Downgrade coming at Taq Taq?

Genel released a disappointing production update this morning with Q3 2016 working interest production of 53.1mbopd. For the quarter, Taq Taq and Tawke gross production averaged 58.6mbopd and 109.2mbopd respectively. Taq Taq’s production compares with 130mbopd a year ago.

A workover campaign on Taq Taq is ongoing with TT-27x and TT-07z completed in Q3 2016; a third side track, TT-16y, is currently underway.

As a result of the recent performance, FY16 production is expected to be at the bottom end of the 53-60mbopd guidance range and revenue will also be at the lower end of USD90-110 million guidance. There is increasing concern around a further reserves downgrade at Taq Taq and DNO’s Tawke field is the more prudent investment for now.

Separately, management continues to talk positively about the gas resources, but the development of Miran and Bina Bawi to look challenging in the current environment.

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Kenya First Oil

On 9th October, a government spokesperson said that President Kenyatta had held meetings with the Lokichar Basin oil companies (Tullow, Africa Oil, Maersk) on the Early Oil Pilot Scheme (“EOPS”). The EOPS has already received FID and will produce 2,000bbl/d, starting in June 2017. The oil will be trucked from the Lokichar Basin to Mombasa. The EOPS will allow the partners to establish a production history, providing valuable dynamic reservoir data. This implementation experience will assist in the planning of the full field development.

In the run up to the launch of the EOPS, the operator commissioned two trucks for the transport of a trial batch of crude from Block 10BB to Kenya Refineries. This trial is currently in progress and will help the partners to understand how the oil behaves under different operating conditions while on transit, and will help in determining the design, cost and type of equipment needed for the EOPS.

The Government expects to sign additional agreements in due course, including the Joint Partnership Agreement (“JPA”) that deals with the work related to the transportation of the crude oil to Lamu by pipeline.

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Support for the Danish DUC

On Wednesday 21st September Lars Christian Lilleholt, the Danish energy minister said that the government is determined to find an economically viable solution that will allow the Trya complex to continue production. This follows Maersk Oil’s announcement in April that it would cease production at the Tyra complex if no solution to extend its economic life during 2016.

The Tyra complex is operated by Maersk Oil on behalf of the DUC, a partnership between A.P. Moller Maersk (31.2%), Shell (36.8%), Nordsøfonden (20%) and Chevron (12%). Tyra is Denmark’s largest gas accumulation and the facilities are the processing and export centre for all gas produced by the Danish Underground Consortium (“DUC”). More than 90% of Denmark’s gas production is processed through the facilities, including production from Norway’s Trym field.

The government’s announcement is potentially positive for the Trym partners (Bayerngas 50%, Faroe 50% operator). Trym was acquired by Faroe from DONG E&P in July 2016 as part of a wider package; the transaction is expected to close in the coming months. Faroe’s acquisition case assumed Trym would cease production in 2018, so any extension of the Tyra complex could allow Faroe to book additional reserves.

Danish North Sea - DUC Network (Northern Segment)
Source: Maersk Oil

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Canacol doesn’t lose sleep over oil prices

Canacol is distinct from its Colombian E&P peers‎, being a gas-weighted producer with operations focussed in the Lower Magdalena Basin. Its gas operations and gas offtake contracts mean that the company has a much lower exposure to oil prices. In the company's recent investor update, it noted that it would generate EBITDA of USD107 million if the oil price was zero! Given this special situation within the Colombian and wider international E&P universe, we look to dedicate a few articles looking at Canacol in more detail.

Canacol: Sensitivity to WTI
Source: Investor presentation

Canacol was initially established as a Latin American focussed E&P and listed on the Toronto stock exchange in 2009 through a reverse takeover. The company has somewhat haphazardly experimented with different strategies and now appears to have settled on one that works: gas production supplying the growing domestic market. As a result of its past, the company has now amassed a position of 23 blocks in the Magdalena, Llanos and Putumayo Basins as well as a service contract in Ecuador, through a series of acquisitions and licensing rounds. It also previously held assets in Brazil and Guyana which have now been sold off.

Key acquisitions in the company’s history include:

• Carrao Energy (November 2011) which came with LLA-23 and Middle Madalena blocks Santa Isabel, VMM-2 and VMM-3
• Shona Energy (December 2012) which had a 100% interest in Esperanza and production in four blocks across Colombia
• 100% interest in VIM-5 and VIM-9, acquired from OGX in December 2014

Esperanza and VIM-5 are now the key assets in the company’s portfolio.

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Shell Gulf of Mexico divestment

On 29^th August, Shell announced that it had agreed to sell 100% of its interests in the Gulf of Mexico Green Canyon Blocks 114, 158, 202 and 248 (the Brutus/Glider assets), to EnVen Energy Corporation for USD425 million in cash. These assets do not appear to form part of Shell's core strategy in the region, with recent activity focusing on the Mars/Vito/Na Kika areas to the east.

The Brutus/Glider assets include the Brutus Tension Leg Platform, and the Glider subsea production system, as well as the pipelines used to evacuate production from the platform. The assets have a combined current production of 25mboepd, although the Brutus platform has capacity to produce 130mboepd.

Given investors' key concern is around the company's debt levels (Shell has over USD75 billion in net debt following the acquisition of BG), and negative free cash flow at current oil price levels, the divestment is welcome and is a step towards the USD30 billion divestment programme mentioned last year.



Source: Shell

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Kurdistan consolidation? DNO's proposed offer for Gulf Keystone

On Friday 29^th July, DNO made a proposal to acquire Gulf Keystone for USD300 million in cash and shares. The tactics around the timing of this offer are unclear, given that Gulf Keystone are part way through a creditor restructuring. Negotiations during creditor processes are generally messy with the potential acquirer having to become involved in discussions with the debt holders, who hold significant power given their ability to "pull the plug" on the distressed company and/or dictate restructuring terms that lead to massive dilution of the existing shareholder base.

The offer of USD300 million, which comprises c.USD120 million in cash and the remainder in shares, represents:

• a 20% premium to the share price of $0.0109 at which, on 14^th July 2016, Gulf Keystone issued shares representing 5.6% of its share capital; and
• a 20% premium to the price at which Gulf Keystone intends to issue further shares. 

DNO further noted that the cash element of the offer would provide an early exit for noteholders and bondholders unable or unwilling to hold equity in DNO.

The acquisition of Gulf Keystone would create further scale and operational synergies for DNO in Kurdistan, and the enlarged entity would operate the Tawke and Shaikan oil fields, with current combined net production of c.89mbopd. Gulf Keystone holds a 58% stake in and operates the Shaikan oil field at a current level of ~40,000b/d, which is transported daily by road tanker to DNO's unloading and storage hub at Fish Khabur for onward pipeline transport to export markets.

For the past couple of years, Gulf Keystone's debt has dominated its story and a combination with DNO together with a clean balance sheet is likely to be viewed favourably by the KRG. However, it is noted that the heavy-oil Shaikan project is a high capex and low margin business that would generate a relatively low rate of return for DNO. As with Genel at Miran, DNO will likely need the support of a farminee to push ahead with the full field development.

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Gulf Keystone debt restructuring

On 14^th July, Gulf Keystone announced the terms of its proposed balance sheet restructuring, marking the culmination of months of discussions with the company's debt holders. The restructuring, if approved by shareholders, will be implemented by way of a debt-for-equity swap and will see existing shareholders significantly diluted.

The company has c.USD600 million of debt, comprising USD335 million of Convertible Bonds and USD266 million of Notes. The restructuring proposes:

• USD335 million of Convertible Bonds: Complete equitisation
• USD266 million of Notes: Refinanced with USD100 million of new notes (the "Reinstated Notes") and through equitisation

Pro forma capital structure

Post transaction, balance sheet debt will be reduced from c.USD600 million to USD100 million. As part of the restructuring, it is envisaged that an USD25 million equity raise be launched as an open offer to the existing shareholders, equating to 10% of the restructured entity if fully subscribed.

Existing shareholders will be significantly diluted and will hold 5% of the company post transaction (pre-open offer) and 14.5% of the company if they fully subscribe to the open offer. Convertible bondholders will represent 20% of the company and the current noteholders will hold 65.5% of the company.

Pro forma ownership

The restructuring is subject to shareholder approval and will be implemented through a UK scheme of arrangement. The board of Gulf Keystone has recommended that shareholders support the transaction, failing which, the company is expected to enter into a formal insolvency and liquidation process.

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