec ranks. Once this transaction closes, Savannah will be a very grown up company. Indeed, it should be noted that CEO Andrew Knott has committed to investing $500/- in it personally.

Savannah is acquiring a substantial portfolio of producing assets at what seems a very attractive price. With the cash flow that they expect from these upstream and midstream assets, they also intend to pay a dividend from 2018 onwards, which makes the transaction even more interesting and will, undoubtedly, put the company higher up the list of international players in the industry.

Upland Resources

I wanted to catch up with Steve Staley, CEO of Upland Resources (UPL), following their recent announcement of a farm-in with Corallian Energy for a 40% WI in UK block 11/24b, which contains the exciting Wick Prospect, and managed to get some time with him this morning.

Apart from some UK onshore with Ineos I hadn’t really done much work on Upland, but SS has a fantastic record in the industry so should be watched very carefully.

Upland have done a lot of prep work on this licence and plan to drill the prospect in late 2018, but with an estimated in-place P50 resources of around 250 million bbls, it may well be worth the wait. The key risk that has been identified I understand is the fault closure, but apparently if the faults seal then this is a very big structure indeed, in fact his words were “it sticks out like a sore thumb”.

Fans of Reabold Resources (RBD) will have more than a passing interest in this as they now have an interest in Wick following the Corallian investment, although guarded about anything until the deals are funded and signed I suspect they are quietly very excited about 2018…

And finally…

The final round of Champions League fixtures, and CSKA Moscow come to the Theatre of Dreams tonight where the Red Devils need a point to top the group and be certain of qualifying… Celtic host Anderlecht and Chelski entertain Athletico Madrid.

The second test in The Ashes was looking all over, but England remain in although with a very slim chance of victory tomorrow. Don’t stand on one leg waiting…

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.