Where next for Zenith Energy as neighbour Block Energy soars?
Shares in Zenith Energy have recovered to 3.02p in recent weeks after falling to lows of 2.57p following the news of a £1m placing at the beginning of April. The positive momentum has been driven primarily by progress in the firm’s well-deepening programme at its Jafarli field in Azerbaijan. Here, chief executive Andrea Cattaneo explains the thinking behind Zenith’s recent raise and why he believes the company’s current price could represent an excellent entry point ahead of a busy period of newsflow.
Earlier this month, Zenith share dipped 11pc to 2.57p after it announced that it had negotiated placings in Canada and the UK to raise £1.02m. It settled the raises with a consortium of private and institutional investors, and the proceeds will go into the company’s existing well-deepening programme as well as towards general working capital.
When TMS spoke to Zenith towards the end of March, the business said it planned to use debt financing primarily to progress its assets. In line with this, it signed a $1.5m convertible unsecured loan facility in September last year to provide additional funding for its field development operations and allow it to pursue potential new acquisitions. Then, in October, its efforts to secure debt financing took another significant step forward when it received a ‘B+ with positive outlook rating’ from European credit rating agency ARC Ratings.
Speaking earlier this week, Cattaneo said Zenith’s primary focus on debt remains unchanged in spite of the raise. He said the recent placing was carried out in response to strong demand from new and existing investors ahead of drilling activity, with difficult broader funding conditions also taken into consideration:
‘The debt financing is on track and remains something we want to do. The reason for the equity raise was simply that there were a lot of investors, particularly institutional, who wished to get in or to increase their holding before drilling began. It made sense to raise at these prices,’ he said. ‘Also, the market is not in a good place; there are a lot of macroeconomic concerns with the UK involving Brexit. So, it is more difficult to turn down offers of financing at this stage. Equity raises are not something we want to fall back on all of the time, but it made sense because some long-term investors registered in the fundraise.’
Following the fall, Zenith’s shares bounced back against a backdrop of development in its well-deepening operations in Azerbaijan. To recap, the company owns 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.
After some initial disappointments at the fields, 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. To do this, it intends to maximise output 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.
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. Its primary target in this well-deepening programme is 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 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 at Jafarli. 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. This will be completed using its own rig.
Earlier this month, Zenith announced that the mobilisation of its rig to well C-37 had begun, adding that it would provide updates on progress across its corporate website and social media channels. It also said the market would be updated as soon as rigging up is completed and drilling can begin. Speaking to TMS, Cattaneo said investors can expect the programme to start imminently, adding that ‘May promises to be a very exciting month’.
‘Everything is going to plan, and we have made good progress,’ he said. ‘The things we are doing now are completing the rig-up, which should take another few weeks. We also have to do testing and make sure everything is functioning correctly because the rig has just arrived from Italy. As soon as the rig is fully rigged up, everything has been tested, and all the personnel has arrived, we will start drilling. We think this well could be prolific for Zenith.’
Moving forward, Cattaneo said he believes that the Zenith’s current share price could represent a solid entry point for new and existing investors given the imminent news flow.
‘The upside could be very large,’ he added. ‘If we have a good result here in our first drilling operation, we will mobilise the rig to a neighbouring well around 100m from where we are now, and things can only get better.’
To illustrate his point, he draws a comparison to Block Energy, an AIM-listed oil and gas firm operating in nearby Georgia. Block has seen its share price soar from 3.9p to 10.2p over the past month after revealing that initial production rates at well 16a on its West Rustavi field had come in at an average of 1,100bopd. This far exceeded the organisation’s 325bopd targeted production rate and, according to the business, indicates a better initial performance than any well drilled in Georgia over the last 50 years. Cattaneo said the market’s reaction to Block’s healthy news is encouraging for its own prospects:
‘We are very happy for Block Energy and its result- aside from BP I think it is the nearest London-listed oil and gas company to us geographically. The reaction to their stock showed a really encouraging appetite, and if we can deliver a strong result in our prolific oil and gas, then we would hope to replicate this success.’
Andrea Cattaneo CEO of Zenith Energy speaks to Bonnie Hughes of TMS
The author was remunerated but does not hold shares