Opinion

Oil Price, SDX Energy, RockRose Energy And Finally…


WTI $65.51 -10c, Brent $70.42 -11c, Diff -$4.91 -1c, NG $3.45 -6c

Oil Price

It has not been a bad week for the oil price, news has mainly been positive and the dollar remained weak until the Donald gave it a leg up yesterday (before which Brent had traded over $71) although the greenback is back down today. Wednesday started with the API figures from after the close on Tuesday exerting downward pressure but the EIA numbers were much better showing as they did another 1.1m barrel draw, the tenth successive down week.

This brought stocks close to the magic five year average, one of the key points of reference for Opec and Russia and with Cushing seeing another 3.15m draw WTI started to catch up with Brent. This was also seen in the NSL numbers where money managers increased their positions by 37.5m bbls which was split WTI up 41 and Brent down 3.4.

SDX ENERGY - Visit, preliminary thoughts

I spent a few days with SDX Energy in Morocco this week along with a decent crowd of investment analysts which shows that the SDX story is rapidly gaining credence and depth. The story of SDX in Morocco is one of ‘simplicity made profitable' as they describe it and from what we saw that is most definitely the case. The idea is to explore in shallow prospects, find gas, where at present they have an 80% success rate, transport it directly and sell the gas to the client on site. The gas needs little or no treatment being 99.6% methane and the potential client base is substantial. As a result margins are high, drilling costs are low and reducing all the time with rig procedure influenced by US onshore practices such as smaller, non concrete pads and biodegradable waste treatment. This has kept operating costs down, currently 30c per MCF there and thereabouts. The fiscal regime is also helpful with a ten year tax holiday and no royalties and contracts tend to be on a  5 year fixed price basis.

Gas prices are relatively high at $10/MCF with the Government pushing for this to be upped to $12, so at present each BCF is worth $10m probably escalating whenever contracts are renegotiated. So how does the potential market look like? Existing customers take 6 MMscfd and the pipeline capacity is 24 MMscfd so the scope is huge and with estimates of demand identified as 52 MMscfd one can see significant upside. There is significant cooperation with ONHYM who have the local knowledge, staff and experience and really appear to be extremely supportive, this can be seen in ‘Project Vingt Quatre' which is the joint plan to fill up the pipeline which would quadruple cash flows. ONHYM also have the exploration background and relationships with the client base that also helps SDX considerably, their help towards SDX was obvious by the big turnout at very senior level at Wednesday's dinner which was really good to see.

All this is possible as there is significant potential to grow reserves, needed for new customers or when wells start to see production declines. The company has identified 50+BCF of potential reserves which will be needed when one bears in mind a full pipeline and five year contracts. I would expect apart from the current 9 well programme, more 3D seismic and another drilling campaign to get underway later in the year.

Whilst in Morocco we saw a number of clients including the largest, Super Cerame where we visited a highly efficient factory producing a wide range of ceramics and also had a speech from the Director of CMCP ( Subsidiary of International Paper) who produce both paper and cardboard and use significant quantities of gas with their drying techniques. We visited the Atlantic Free Zone (AFZ) which is attracting major clients such as Peugeot which is already a new customer connection, here SDX is considering installing a 7 way gas distribution hub in order to easily connect new customers attracted by the AFZ.  Later we were given a presentation by the MEDZ Free Zone at Kenitra who have a very credible existing footprint with a lot of signed up companies but there is room for many more.

We were able to visit a number of well sites, a couple that were in production and the recent discovery at ONZ-7 which is finishing off wireline and cement logging before going onto production shortly. There are four wells still to be drilled in this campaign, two development wells and two exploration wells further north at Lalla Mimouna. As mentioned there is an aggressive seismic plan in the Rharb Centre concession where potential leads can be established.

All in all the visit was undoubtedly a success,  there is much going on and with a high degree of operational conversion  there is little doubt that the market for this high margin gas is substantial. The company are targeting the upper end of 8-10 MMscfd by the end of the year and this  should be easily attained. Nearly a year on from the Circle acquisition costs are down substantially (headcount down from 150+ to 35) in all areas, margins are up and growth looks increasingly likely. More later.

RockRose Energy

An update from RockRose Energy this morning which primarily includes the return of capital to shareholders amounting to £1.50 per share. The directors have also announced that they will consider an annual dividend and also possible hedging as a response to the recent rise in oil prices. I understand that the shares will return from suspension cum dividend the week of the 5th February and will go XD after the EGM on 14th February so not long to wait for the payout.

With production guidance of 5,250boed RRE have been highly successful in their initial strategy even if the Maersk deal has fallen over and Chairman Andrew Austin remains confident about doing more deals. Opex pb is below $30 and G&A is $3pb so the company is cash generative. Returning cash to shareholders in this manner seems entirely sensible, it is efficient for the company and its investors and shows that RRE will not sit on a pile of cash for longer than necessary. As and when the company need to raise money it is likely that those investors will remember this event.

And Finally...

Hard luck to Bristol City who put up quite a fight against the Noisy Neighbours whilst I was away!

This weekend its the FA Cup with its usual mix of fixtures quite a lot of which are on TV. Tonight sees Yeovil host the Red Devils which is always a favourite for the neutrals, they always love to see the big club go down and Yeovil did well against them when they last met in the Cup. The Noisy Neighbours go to Cardiff, Spurs are at Newport, Chelksi host the Magpies and the HubCap Stealers entertain the Baggies. The Hammers have a tricky tie at the Latics and the Foxes go to the Posh whilst there is another all Prem ties between the Saints and the Hornets.

England started the latest one dayer as if they were already on the plane home, 8-5 after not very long and they did indeed lose.

Some great NH racing at the weekend, mainly a great card at Cheltenham but also Doncaster.



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