Are the choppy waters behind Canadian Overseas Petroleum?
“…As we have noted, the challenge is to discern whether COPL is navigating temporary storms or is compromised by more fundamental issues. Prospective investors will need to make their own judgements….”
Canadian Overseas Petroleum (LON:COPL) seems something of an enigma. The oil and gas exploration, production and development company acquired a set of intriguing assets last year across Wyoming’s productive Powder River Basin. But COPL’s efforts to define and realise their promise have been clouded by operations issues, the bankruptcy of a venture partner, and questions regarding the company’s financing arrangements. Are these just setbacks, or chronic ‘buyer beware’ issues? Here we try to provide some clarification, summarising COPL’s story over the past 18 months.
COPL acquired its flagship assets last March from Atomic Oil & Gas, taking working interests in four Wyoming ‘units’: the Barron Flats (Shannon) Unit (58pc), the Barron Flats (Deep) Unit (55.56pc), the Cole Creek Unit (66.7pc) and a set of ‘Non-Unitised Lands’ (58pc). Cole Creek is producing, with potential upside; the Deep and the Non-Unitised Lands are exploration; and Shannon is a ‘miscible flood unit’, open to injection processes that introduce gases into the reservoir to facilitate oil displacement.
On purchasing the units through a $45m credit facility COPL indicated that they offer a collective 31.1 million barrels of oil equivalent of Proved and Probable (P2) Reserves. The company forecast monthly make-up gas volumes would increase from 15,600 Mcf in February 2021 to 126,000 Mcf in April, and to 200,000 Mcf in the fourth quarter. A reservoir simulation conducted by a third-party specialist reservoir engineering firm suggested a ramp-up of gas injection volumes could increase gross production at Barron Flats from 1,350 bbl/d to 7,000 bbl/d. COPL was planning to drill 20 new production and injection wells through 2022 and 2023 to balance oil recovery and maintain high production levels. The company said drilling plans announced by large US oil and gas independents to the north of COPL’s units highlighted the promise of the geography’s oil-bearing horizons. COPL also stressed its ESG commitments: its operations would require minimal gas flaring and methane emissions, and would be part-powered by electricity sourced from a neighbouring wind farm.
Dealing with an insolvent venture partner
A positive prospectus then. But issues emerged last August when COPL reported it had filed a law suit in the Wyoming courts against Cuda Energy LLC, the holder of non-operating interests in the assets ranging from 27.5pc to 33.33pc. As at the end of June Cuda owed COPL operating costs of nearly $2.5m. ‘Regrettably’, CODL reported, ‘it appears Cuda Oil and Gas Inc are insolvent, and this is the fundamental cause of the issue’. Recourse to legal action was ‘a measure of our frustration as to the direction of the discussions that we have had to date with Cuda’s parent Cuda Oil and Gas Inc and its creditors in order to find an amicable resolution.’
This April CODL said it would seek to close the issue through the purchase of Cuda’s assets. A Purchase and Sale Agreement had been reached with Cuda, which had entered receivership, supported by a $20m bridge loan from ‘a UK/US based institution’, augmented by a placing worth a gross $13m. Under the agreement CODL would acquire a 100pc interest in Cole Creek, 85pc in the two Barron Flats units, and a 100pc interest in the Non-Unitised Lands. The company would now operate four assets across some 48,000 contiguous acres, with a reserve life of more than 40 years and facilities already in place. COPL’s 2P reserves would increase by 47pc from 25.8 million to 38.2 million barrels. And the company’s NPV10 would increase by $122m from $258m to $380m, giving COPL a higher bankable borrowing base and additional leverage for negotiating an attractive Reserve Based Lending (RBL) arrangement.
In July COPL reported the bridge loan would be replaced by the sale of two sets of convertible bonds, to mature in 2025, anchored ‘by a long term, UK based institutional shareholder and other institutional investors’, an arrangement that would further augment the company’s capacity to negotiate a suitable debt structure. CEO Arthur Millholland said COPL was planning ‘an active work program for the remainder of 2022 including optimization and facility work at the Barron Flats Shannon Unit, recompletions at the Cole Creek Unit and drilling two horizontal wells at the Barron Flats Deep Unit to target the significant oil discovery COPL has made in the Frontier Formation, 1 and 2 sands.’ The company had ‘well design in hand’ and was ‘procuring long lead items to commence drilling at the Deep Unit in Q4 this year.’ A subsequent update a few days later sought to shore up investor confidence further, Mr Millholland commenting: ‘The market continues to misunderstand the full potential of our Wyoming assets. In my near forty years within the oil industry I have seldom come across assets with such prolific oil and gas potential. We now have full ownership which we have secured when the assets are at an early stage in development with everything to play for.’
Operations this summer
Another positive update followed last month, when COPL said a Resource Report prepared by independent energy consultancy Ryder Scott confirmed its internal assessment of the possible scope of a deep oil discovery at Wyoming made earlier in the year. The Report indicated Total Original Oil in Place (OOIP) across the company’s 12,480 acreage of 993,472,000 Bbls, including a ‘Frontier 1’ of 704,728,000 Bbls and a Frontier 2 of 217,365,000 Bbls. COPL said that ‘Compiled to Canadian regulatory standards, the Report gives a conservative view, and we expect to see further exploration upside in due course once our drilling program gets under way in the coming months.’
A second Resource Report – published this month – from Ryder Scott, taking into the account the Cuda purchase, further underlined Wyoming’s promise. The Report stated Net WI Total (1P) Proved Reserves (boe) of $17,272,220, up from $11,730,222; Net WI Total (2P) Proved plus Probable Reserves (boe) of $31,348,608, up from $22,636,519; Total 1P NPV at 10% (US$M) of $254,833, up from $131,893; and Total 2P NPV at 10% (US$M) of $492,073, up from $257,860. COPL said: ‘The updated reserves of the Company and the significant increase in COPL’s 2P NPV 10pc to $492m illustrate the benefit of the timing of our acquisition of the Cuda assets in a high oil price environment. We purchased these assets for $19.15m with the incremental reserves acquired at a cost of $2.20 per barrel.’
The company plans to further evaluate the three Frontier 1 sands through coring and open hole testing in a first horizontal well in the Barron Flats Federal Deep Unit, then drill and complete the well. Suitable well bores have also been identified at Cole Creek to re-complete, again in Frontier 1, for production in Q4 2022. The Frontier 2 formation will be targeted during Q4 2022.
An August operations update reported some issues in ramping up CODL’s drilling programme. Total net average oil production in Q2 2022 was 1,376 Bbls/d as compared to 1,591 Bbls/d in Q1, attributed to ‘operational interruptions at certain high impact wells’. The miscible flood operations, which involve the injection of high-pressure solvent that raises the reservoir pressure and mobilises the oil in place, had generated higher pressure production at the wellhead requiring the wells to be shut in for a period. Low-pressure pumping equipment was being replaced with a high-pressure configuration, and updates to the gas gathering system were being re-engineered. Until complete ‘there will continue to be take away constraints at certain wells’.
The company had incurred a net realised hedging loss of $2.6m as compared to loss of $0.9 million in the first quarter of 2022. But petroleum sales revenues for Q2 were holding up, remaining at $7.1m, with higher prices offsetting the reduction in oil production. The company had a cash position of $11.5m as at 30 June, as compared to $7.8 million as at 31 December 2021. In an effort to manage its capital resources and liquidity COPL had reduced capital expenditures in the period to $1.7m as compared to $3m in the first quarter of 2022. Offering an update on the company’s efforts to define its financial arrangements, COPL said $2.9m of its senior net facility had been prepaid through the quarter, reducing the principal amount to $42.1m. Debt advisors had been appointed, with the company ‘in discussion with banks and other oil lending institutions’ to negotiate and secure debt facilities intended to refinance its existing senior credit facility and provide capital for future growth.
Dispute over financial filings
In addition to issues with Cuda and production challenges, COPL’s year has been troubled by speculation from some market commentators regarding the clarity of the company’s 2021 financial results. Suffice to say, the full content of those concerns can be found online. COPL responded earlier this year through an extensive statement designed to ‘address unfounded market rumours’ and ‘disinformation posted on social media and internet chat forums’.
The speculation referred to a waiver COPL had entered, through its US subsidiary, dated 31 March 2022, from its ‘lender with respect to past defaults determined by the lender to the terms of the COPL’s Senior Credit Facility’. COPL said by way of clarification that the ‘intention of the Waiver, and associated additional costs and conditions, was to waive the past defaults, and was to have the Waiver in advance and effective for the Company’s First Quarter 2022 Financial Statements as at March 31, 2022. The timing of receipt of the Waiver, received after its December 31, 2021 financial year end, thus caused the Annual Filings of the Company’s audited Financial Statements to contain an emphasis of the matter, and as a result its Facility was classified on the Company’s Balance Sheet as a current liability at the year ending December 31, 2021. As such, the Annual Filings were required to include disclosure surrounding liquidity and going concern risk factors due to past defaults determined by the Lender at December 31, 2021, pre receipt of the Waiver’.
In a forthright comment accompanying the clarification Mr Millholland said: ‘I am making this statement to the markets as I am aware that we have a large number of private shareholders who may be influenced by certain groups or individuals with an agenda propagated by social media or other platforms to benefit themselves. I do though understand the disclosure with respect to financial accounts can be difficult to understand to some, but I am also well aware these disclosures can be easily manipulated by those who understand the inherent weaknesses of others in the market. I hope our clarification aids those stakeholders that have concerns resulting from the views and discussions on social media and internet chat forums.’ He added that current and prospective investors ‘should not discount our recent deep oil discovery which COPL will fully capitalize on as we are confident in our assessments.’ 2021 had been ‘a transformative year for the Company and we look to the future with renewed confidence. You will never hear this from “snake oil salesmen” dressed up as experts, commentors or prophets on our Company’s business on social media or internet chat platforms due to their sole focus for their own nefarious personal gain.’
What, then, to make of COPL? This is a company that has enjoyed high share prices quite recently, spiking at 80p after the Atom acquisition last year. COPL’s stock then settled back to a range somewhere between 30p and 40p until this year’s turbulence dragged it down further, to 16p at the time of writing, and a market cap of CAD$54m. In the Powder River Basin units the company seems to have a set of promising assets, as indicated by the new Resource Reports, which have injected some fresh life into the value of COPL’s stock. As we noted above, the challenge is to discern whether COPL is navigating temporary storms or is compromised by more fundamental issues. If the former, the company may be in value territory given the ongoing demand for hydrocarbons to which it seems well placed to help supply. We have tried to clarify the COPL story somewhat: prospective investors will need to make their own judgements.