Green shoots of recovery for Longboat Energy
“…Value triggers on the horizon for Longboat include the prospect of further announcements regarding Egyptian Vulture, Rødhette and Kveikje, continuing operations at Oswig, and the (longer term) prospect of exploration at Velocette…”
Founded three years ago to create a full-cycle Norweigan North Sea exploration and production company through mergers and acquisitions and near-field exploration, Longboat Energy (LON: LBE) has been one of this year’s more interesting trades, the market twisting and turning in response to a series of discoveries and disappointments announced from the company’s growing portfolio of interests. LBE’S shares rose to 75p by April then plunged to just over 20p earlier this month, but have shown signs in the past few days of bottoming out. Here we take a step back and assess the company’s performance over the past year.
LBE’s busy year
Over the past 18 months LBE has entered into a series of ventures with partners including Equinor, Spirit, Idemitsu and OMV to secure interests in nine, gas-weighted exploration wells on the Norwegian Continental Shelf close to established infrastructure. Drilling over the past year has yielded five discoveries, at a respectable two-thirds success rate.
The drilling of six wells at the Egyptian Vulture, Rødhette and Kveikje projects got underway in Q3 last year, uncovering three discoveries representing an estimated 12 MMboe of resources net to LBE, allowing the company to investigate multiple commercial opportunities. The company has a 15pc interest in the Egyptian Vulture discovery, which a CPR estimates to contain a gross 4-68 MMboe. The discovery, close to infrastructure on the Shelf’s Halten Terrace, ‘is visible on seismic as a large amplitude anomaly covering an area of more than 80km2’ with ‘significant volume potential’. The project partners are currently analysing whether findings from the discovery justify the drilling of a second well. A discovery last October at Rødhette, in which LBE has a 20pc interest, is estimated to hold gross oil and gas resources of between 9 and 12 MMboe. Although ‘not commercial as a standalone development’, the well could be tied-back for production as part of an area cluster development if findings from several third-party exploration wells scheduled for drilling ‘before the end of this year’ are positive.
Another significant discovery was made in April at Kveikje, located close to the giant Troll field with significant infrastructure and multiple tie-back opportunities. Several third-party discoveries have been made close to Kveikje, in which LBE has a 10pc stake, during the last few years, including Røver Nord, Toppand and Swicher. The discovery encountered hydrocarbons at all four targets levels, including an ‘oil-filled reservoir of excellent quality’ in the primary Eocene target and a gas layer ‘of similar excellent reservoir quality’ in the overlaying Hordaland Eocene injectite, where estimates indicate a preliminary recoverable gross resources of 28 to 48 MMboe. Secondary targets Rokke and N’Roll both yielded findings warranting further analysis.
There was disappointment in June, when the Cambozola exploration well, in which the company had a 25pc interest, found nothing, and in September, when the Copernicus prospect in the Vøring Basin, estimated to contain gross mean prospective resources of 254 MMboe, 25 MMboe net to LBE , failed to encounter ‘any effective reservoir’. LBE and its partners are analysing findings at both wells to assess any residual prospectivity.
Undaunted, LBE farmed into a separate venture with Austrian multinational OMV focused on two gas weighted exploration prospects targeting combined gross unrisked mean prospective resources of 223 MMboe (45 MMboe net). The deal included a 20pc interest in Oswig, investigating a high pressure, high temperature Jurassic rotated fault block with a pre-drill gross unrisked mean resource of 93 MMboe, one of the larger gas prospects being tested in Norweigan waters this year. Several additional fault blocks have been identified on-block which could contain further gross unrisked mean resources of 80 MMboe. Oswig is an analogue to Equinox’s nearby Tune field, which has produced around 140 MMboe over the past 20 years.
Drilling this autumn targeting has been a qualified success, initial exploration indicating ‘excellent correlation with the nearby Tune field’, with ‘preliminary gas in-place volumes (GIIP) in the Tarbert formation higher than the overall pre-drill expectations’, paving the way for a decision to drill a sidetrack well and perform a drill stem test (DST). Those operations, reported in November, were, by the company’s own admission, ‘at the lower end of pre-drill expectations ’, but sufficient to confirm a discovery.
The Oswig sidetrack, drilled to a depth of 4,726 metres to allow testing of the Upper Tarbert Formation, encountered a gas/condensate column of about 100 metres with no gas-water contact, ‘a well-defined structure with excellent quality gas and high condensate content.’ Average production of approximately 650 boepd during the DST period yielded of 2.1 MMscfd of gas and 280 bpd of condensate. A preliminary estimate indicates recoverable resources of between 10 and 42 million boe (gross) based on in-place volumes of 100 to 215 million boe and a condensate/gas ratio of 110-130 bbl/MMscf. Significant upside was identified in a potential southern extension to the Oswig discovery not included in the preliminary resource estimates. In LBE’s assessment the DST ‘proved the ability of Oswig to flow hydrocarbons from poor quality reservoir’ and supports ’a potential development via nearby infrastructure in the Northern North Sea’. The venture partners are evaluating the discovery’s potential with a view to setting the location of further appraisal drilling and well configurations, whether horizontal, multilateral or fracked.
Drilling at the other OMV gas-condensate prospect, Velocette, in which LBE has a 20pc interest, is planned next year. Focused on Cretaceous Nise turbidite sands located within tie-back distance to the established Aasta Hansteen gas field, Velocette promises gross unrisked mean resources of 130 MMboe, with 26 MMboe net to LBE. A rig contract has been signed for the drilling of an exploration well in ‘Q3 2023’.
LBE’s credit line
LBE has been able to secure working capital for the company’s busy programme through an Exploration Finance Facility (EFF) offering credit for drawing until the end of next year. The company’s H1 2022 figures reported debt drawn through the EFF of £15.7m. LBE had gross cash at 30 June 2022 of £22.5m (30 June 2021: £38.7m), resulting in a net cash position – once the EFF is factored in – of £6.8m. The company’s post-tax loss for the period was £1.7m (30 June 2021: $0.9m). LBE says its ‘EFF drawings in the period will be repaid from the Norwegian Government’s tax rebate, due in November 2023.’ LBE welcomed adjustments to the Norwegian Petroleum Tax System announced this summer ‘as positive for the Company, allowing for the expansion of existing financial structures to fund both exploration and development projects with improved economics and reduced working capital’. The new system leaves the sector’s marginal tax rate of 78pc unchanged, and allows companies to pay a corporate tax rate of 6.2pc until they begin to record profits.
Boom times for Norwegian gas
LBE is positioned in a Norwegian North Sea industry that has replaced Russia as Europe’s biggest supplier of gas, becoming a significant seller of oil and electricity across the continent and the UK. Norway’s oil and gas sales had already reached record levels when the energy crunch began to bite last year, and rose ever higher in the wake of Ukraine. With the country’s gas supplies to Europe rising 10pc this year the Norwegian government has even mooted the possibility of introducing a price cap.
European gas prices, however, have fallen from the all time peak of €300 per megawatt hour they reached in August, down to around €130MW/h, as storage sites have reached capacity and a mild autumn has delayed the start of the heating season. But those prices are still exceptional, well above the long-term average of €20 to €30, and the International Energy Agency (IEA) is warning about gas supplies next year, with Russian supplies expected to remain largely cut off: it may only be possible to attain two-thirds capacity. And LNG supplies are expected to grow by no more than about half the normal rate in 2023, which may leave the continent struggling to access enough cargoes if Chinese demand reasserts itself.
LBE continues to pursue opportunities arising from Norway’s regular licensing rounds, with ‘a number of potential applications under review both as follow-on acreage around its existing licences and in new areas’. But the company says the Ukraine-induced recent spike in commodity prices ‘has widened the gap between buyer and seller expectations’. Though it ‘continues to be active in this market’ the company ‘is not willing to compromise on its requirement for transactions to be of high quality and value accretive.’ LBE has recently, therefore, ‘started to review opportunities in a few carefully selected countries outside of the North Sea … which offer attractive opportunities in supportive regulatory regimes as we continue to pursue in Norway.’
LBE’s hit-and-miss record this year has been reflected in the company’s share price, which hit highs of 75p in April after strong results from Kveikje, but tumbled all the way to 33p by August in the wake of disappoint at Copernicus and Cambozola. Back to 47p going into November, the price fell away again to 21p as Oswig failed to meet high market expectations and gas prices continued to decline. But with the exit of one significant seller the price is displaying green shoots again, up to 25p this week, moving the company’s market cap back up to £14.5m.
Value triggers on the horizon include the prospect of further announcements regarding Egyptian Vulture, Rødhette and Kveikje, continuing operations at Oswig, and the (longer term) prospect of exploration at Velocette. In LBE’s words, the company is focused on ‘appraising and monetising existing key discoveries and on building an attractive 3-5 well programme for 2023.’ LBE is clearly something of a gamble, but this stock is charged with the kind of volatility that can go up as well as down, making it one of the more colourful prospects in the gloomiest of years for investors.