Can production plans and prospects in Georgia bolster Block Energy?
Since listing in June, oil and gas firm Block Energy has seen shares decline from 4p to their current 2.75p as its portfolio of oil and gas assets in the Republic of Georgia has failed to capture the attention of investors. With Block boasting existing production and launching a clear three-phase growth plan across its assets as resource majors flock to Georgia, we look at whether the market could be missing out.
Georgia player
Block’s assets sit in Georgia’s Kura Basin near the country’s largest historical producing field, which was once delivering c.70,000bopd. Specifically, the business owns a 100pc working interest in the producing Norio licence and a 90pc position another producing licence called Satskhenisi. Finally, it holds a 25pc position in the earlier-stage West Rustavi licence, with the right to farm-in to up to a 75pc working interest.
Despite production currently sitting at below 100bopd, Block’s portfolio contains estimated net proven oil reserves of 1.5MMbbls plus 61MMbbls oil and c.473bcf gas of unrisked contingent oil resources. With net contingent resources of 456 BCF alone, West Rustavi is Block’s most significant opportunity. To scale up produce and de-risk these contingent resources, the firm is pursuing a three-phase strategy.
The first phase, which it expects to complete within 18-24 months of listing, will see it target 900bopd production. It aims to achieve this via a fully funded, low-cost/low-risk workover and sidetrack programme of existing wells. At oil prices of $70/bbl, the company breaks even at a production level of just 110bopd. This phase will also see it test gas discoveries at West Rustavi as it continues to appraise the licence.
The second phase of the programme will see it target production of more than 2,000bopd through the drilling of new horizontal wells and sidetracks from existing wells. Finally, step three will see it look to bring the West Rustavi gas discovery into production with an estimated capex of US$1.10/MCF and operating netbacks of ~US$3/MCF. The company will also look to acquire additional licences in the wider region.
Hard at work
Block has been hard at work preparing for phase one of its development programme this year. Upon listing in June, it said it planned to use part of the £5m it raised (at 4p a share) to complete a 12-month programme of workovers, re-completions, and side-tracks of existing wells.
Following this, in October, it announced that it had signed an agreement with Georgian drilling contractor JSC Norio Oil company for the supply of drilling and workover equipment for its 2018/19 programme. Specifically, it expects the firm’s workover rig to complete eight candidate wells at Norio and Satskhenisi by the first quarter of next year. The apparatus will also be used to re-enter up to five wells in West Rustavi in preparation for drilling side-tracks and the re-testing of a legacy gas discovery. A separate drilling rig will drill two high impact horizontal sidetracks in the West Rustavi permit during Q4 this year or Q1 next year targeting initial oil production of c.600bopd. This latter work will increase Block’s stake in West Rustavi to 75pc.
Later in October, the business revealed that it had commenced workover operations, adding that it expects the Norio workover to boost production from 10bopd to 150bopd. An additional side-track planned at one of the wells is then scheduled to take output to 250bopd.
Elsewhere, the firm has signed a memorandum of understanding with Bango, one of Georgia’s largest private gas suppliers, for a proposed offtake agreement at West Rustavi. In exchange for acquiring the total amount of gas produced at the site, the business is looking at wholly or in part financing required gas infrastructure. This work will include pipeline tie backs to local infrastructure and gas processing plant solutions.
This week also saw significant shareholder Mayan Energy sell off its entire 3.3pc stake in the firm to allocate resources to developing its onshore US oil and gas assets. Its stake was acquired by three existing Block shareholders, all of whom participated in the firm admission placing.
Worth a look?
As it stands, Block has a market cap of just £6.9m, with shares well below their 4p listing price at 2.75p. Although it is early days, several encouraging signs could point towards this being an attractive buying opportunity.
Firstly, despite boasting plenty of oil and gas infrastructure, Georgia is a comparatively under-explored region with a historic reliance on Russia for its commodities. Block has previously argued that this creates a large potential market for domestic production, which was validated by oil services major Schlumberger’s entry into the country last year. Rather handily, Schlumberger is using its vast financial resource to target the same high impact gas play as Block’s West Rustavi permit, potentially helping to further de-risk the latter.
Georgia’s domestic potential was highlighted again this week when Block announced that a second oil major was looking at the country. ExxonMobil is set to carry out a comprehensive review of Western Georgia’s hydrocarbon resource base and potential.
As Block’s chief executive Paul Haywood put it: ‘The Georgian Government’s Agreement with Exxon further validates the country’s credentials as a secure and stable place to do business, and an emerging hydrocarbon jurisdiction in terms of naturally occurring oil and gas. Thanks to our positioning and excellent relationships in Georgia, we have already secured a high-quality asset base, which includes multiple low-risk development opportunities as well as a huge gas discovery that we estimate is potentially worth US$600 million to Block.’
This potential, alongside Block’s managerial experience in Georgia, has also helped the firm to secure a considered amount of institutional despite, regardless of Mayan’s exit. Indeed, Amati Global Investors owns a 14.5pc stake while Miton Asset Management also owns a 9.2pc position (as at 03/09/18).
Finally, it is also worth pointing out that Block is already producing, albeit at a minimal level. This is not a position that all oil juniors can boast, especially those with such a low market cap. What more, the company says its current cost of production comes in at c.US$25/bbl, providing a healthy netback of c.US$30-35/bbl.
With enough cash to carry out its 12-month work programme and a clear route for development in an exciting developing oil & gas region, Block’s current valuation could soon look very cheap – especially if the firm’s claims that its assets could be worth up to $600m turn out to be justified.
