WTI $38.01 -$2.36, Brent $40.31 -$2.32, Diff -$2.30 +4c, NG $1.60 -4c

Oil price

The markets, equity and oil, headed south yesterday on the back of GDP reports from the IMF that downgraded GDP forecasts pretty much everywhere. The good news is that these appalling organisations are almost always wrong and that they are only headline seeking economists, in fact you can take out the headline seeking bit, its a given.

The  forecasts were accompanied by reports of increases in COVID-19 numbers, again that is a certainty as economies start to open-up after the long time in lockdown. Markets that were full of gains didn’t need much encouragement to come off a touch but the panic is overdone, as with economists, market commentators, the so-called professionals here have tried to diss the recent rally. Remember, stocks, unlike economists are a forward looking mechanism…it’s the Fed wot counts…

Finally the EIA inventory stats were a mixed bag, yes crude built again, by a mere 1.4m barrels but the key measure of gasoline drew again, this week by 1.7m b’s and on gasoline production of 8.8m b/d and refineries ran at 74.6% of capacity up another 0.6%. One interesting point is that the EIA detected a small rise in US production which I remain convinced is domestic production companies running the operation for cash and the bank manager.

Far Limited

Far Gambia has signed new JOA’s in respect of Blocks A2 and A5 with Petronas with Far as operator on which ‘better reflect’ new terms. Far continue to present the farm-out opportunity to interested parties and hope to conclude these before the restart of drilling operations.

The company commented “We are delighted to enter into new JOA’s with Petronas in respect of the A2 and A5 Blocks, following the granting of the new Licences last year. This is testament to an excellent partnership between FAR and Petronas. The new JOA’s and Licences provide us with up-to-date agreements for our ongoing work on these Blocks, where we are highly encouraged to continue exploring in this proven and prospective basin.”

Far has been hit hard by the virus and oil price crash and the falling of the debt package which had already been arranged for Senegal. The company is strong and one of the best in the industry and deserves to succeed, hopefully with farm-out in Gambia and a partial sell-down of its Sangomar stake.

San Leon Energy

Final results for 2019 for San Leon this morning, much is historical but it is worth noting that Eroton Exploration, the operator of OML 18 received a 20 year lease renewal which will expire in 2039. Production capacity has been around 39,000 bopd due to various nefarious reasons but the completion of the pipeline in the coming months should increase production to 50,000 bopd with no ‘downtime’. (See Malcy’s interview)

Financially $43.2m was received in 2019 via the loan notes mechanism which strengthened the company’s financial position and ‘enabled the company to start to deliver its shareholder return commitment and that to date the company has received just over $190m in total loans payments’.

So far this year a further $41.5m has been received with an expected $10m to come in Q4, in addition a further c.$103.9m is expected in interest and loan note repayments by end 2021. CEO Oisin Fanning says that ‘The current environment generates challenges which Eroton is addressing well, but at the same time it provides a huge opportunity for our Company to initiate its next stage of growth. We have the cash resources, technical and managerial capability, and established relations to select our next projects’.

Much has been going on at San Leon in recent months mostly to do with its stated commitment to shareholder returns. It has completed a tender offer and repurchased $30.5m of shares early in 2019, repurchased $2m worth of stock in Q4 2019 and Q1 2020 and declared a $33m special dividend in May 2020. At that time the dividend yield of 30% and right now the company has a cash balance of $36.5m which looks good to me.

It is clear that the model at San Leon is working well and assuming operating stability, which one cannot doubt in any current scenario, cash is continuing to come in. In my interview this morning CEO Oisin Fanning reminded me that almost everything has been written down in the books including Barryroe which should ensure the absence of any nasty shocks.

Indeed it is clear that the team, with the senior appointment last year of Lisa Mitchell as CFO, is not only looking to make shareholder returns but is also looking at accretive acquisition opportunities in country.

Putting all this together it seems to me that this is an investment that warrants investigation especially from retail investors. Back to CEO Fanning, “Our robust financial position, additional significant funds expected to be received in the in the next 18 months, existing and anticipated new projects, are planned to continue to provide continued shareholder returns. We are proud to have distributed US$66.0 million to shareholders in the past 15 months”.

San Leon is in a very strong financial position, has a world class asset in Nigeria with probably more to come and of course that friendly distribution policy. I would conservatively put a target price of 50p on the company based on yield, reserves and acquisition opportunities.

I managed to speak to Oisin Fanning on Core London this morning, here is the link to a fascinating conversation.

Core Finance CEO Interview: Oisin Fanning of San Leon Energy

IGas Energy

An operational update from IGas this morning which includes further cost reduction measures as well as production guidance. The company, having shut-in certain production on May 1st has now returned some 9 fields to production and been able to reduce the number of furloughed employees.

The remaining 6 fields (with the Albury gas to grid) count for 320 boe/d and remain ‘under review’ whilst there are still some COVID-19 impacts which the company estimate to be around 150 boe/d. This means that the production guidance is 1,850-2,050 boe/d for 2020.

Finally the company has had another go at costs and this time it is the CFO who has effectively made his own position redundant within the finance team where the Group Finance Controller heads up and reports to the CEO. All these savings add up to a further £1m and makes the total for the year £1.6m less the one-off cost of implementing these measures is £550,000 and will be taken this year.

IGas has been swift all through this process been quick to cut costs and show the flexibility it has in production, and with its robust balance sheet and substantial headroom within its debt facility it shows material relative strength. Overall as the company says, ‘It’s all about right sizing for the future today – not pretty but necessary and as things improve we have a lot of optionality in the portfolio’.

And finally…

Liverpool eased past the Eagles 4-0 last night meaning that they will win the Premiership if the Noisy Neighbours fail to beat Chelski tonight. Last night the Red Devils beat the Blades 3-0, the Magpies and Villa drew 1-1, the Toffees won 0-1 at the Canaries and Wolves beat Bournemouth 1-0. Tonight the other fixtures are Burnley v Watford, and the Gooners go to the Saints.