Zenith – What’s Next?

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Can Zenith Energy’s new strategy in Azerbaijan help it turn its back on previous disappointments?

After declining from highs of more than 13p after an initial round of workovers at its flagship assets in Azerbaijan failed to meet expectations, Zenith Energy has reassessed its strategy in the country. The firm currently sits at 2.9p a share as it prepares to launch a well-deepening programme that it believes could be a catalyst for a major re-rate. Here, head of business development & investor relations Ippolito Ingo Cattaneo talks us through Zenith’s turnaround & financing strategy and its plans for the future.

Azerbaijan operations

Zenith is the only junior independent operator in Azerbaijan, the world’s oldest oil-producing country. The nation boasts average daily production of 797,000bbls and is a favourite among such majors as BP, Statoil, and Total.

The company took a significant step forward in 2016 when it agreed a 25-year rehabilitation, exploration and production sharing agreement (REDPSA) with state oil company SOCAR. It also acquired an 80pc interest in three contingent oil fields called Muradkhanli, Jafarli, and Zardab. The assets, which the firm also operates, make up the largest onshore oilfield in Azerbaijan by cumulative acreage, covering an area of 642.4km2. What’s more, they currently feature 34 active production wells and 75 wells capable of production.

All-in-all, the fields boast plenty of upside potential, with independently assessed 2P reserves of 31.7MMboe. This translates into an NPV(10) of $469m thanks to low all-in average production costs of $19/bbl.

Zenith’s head of business development & investor relations Ippolito Ingo Cattaneo tells us that Azerbaijan has so far proved to be a very stable place to base a lot of the company’s operations: ‘Onshore, we are undoubtedly the smallest company because oil majors dominate Azerbaijan. However, this popularity has led to the creation of a very sophisticated oil industry. The state always pays us on time for our oil production we currently produce so we have a stable cashflow situation and our 25-year agreement has been passed by Parliament which binds it by law.’

Moving forward

Upon listing in 2017, Zenith planned to achieve production of 1,000bopd by March 2018 through a workover programme across its fields in Azerbaijan. Excitement for the work led the company’s shares to rise from their 7p listing price to highs of more than 13p.

However, the programme underwhelmed expectations. As a result of inaccurate historical data, poor well conditions, and the complex geology of its fields, Zenith was unsuccessful in achieving material increases in its daily production. A long stream of difficult newsflow led shares to decline fairly consistently until last April when the firm announced that it had decided to shut-in 31 uneconomic production wells.

This lack of success prompted Zenith to rethink its strategy with the support of a £2m placing at 4p a share last June. Since then, the firm has completed two comprehensive geological surveys to optimise its selection of drilling locations. It has also improved infrastructure by installing modern electrical submersible pumps and undertaking a programme of line pipe replacement. Elsewhere, it has received around £1.3m of Chinese oil production materials and begun work on an oil storage tank reconstruction programme.

 

 

Perhaps most notably, the company purchased a 1,200hp drilling rig in September to help it complete its planned workover and drilling activities for 18 months. The apparatus is currently being transported to field operations in Azerbaijan from Italy alongside a further €722,000 worth of ancillary equipment. Cattaneo says that owning rig is unique to Zenith, adding that ‘its major piece of kit that no other company of our size owns.’

Well deepening

Zenith’s fields boast historical peak daily production of 15,000boepd.  However, the company’s output in Azerbaijan currently comes in at just 270bopd. Despite this, the business has its sights set high, targeting oil production of 1,000bopd by 31 December 2019 and 3,000bopd by the end of 2020. So, how does it plan to do this? To kick things off, the business has set out several operational objectives for the current year.

Firstly, it intends to maximise production from 34 active production wells through a programme of systematic workover activities. It also plans to identify bypassed pay zones in shut-in wells and identify and isolate water source to achieve economically viable production with a reduced water cut. Learning from its past mistake, Cattaneo says that the firm will now only target modern wells with verified data.

Meanwhile, Zenith also plans to spud a new well using its drilling rig to appraise the large Upper Cretaceous formation structure in the Muradkhanli field. Finally, it expects to perform two well-deepening operations in the first six months of 2019 to test the unexplored Upper Cretaceous formation in the Jafarli field.

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Its first target in this well-deepening programme will be a well-called C-37. This was first drilled in 2008 by SOCAR to a depth of nearly 4,000m and produced at a rate of just 5bopd following the installation of an electrical submersible pump.

However, historical well data indicates that an adjacent well called C-22 achieved an initial production rate of 700bopd from the Middle Eocene formation when drilled in 1986. Then, in October last year, Zenith’s geological and reservoir investigations identified a new structure in the Middle Eocene and Upper Cretaceous formations of the Jafarli field. In response, the company has formulated a two-stage drilling programme for the site that it believes could bring ‘potentially significant’ reserves into production through deepening.

Cattaneo says the structures that Zenith is targeting could potentially be ‘prolific’, adding that the Jafarli well-deepening programme could be a key catalyst for share price growth.

‘We are on the cusp of operational drilling, and it is probably the most exciting moment in the history of our Azerbaijan operations. No one has ever produced from the Upper Cretaceous formation, but historical production in the surrounding area suggests that we could enjoy a sizeable discovery if deepening goes well,’ he said. ‘Now that we have the rig, the kit, and all of the personnel on the ground getting operations ready to go. it is just a case of getting the oil out of the ground.’

Debt financing

Finally, to minimise shareholder dilution, Cattaneo says Zenith plans to use debt financing rather than equity to fund the progression of its assets.

In September last year, the firm signed a $1.5m convertible unsecured loan facility to provide additional funding for its field development operations and allow it to pursue potential new acquisitions. Then, in October, the company’s efforts to secure debt financing took a significant step forward when it received a ‘B+ with positive outlook rating’ was European credit rating agency ARC Ratings.

‘This has really helped us because fund managers will want us to have checked that box before entering a debt financing agreement with us,’ said Cattaneo. ‘As is stands, shares are at a low, and there are plenty catalysts for the price to grow, so debt provides a non-dilutive way for us to ensure we can progress.  ‘At the same time the board of directors holds about 15-16pc of the company’s stock, so there is no interest from them in diluting themselves. All-in-all, there is a real opportunity for us to turn our back on previous disappointments and create a lot of shareholder gain and debt financing is the best way to get there.’

Andrea Cattaneo spoke to TMS and Bonnie Hughes here

The author was remunerated but holds no shares


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