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RM plc – interims, “starting to build encouraging revenue momentum”. Really? Read HERE
Whilst I’m generally wary of investing in small oil and gas companies, occasionally one comes along that appears to be in the right place at the right time and with the right assets and management team. I believe that could well be the case with Orcadian Energy (ORCA) which, although only listed last year, looks to have interesting assets with the potential to actually be developed in the near future and which also fits in with the focus on ‘net zero’ as well as any company operating in this sector can. Whilst it is still at a very early stage and carries plenty of risk in terms of its assets actually being developed, and also financed in a way that is beneficial to shareholders in at an early stage, I can see value in taking a speculative longer term position in this one as the rewards in the success scenario look to be very attractive.
Does anyone believe in Powerhouse Energy any more? Another set of jv terms amended. Read HERE
The main focus with this company is its 100% equity stake in licence P2244 which holds the Pilot and Harbour discoveries, with the main focus being on Pilot which historically has already been drilled and appraised to the extent that 79mmbbls of proven and probable reserves (2P) has already been assigned to it, with a further 15mmbbls of 2C contingent resources as well. In addition it does also have the Elke and Narwhal discoveries (100%), which were drilled in 1993 and 2000 respectively, and have been assigned 53mmbbls of 2C contingent resources, and which if ever developed would see it tied back to the adjacent Pilot field, and the FPSO which would be used for any production from that. Also as part of the Pilot development, the company has a 100% stake in licence P2320, which surrounds the pilot field, and where the licence has recently been extended to allow it to be tied into the likely field development plan for Pilot. This licence will form part of the emissions reduction plan for Pilot, as the excess gas produced during production at Pilot would be injected back into the Feugh reservoir (part of P2320) and would eliminate any need for flaring. In addition to that, P2320 also contains the Blakeney field, which was discovered in 2010 and looks interesting in its own right, with 25mmbbls of 2C contingent resources assigned to it, although it is still very early days. Also contained within P2320 is a sub-area, the Carra prospect which has recently been farmed out to Carrick Resources Limited, which has received 50% of it in return for undertaking work to get it to a position where it can be drilled, and also to find an additional farmout partner to enable that to happen. Finally, it also has the Fynn discovery, on licence P2516, which it owns on a 50:50 basis with operator Parkmead Group (PMG), and although again this is at a very early stage, it appears to have potential with large amounts of oil in place, although a significant amount of that is heavy oil and as yet it hasn’t been developed despite being discovered by Texaco way back in 1978.
Whilst these other fields all could have some potential in the future, the main area of interest for investors here – given that Orcadian is a small AIM listed company with a market cap of just £22 million and doesn’t have the cash to drill wells all over its acreage in the North Sea – is the potential development of Pilot, which the company was awarded in 2014. Part of that development has already been submitted to the Oil and Gas Authority, including the use of a floating wind turbine as part of the aim of the company to keep emissions as low as possible, and it received a ‘ letter of no objection’ in response to that. The company subsequently submitted a draft FDP in June, and as part of the process of actually getting that ratified – which will dependent on the company managing to secure the necessary financing – it also initiated a farmout process to fund it through to production. The metrics look attractive, with an NPV(10) of $640 million at $60/barrel, but the main stumbling block is that it will cost $1 billion to get it to first oil, and that is obviously way in excess of the amount that Orcadian could hope to access on its own and therefore it is totally reliant on finding a partner to fund it in return for a share of the licence. But it could actually be one of the beneficiaries of the new oil company tax regime introduced by the UK recently, with any partner that stumped up the cash being entitled to $750 million in tax relief immediately after the money is spent, which certainly makes it look very attractive, and especially so whilst that 75% relief on investment is still in place and there is a window to secure both that and a stake in a field that looks to have plenty of potential. For any partner that does come onboard, this development also looks attractive on an emissions basis, which would only be around 12.5% of the North Sea average for each barrel produced, and makes it one of the lowest in the world. It has already been in contact with three different companies which expressed an interest in providing the FPSO needed for the project, and has been working with them on the concept of converting such a vessel with the wash tank technology required for this development. It has also been exploring the financial side of things and the level of debt funding that the assigned reserves could give it access to, as well as looking into the potential for similar funding to that which Premier Oil (PMO) obtained for its Tolmount development - prior to its takeover by Chrysador, and the combined company being renamed Harbour Energy (HBR) - whereby the parties involved received a tariff for the transportation and processing of gas from that field. The remainder of the cash required to develop Pilot would have to come from either a farm in partner or be raised via the equity markets, although I would imagine the latter option would be limited significantly by the size of the company.
When it comes to dilution, the directors are definitely well aligned with shareholders here, with CEO Steve Brown holding a 43.8% interest, and technical director Greg Harding having 12.3%, plus CFO Alan Hume with 6.1%. I also like the management team and their track record in the industry. Obviously with a company of this size and at this stage there is plenty of risk involved, despite the assets looking good on paper, but it isn’t one that burns through huge amounts of cash and hopefully has enough to see it through to a stage whereby an FDP can be submitted, and at which time I would expect the shares to be trading higher for any further working capital needs going forwards from there. The shares here are tightly held and with little in the way of freefloat or daily trading volumes, so that does also present a risk if anything goes wrong, as there will be little or no liquidity to sell on bad news. But the flipside of that is that should the company be successful in the longer run, the opposite will also work in your favour, and it won’t be easy for anyone to buy in after good news without the share price moving materially ahead of them. There is some political risk if further moves were made to punish the industry, and to accelerate the move away from oil and gas - currently though the opposite appears likely, as we seem to be waking up, as a country, to the fact that we can’t just stop using this type of energy overnight, and that it definitely has a part to play in the foreseeable future. So based on all of that, I would suggest that this is an attractive speculative buy with a view to holding it longer term and seeing where things go with the Pilot field development.
CyanConnode – is further significant underlying cash burn a ‘successful result’ then? Read HERE
Filed under: Orcadian Energy, RM plc, Powerhouse Energy, Wood Group, Love Hemp, CyanConnode
2022-08-23 13:56:25