Last chance saloon for Advance Energy
“…The company needs to turn talk of a new prospect into reality. For investors with faith Advance’s directors can execute, the Company is now available at a bargain price…”
2022 has not been a happy new year so far for energy company Advance Energy (AIM:ADV), focused on acquiring or farming-in to non-operated interests in discovered upstream projects.
Just a few weeks ago the company was eagerly anticipating initial drilling results from an appraisal well at its flagship Buffalo Oil Field offshore East Timor, in south eastern Asia, a 50/50 joint venture with Carnarvon Petroleum. After it became apparent last week that the prospect would yield little oil, Advance’s share price plunged from 5.30p (on 17 January) to 0.24p at the time of writing, slashing the company’s market cap to £2.41m. Advance now needs to find another worthwhile prospect, and soon.
Originally incorporated in September 2006, Advance relaunched in February 2020 with a new board and a fresh strategy designed to take advantage of the opportunities opened by the gathering trend for traditional oil majors and national oil companies to divest non-core assets from their portfolios. Advance’s Buffalo acquisition, funded by a £21.8m placing last April, was the first fruits of the new approach.
Buffalo, originally developed and operated by BHP & Nexen around the turn of the millennium, produced 21 MMstb over five years, achieving a peak production rate of 45,000 bopd, before being shut-in late in 2004. 3D seismic data reprocessed by Carnarvon after acquiring the permit in 2016 identified a significant attic oil accumulation – oil trapped upstructure of the highest producible well in a reservoir – remaining from the original development. Reservoir modelling conducted using structural interpretation and data obtained from numerous well penetrations of the reservoir allowed Carnarvon to commission a CPR estimating the field’s 2C contingent resources at 34 million barrels. With a potential gross peak production rate of 40,000 bopd Buffalo promised to generate free cash flow of $276m within 12 months assuming $50 Brent, the majority of which would be net to Advance.
The appraisal well, Buffalo-10, would be drilled to a depth of approximately 3,500 metres, targeting an oil column below a previously undrilled crest of the Buffalo structure estimated to be 80 metres high. A final investment decision was to be made after drilling – which the CPR suggested had an 86pc prospect of success – with first oil to follow in H2 2023.
Drilling got underway as planned on the very last day of 2021, after a series of positive operations updates, but three weeks later, on 19 January, a rather enigmatic RNS indicated that all was not well. The primary reservoir had been intersected, but at a depth of around 3,338 metres ‘approximately 80 metres low to prognosis and outside the pre-drill range of expectations’. An ‘approximate 12 metre gross oil column was encountered’ – underwhelming in comparison to pre-drill estimates. And it seemed the seismic data that had guided the programme was imprecise, the announcement stating, somewhat confusingly, that ‘information to date indicates that the seismic processing techniques employed on this project have not resolved the underlying seismic velocities or imaging resolution issues that are present in this field.’
The market’s fears were confirmed five days later when a stark update said that wireline logging operations had been completed with ‘only residual oil’ being encountered, and that the ‘well will therefore be plugged and abandoned, and the rig demobilised.’ CEO Leslie Peterkin could only describe the results as ‘both disappointing and hugely surprising’, given that, in the words of the company’s most recent set of final results, it had been ‘selected on the strength of its risk versus reward ratio – with low geological risk relative to the upside achievable in the success case’.
Another update a few days later reported that Advance had already begun implementing urgent measures to reduce the company’s costs by more than 50pc, which included reducing salaries and director fees by over 60pc. Mr Peterkin had resigned from the company with immediate effect, and had been replaced on an interim basis by current Non-Executive Director Larry Bottomley. The company was scouting new opportunities: following completion of the Buffalo-10 well and the settlement of associated costs ‘the Board believes it has sufficient liquidity to progress new business development through the current calendar year’. Reducing the cost base would leave the company with sufficient cash and no debt, giving it more time to assess and progress a pipeline of candidate projects.
Advance was now focused on ‘capitalising on the current deal pipeline’, aiming ‘to lever the time and cost expended in assessing potential new ventures over the last year built on the Board’s extensive industry relationships.’ Opportunities in across ‘Europe, Africa and the Far East’ suitable for debt or vendor financing were being assessed. The company was ‘confident that it will enter into an agreement on at least one opportunity in its pipeline this calendar year.’ Its most recent interim report for the six months ended 31 October 2021 – another publication during an exceptionally busy January – stated cash and cash equivalents at end of the period of £5.86m.
Looking for new opportunities
Advance’s future now depends on the capacity of its directors to carry out their commitment to secure a viable new prospect. Interim CEO Mr Bottomley has 40 years of experience in the oil and gas industry, encompassing senior leadership roles with Perenco SA, Hunt Oil, Triton Energy and BP, and, until June 2020, as CEO of Chariot Oil & Gas. Non-Executive Chairman and Director, Mark Rollins is a former Chairman and CEO of Ukrnafta, responsible for a significant share of oil production in Ukraine, and has also served as a senior executive at BG Group plc, managing the former international E&P company’s interests in Kazakhstan. Advance’s website lists several successful projects in which its directors have participated, including the design of development plans for the Hovea Oil Field in Western Australia operated by Arc Energy, which ‘completely transformed the company, allowing it to proceed to discover and develop other nearby oil fields’, and was instrumental in AWE taking over Arc for $480m in 2008; and for the Sarqala Field in Kurdistan, which, when implemented by operator Gazprom facilitated production at an initial combined rate of more than 30 Mstb/d.
If Advance can get itself back on track it may be able to take advantage of the tailwinds currently behind the small cap hydrocarbons sector. As noted above divestment opportunities are opening, and higher oil and gas prices seem likely to persist for some time. The company’s interim results said that current conditions present ‘an opportunity-rich landscape for the company moving forward’.
That may be so. But for Advance that report’s rosy glow must now seem very dim after the Buffalo disappointment. The company needs to turn talk of new prospect into reality. And progressing that new project may require a new fundraise. For investors with faith that Advance’s directors can execute the company is now available at a bargain price. Others, however, will want to see what new prospects Advance can offer before committing to a company that now seems a highly speculative venture.