North Yorkshire Fracking, Could other councils follow suit?

The first fracking operation in England since a ban was lifted in 2012 has been approved by North Yorkshire County Council who have approved a bid Third Energy to extract shale gas at a site near Kirby Misperton in Ryedale.

https://www.third-energy.com/

The council's planning committee voted seven to four in favour

My guess is that  North Yorkshire County Council was probably looking at the positive economic development impact oil and gas developments bring to the regional economy. Remember many councils are facing severe cutbacks. 

Many other councils up and down the country will be monitoring closely the situation in North Yorkshire. If the impact of Third Energy's activities turn out to be positive, it could serve to trigger other councils to follow suit.

LGO Energy (AIM:LGO) Shares at a ten year low. Are we in the investment horizon?

LGO Energy (AIM:LGO)

Shares at a ten year low

But with the commencement of a turnaround strategy now under way, are we now in the investment horizon?

There is no secret to successful stock trading, it really is just a matter of buying low and selling high. Naturally the trick therefore is working out when is a low a low and when is a high a high.

It may come as a shock to some, but circa 50% of global stock market trading is undertaken through high-frequency trades on electronic algorithmic trading systems. Fund managers through their IT team, set certain criteria in a trading program based around market fundamental indicators such as currency strength, commodity pricing, weather, financial market indicator reporting news and even factors such as elections.

These factors are programmed into algorithms that are then aligned to stock portfolio’s that are often spit into sectors and where these underlying market indicators impact these sectors, the fund is then programmed to buy or sell.

So for instance, if a fund manager believes the oil price and its underlying value is likely to fall, that event is likely to impact on the stock price of oil companies and so the algorithm will be programmed to sell off that section of their portfolio and or sell short those oil stocks in the portfolio. 

The reverse is also true should the fund manager believe the underlying value of oil is likely to increase then the algorithm will be programmed to buy the oil section of their portfolio.

Last week my colleague had a series of meetings with London stockbrokers and he reported back that there was a real mood upswing underway in the market related to the oil and gas sector……..why I said?

The upside price increase exposure could be significant with a positive swing upwards in the oil price.

Well the view on the street is that the oil price is likely to bounce back and bounce back big. Investors believe that there are real bargains to be had in the market at the moment, particularly with the funding / IPO of decent oil and gas stocks, where pricing will be on the low side, but where the upside price increase exposure could be significant with a positive swing upwards in the oil price.

So this leads me nicely into LGO Energy. It is fair to say that following the exogenous economic and technical shock LGO suffered back in September 2015, caused by the Trinidad Goudron oilfield GY-678 well bore, obstruction and abandonment, LGO's share price took a hit.

The fallout from this shock saw the subsequent suspension of the banking arrangements put in place by BNP Paribas, (designed to help fund LGO's Goudron oilfield expansion and production) and the share price of LGO Energy fell sharply.

LGO’s share price was trading at around 1.35p during September 2015, having come off a high of 6p around September 2014.

One should not forget that in April 2014, LGO’s share price traded at circa 0.6p and then went on a bull run that saw the shares reach a price of 6p on the 29th September 2014, a bull run that coincided with very positive development activities underway at Goudron and one that certainly caught the shorters by surprise.

Whilst the bull run on oil started to slow in June 2014, it was not until mid September 2014 that the price slipped below the psychological level of $100.

For those that had invested in LGO in April 2014 and got out of the stock in September 2014, they would have made a return on their investment of a staggering 900%

Investing is about picking your investment and realisation horizons. Fundamentals are important and we should not forget that LGO, prior to the GY-678 incident, had actually been doing very well.

For 6 month financial reporting period ending 30 June 2015, LGO posted revenue of £6,610,000 (1H 2014 £3,230,000), an increase of over 100% and posted a gross profit in that period of £2,062,000 (1H 2014 £797,000), a rise of over 150% and had narrowed pre-tax losses for the group to just £187,000, not bad considering the huge investments the company was making in sinking new wells at Goudron.

Are we now in the investment horizon for LGO?

I think we are and the reasons for this are as follows

1, The oil price is starting to recover and this should signal sector improvements as funds aligned to algorithmic trading push buying volume back into the oil sector. For example, April was a good month for BP, their shares have now started to post gains from losses in February and March. This momentum will inhibit the shorting of oil stocks. If oil goes on another bull run, which is likely given the fact the International Energy Agency is now commenting that oil oversupply will shrink dramatically in 2016, and a tightening of the market is now on the cards, oil stocks like LGO’s should see  a sector positive investor sentiment return into their stock.

2, LGO’s turnaround program at Goudron is underway and is starting to see production rise to 500 bopd and with more well recompletions, this production level should continue to rise. With bopd all in costs at Goudron of circa $27 bopd and with rising oil prices, fundamentals are looking better. The BNP debt is only $4.8 million and should be possible for re-structuring. On that front it is important to remind the market that LGO has two very positive independent technical and geological reports on Goudron, by respected consultants such as LR Senergy (http://www.lr-senergy.com), these reports will help in any debt restructuring process.

3, LGO’s shares are trading at 0.2p. This is a five year low and has seen the market cap of the company fall to just above £10 million ($14 million)

If Brent can hit $50, LGO will net circa $23 bopd. I anticipate production volumes through the re-development program to hit 650 bopd, over 12 months this should deliver circa $5 million in revenue, which is 35% of LGO’s current market cap valuation. Accordingly, the prognosis for an LGO share price recovery looks pretty good.

With these factors in mind it may be time for LGO to take investors on another run, like they did between April 2014 and September 2014. The fundamentals for this bull run are now lining up very nicely.

Kiliwani North KN-1 Gas Well, Onshore Songo Songo Island, Tanzania. Gas Sales Agreement Secured. What This Means Financially.

Huge cash flow boost to Solo Oil (AIM:SOLO) & partners

Fantastic news out yesterday by the partners in the Kiliwani North gas field (Ndovu Resources Ltd (Aminex) 55.575 % (operator), RAK Gas LLC 23.75 %, Bounty Oil & Gas NL 9.5 %, Solo Oil plc 6.175 % and TPDC 5 %) who have finally been able to secure a Gas Sales Agreement (GSA) that now means the production ready KN-1 well can start to flow gas and help generate cash flows for the partners in the agreement.

So what will this mean in terms of cash flows for Solo?

Approximately 20 million cubic feet of gas per day will start flowing from the Kiliwani North KN-1 well to the Songo Songo gas processing plant. This is a facility that has a capacity to process between 1.98 MMcm/d (70 MMcf/d) and 2.97 MMcm/d (105 MMcf/d)

Gas from the KN-1 well, following processing, will flow through a 12 inch pipeline that runs 25 km (15 miles) from Songo Songo Island to the Somangafungu onshore processing facility where it is then transported another 207 km (129 miles) by a 36 inch pipeline to the Ubongu power plant in the Tanzanian capital, Dar es Salaam.

Under the GSA, the partners will receive US$3.00 per mmbtu (approximately US$3.07 per mcf) and the price will be adjusted annually by applying an agreed United States Consumer Price Index. The gas price is not linked to any commodity price so is unaffected by current commodity market conditions, which is a real benefit to the partners, meaning business and financial planning can be undertaken by the partners based on stable pricing and incomes from

KN-1.

Solo will benefit from cash flow of $50,000 per month on start up phase

rising to $100,000 and up $230,000 US$ per month on exercise of full percentage production share. 

At a flow rate of 20 MMCF per day / circa 600 MMCF per month. (600,000 MMBTU per month), Solo’s share is initially a 6.175 % based production share ie 37,050 MMBTU per month. Based on the agreed GSA contract price of $3.00 MMBTU, Solo will secure a monthly cash flow of circa $111,150, on a full production level at 6.175%, initially, the income in the start up phase will be circa $50,000 per month.

If Solo decide to exercise their option to increase their stake to 13% then their share of monthly production would be 78,000 MMBTU and would deliver monthly cash flows of $234,000, on full production flow helping generate close to $3 million in annual cash flows.

Solo has Set Itself Apart from its peers on AIM

For investors in Solo, the news today should be seen as game changing. Given the difficulties companies operating in the oil and gas sector are having in raising capital on the AIM market at the moment, Solo has now set itself apart from its exploration peers and moved into new business territory, where it will be able to deploy its cash resources to help advance its other assets which include the massive potential locked in the Ntoya and Ruvuma Basin PSA where potentially at Ntoya another 20 MMCF per day could flow.

Wentworth’s Gas Payment Security Agreement Gives Tanzania’s Gas Sector Players a Huge Boost

Players in Tanzania’s gas market that are relying on sales of gas to domestic customers through the Mnazi Bay-Dar es Salaam gas pipeline, received a huge boost last week when Wentworth (OSE: WRL) and AIM (AIM: WRL) announced they has secured a payment security agreement with Tanzania’s Petroleum Development Corporation (TPDC) enabling the company to make its first gas delivery from its Mnazi Bay gas project, a joint venture production sharing contract which also includes Maurel and Prom and TPDC.

As I have reported on in the past, the difficulty with securing gas sales agreements in Africa for sales of gas where the end customer is a domestic one, has always been the securing of a suitable financial guarantee. African utilities in particular have challenges when it comes to credit control. Let’s put it this way, it’s very difficult to collect cash from some customers.

On September 12, 2014, Wentworth and the Mnazi Bay partners signed a gas sales agreement with the Tanzanian government to deliver up to 130mmcf/day of natural gas from the Mnazi Bay concession, however, the agreement still required a financial guarantee.

Under the terms of the gas sales agreement, the sale price of the gas has been set at US$3.00 per million BTU, or around US$3.07 per thousand cubic feet, rising in line with the US CPI industrial index. The Partners have agreed payment security terms with TPDC, the buyer of the gas, and various other parties. Accordingly, the sales of natural gas will be settled in accordance with the agreed payment terms.

From my experience I think the agreement with involve typically a three month rolling letter of credit and probably some form of upfront payment, probably also three months. It is unlikely the World Bank would have supported TPDC with a Partial Risk Guarantee (PRG) and or a Multilateral Investment Guarantee Agency (MIGA), but I might be wrong,

Shares in Wentworth are up 13% today and the other two AIM players that will receive a huge value catalyst from this news are the two other Tanzania London listed Tanzania gas players who have a similar JV turn on gas project ready to go at Kiliwani North are AMINEX  (AEX) shares up 9% today and Solo Oil (SOLO) whose shares are also up 9%

I would expect AMINEX to secure its GSA for Kiliwani quite soon and this would mean a significant re-rating of its stock and that of Solo Oil, who can excerise an additional 6.5% stake in Kiliwani on the GSA being signed. At 13% (78,000 MMBtu per month) Solo would generate over $200,000 of free cash flow per month.

Tanzania Gas Sales Agreement Will Re-Rate AMINEX & SOLO

It’s hotting up in Tanzania for AMINEX and Solo Oil. The recent placing by AMINEX where they have raised £1.67m, provides some indication that investors believe the company will be successful in securing favorable terms for the Kiliwani North Gas Sales Agreement. Both AMINEX and SOLO will become cash generating companies this year when the gas sales agreement for Kiliwani can be secured. The pre-requisite infrastructure is in place.

It is in everyone’s interests for this agreement to be signed quickly. Tanzania needs the gas, its economy is booming, GDP growth is expected to be circa 7% in 2015. Only last week the World Bank Group, approved a $100 finance package to help Tanzania increase transparency and accountability in governance and improve public financial management, this is important intervention.

AMINEX will be looking to finalise the Kiliwani gas sales agreement that follows international oil and gas industry standards, sounds obvious, but these agreements can be complex and require the support and guarantees of external international financing agencies.

The last gas sales agreement I can recall being struck in Tanzania that is representative of the type of contract AMINEX will need was the Mnazi Bay GSA secured in September 2014 by Wentworth (OSE: WRL) & (AIM: WRL).

The Mnazi Bay GSA covers a 17 year term with net back price of gas agreed at US$3.00/MMBtu for the discovered gas and is non Brent linked. The Tanzania

government is responsible for transportation and processing costs. Importantly it is an 85% take or pay deal, however, as of yet I understand the financial guarantees have not yet been signed.

This is always a sticking point with these type of gas sales agreements for some Africa countries where the end customer is essentially the domestic market.

Yes the main utility customer of the gas such as Pan African/TPDC which is piloting bottling distributing natural gas in Tanzania will be credit worthy, however, they will need to secure reserve bank support, ie from the Bank of Tanzania, who in turn will need to secure international financial support, so the guarantees within these gas sales agreements are syndicated. But remember, the World Bank and a host of other international financial agencies are very active in Tanzania, which is why last weeks news of World Bank support for Tanzania is timely.

We have seen some evidence of the complexities involving gas sales agreements, particularly in Namibia with the Kudu gas project. The question was always Nampower, the parastatal power utility, and its ability to guarantee to take the Kudu gas production at a price that could support the economics to finance the gas to power project. Encouragingly the Kudu Gas GSA was signed in 2014 and has paved the way for Kudu to begin producing in 2017.

Credit risk is the reason why this is interesting. In Namibia for example Nampower sell their electricity to regional electricity distribution companies, (REDS) who in turn are responsible for collecting the revenue from their local domestic and business customers. Credit control and cash collection can be challenging, and often Nampower can suffer as a result. In Tanzania, TANESCO is the electricity utility and operates a vertically integrated a system that removes some of the risks Namibia has where Nampower is exposed to the ability of its REDS to collect cash.

The REDS in Namibia tend to be lenient and are not fond of cutting off electricity and Nampower is exposed to this more tactile system of cash collection. Customers of TANESCO, I think will not be treated so kindly, and I think the international funding partners understand that and so I think at least the credit risk in Tanzania is lower than other African countries. Given Shell’s recent purchase of British Gas Group who now join a raft of international oil and gas companies operating in Tanzania, the pressure to finalise a structure for gas sales agreements is clear.

On the demand side, Tanzania currently has five gas fired power stations, Ubungo I, Ubungo II, Tegeta, Mtwara and Songas. Coming on stream are Kinyerezi II Thermal Power Station (240MW) 2015, Mnazi Bay Gas Plant (300MW) 2016 and Kinyerezi III Gas Plant (300MW) 2016.  The demand for electricity in Tanzania is clear and so is the domestic demand for gas. These developments are helping lower credit risk.

The recent decision by the World Bank to support Tanzania in terms of the strengthening its financial management is saying to me that the syndication of international financial risk to support GSA’s is underway.

I would expect AMINEX to secure its GSA for Kiliwani quite soon and this would mean a significant re-rating of its stock and that of Solo Oil, who can excerise an additional 6.5% stake in Kiliwani on the GSA being signed.

Currently we are in perfect investment horizon for both of these stocks.

Schlumberger Report on Horse Hill Weald Basin

The news out this morning by UKOG is breathtaking. There is no other word to describe Horse Hill. This is Schlumberger we are talking about.

Schlumberger estimates an overall Oil in Place ("OIP") for the Jurassic section of the Horse Hill to be 271.4 million barrels of oil ("MMBO") per square mile. (NUTECH said there was 158 million) The total OIP comprises 16.2 MMBO per square mile for the conventional Upper Portland Sand reservoir discovery and 255.2 MMBO per square mile solely for the tight limestone and mudstone plays of the Kimmeridge, Oxford Clay and Lias.The OIP hydrocarbon volumes estimated should not be construed as recoverable resources or reserves.

Let’s remind ourselves of the facts.

It was a very simple deal, a consortia of oil company investors “Horse Hill Developments Ltd” including Angus Energy Ltd, Alba Minerals, Solo Oil Plc Doriemus Plc, Stellar Resources Plc, Magellan Petroleum Corporation, UK Oil & Gas Investments Plc came together to finance the drilling of a well in the Weald Basin…………WHY?

Because there was a pretty good chance oil was contained in the Weald Basin, simple as that.

Exploration began as far back as 1930 when a number of wells were drilled and where in 1964 oil was discovered when the Collendean Farm1 well was drilled.

The respected academics, Butler and Pullan published a paper in 1990 that provided pretty robust academic research on the Weald Basin that detailed the reservoir rock structures, detailed the seals, traps, generation, timing and migration of the Weald Basin oil play………..yes there was a fair chance oil was in the Weald Basin.

Remember, when drilling was done in the 1960’s there was no Windows software, there was no high powered geological, geophysical software available…….what did anyone know about tight oil or low permeability tight sandstone rock bearing oil back then………….not a lot?

But there was enough data to encourage Magellan to commission their own geological study on the Weald Basin with their consultants ENVOI. Let’s face it, conventional tight oil extraction was now commonplace in the US, Magellan, god bless them could see the potential in the Weald and so could others.

So the Horse Hill consortia came together, and it needed a leader, someone that could raise money, but also someone who could but a decent petroleum geological and geophysical team together to drill the Weald Basin.

But for the first time, drill it deep enough to access all of the main rock structures. The well would need to be drilled to over 8,500 feet, but just as importantly, the open hole electric logging would need to be undertaken properly.

David Lenigas, had rescued a failing AIM shell company and formed UKOG, with a simple idea to drill for conventional oil, UK onshore. No stranger to the oil business, Dave was founder of AIM listed Lenigas and Oil, (LGO Energy) and someone who had hands on and current experience in drilling for oil onshore. He stepped up, helped mobilise the consortia and raise the money to drill Horse Hill, it was as simple as that.

On the 3^rd September 2014, Horse Hill 1 was spudded.

This is when the game changed.

It really is pretty much after this point that the game changes when it comes to AIM rules for oil and gas companies and reporting of reserves and resources.

To its credit UKOG said, “OK we have drilled this well, lets get a competent person (CP), an external expert in tight oil plays to serve as an independent assessor that can tell the Horse Hill consortia what the results of the Horse Hill well actually are.”

That independent assessor was NUTECH, one of the world's leading companies in petrophysical analysis and reservoir Intelligence, who were appointed by UKOG on the 30th January 2015 to assess the Horse Hill 1 well data.

Now the significance of the appointment of NUTECH was not, in my view, properly picked up on by the press. I will come to that later and why today’s announcement is so important in that respect.

On the 9th of April, shares in UKOG surcharged at one point by 400% on the news that NUTECH, remember the independent CP, had provided the Horse Hill consortia with their assessment of the Horse Hill-1 well.

Horse Hill-1 had a total oil in place ("OIP") of 158 million barrels ("MMBO") per square mile, excluding the previously reported Upper Portland Sandstone oil discovery.

This led to huge media coverage and where some commentators who clearly did not have a clue about AIM rules on reporting, served to dish out what was clearly unjustified criticism of UKOG and the Horse Hill project without, in my view proper understanding of the way in which AIM works when it comes to the independent reporting of reserves and resources.

Now remember, NUTECH has their own reputation to consider. They are not in the business of misreporting, they have nothing to gain by that, there is no moral hazard here.

They just report what they see given their own extensive access to data and importantly up to date field knowledge of tight oil plays from their own extensive experience of working in the US Bakken oil formation.  No commentator ever gave any credit to NUTECH or indeed UKOG for hiring one of the best petroleum geoscience companies around. UKOG also hired Xodus Group, another highly respected team of petroleum geoscientists to report independently on the oil in place volumes contained within the Horse Hill conventional Portland Sandstones, again, I do not think enough credit was given to UKOG for that appointment either.

With criticism lingering, what did Dave Lenigas and UKOG do next? They approached Schlumberger, the world’s leading independent petroleum industry experts that specialise in providing governments, yes governments and the world’s major international oil companies with services such as seismic data processing, formation evaluation and petrophysical evaluations.

So now will the market give UKOG any credit for hiring Schlumberger?

Well if it doesn’t then we should all turn the lights off and go home.

The news today is so incredible on many levels.

For UKOG, by any standards a minnow oil company, to have secured the services of Schlumberger is in itself pretty incredible, but for Schlumberger to have allowed UKOG to released today’s Petrophysical Evaluation on Horse Hill is even more impressive.

What Dave Lenigas has said by hiring Schlumberger to conduct their independent assessment of Horse Hill, is,,,,,,,,,

“Look, I am highly confident of the technical reservoir assessment work undertaken by NUTECH and Xodus on Horse Hill, but it would be nice to get another opinion and I we would like Schlumberger to do that, not because we have any issue with NUTECH and Xodus but because of the magnitude of what we have here. This is potentially a major oil system, that has huge consequences for the British government and that they must take Horse Hill and the Weald Basin seriously and that the oil play itself is so interesting that it warrants investigation by Schlumberger’s Unconventional Resource Group and because Schlumberger is such a highly respected oil and gas petroleum geoscience company, and the Weald Basin-Horse Hill discovery is such an extremely interesting oil system, this combination justifies the highest level of professional attention and intervention by an expert such as Schlumberger.”

Summary

Later today I will write up an assessment of the Schlumberger report and what it means. But for now, anyone who is considering shorting UKOG and indeed any of the Horse Hill consortia, please think again, you would have to be certifiably insane to do so.

If Andy Samuel the CEO of OGA is reading this, then Andy, please pick up the phone to Dave Lenigas and open up a discussion…….. a proper discussion about the Weald Basin,,,,,,,,,,,,,he has bowled you a googly and you should work out how to play it.

Further, NUTECH this morning must feel vindicated in their early assessment of Horse Hill now that even Schlumberger confirm the volumes, which they say are even bigger!!!!!!!

And for those reporters that might want to have a go at Dave Lenigas, just have a think. This is an entrepreneur, someone that has got stuck in and made something happen, it is businessmen like this that have made Britain great and we need more of them and we need to encourage them and support them if we are to succeed as a nation.

The Weald Basin has the potential to generate billions of pounds of tax revenue to help fund schools, hospitals, create jobs and provide the UK with much needed energy security. We should remember that and we should also remember that this is a conventional oil play, a tight oil horizontal well recovery system technique to enable oil production, its not fracking.

The Weald Basin needs the support of the community, enabling its development could unlock huge wealth for the country and help fund many great positive environmental projects across our great land.

Andre Brand