Malcy’s Blog: Oil price, Genel, Chariot, Gran Tierra.

WTI (Sep) $81.37 -43c, Brent (Oct) $84.91 -65c, Diff -$3.54 -22c.

USNG (Sep) $2.56 -7c, UKNG (Sep) 68.5p -5.35p, TTF (Sep) €27.5 -€2.46.

Oil price

After a long run oil took a breather yesterday, it was up c.13% in July. But markets took fright across the board last night after credit agency Fitch reduced the rating for the US economy from AAA to AA+ saying that there has been ‘ a steady deterioration in standards of governance over the last 20 years on fiscal and debt matters’. Given that most investors have a significant disrespect for the credit agencies and they are almost always wrong this should be taken with a bucket load of salt. Not surprising that the US Treasury called it ‘arbitrary’.

Opec is creeping up on us, they meet on Friday, expect no change in production and that the Saudis will keep their cut in place. Bloomberg report that the cartel was down some 900/- b/d in July which is mainly the KSA and Nigeria. After hours the API stats showed a huge crude draw of some 15.4m b/d which if repeated by the EIA would prove the above. 

Genel Energy

Genel has announced its unaudited results for the six months ended 30 June 2023.

Paul Weir, Chief Executive of Genel, said:

“The closure of the Iraq-Türkiye pipeline on 25 March 2023 has resulted in minimal sales and no payments from the KRG since that date. This has materially impacted both our current and expected cash flows, with the current period seeing a free cash out flow.

Approval of the Iraqi budget in June put in place a framework for the restart of payments and exports, with production from Kurdistan incorporated in the budget, and this was an important step. Discussions are now ongoing between Iraq and Türkiye regarding the commercial and political arrangements that would enable the resumption of exports.

As we await a positive outcome to discussions between Iraq and Türkiye, we retain a material cash position, prioritised for investment in new assets, and remain clear and determined on our direction of travel. We have accelerated the ongoing reshaping of our portfolio, organisation, and plans, and we continue to diligently review assets and businesses that can support delivery of the business that we have framed over the past 12 months.

Given the $170 million impact so far that the lack of payments and revenue is expected to have on our liquidity at year-end, and with no clear line of sight on when either pipeline exports or payments will restart, we have taken the decision to suspend the dividend. We remain committed to building a business with predictable, repeatable, and diversified cash flows, which would ultimately support the re-establishment of a dividend programme.”

There is, to be frank nothing much that Genel can do until the pipeline reopens and at the moment despite a number of predicted signs of rapprochement it remains shut. With revenues down, although there are various optimistic noises in particular with regards to the relationship between Erbil and Baghdad nothing is for sure. 

Obviously the revenue fall has hit the dividend, which is to be expected although it seems that it won’t be restarted the moment the pipeline opens, cash generation will come first. Otherwise capex is falling although there were a number of commitments that were ‘diligently completed’ at Tawke and there was some work done in Somaliland, all first half loaded.

The company is sorting out Sarta which is so inefficient that an exit route is in place, while Taq Taq is expected to be only a minor contributor. M&A continues to be part of the plan but with less moolah and still high prices has become more challenging. 

It sounds like a bit of a platitude but clearly we are all waiting for the pipeline to reopen which as we have said all along makes no sense to be closed, in the meantime Genel is benefitting from a streamlining or as the management say are ‘deep cuts’ to the business. So, for the time being Genel should remain in the portfolio and despite the short term problems has sufficient long term attractions not to let the baby out with the bathwater…

Results summary ($ million unless stated)

1. EBITDAX is operating (loss)/profit adjusted for the add back of depreciation and amortisation, impairment of property, plant and equipment, impairment of intangible assets and impairment/reversal of impairment of receivables
2. Free cash flow is reconciled on page 7
3. Reported cash less debt reported under IFRS (page 7)

Summary

• The prolonged closure of the Iraq-Türkiye pipeline has materially impacted production, which averaged 13,440 bopd in H1 (H1 2022: 30,420)
• Two payments totalling $61 million were received from the Kurdistan Regional Government (‘KRG’) in the period, with $110 million now overdue
• Given the loss of cash flow in the period and the lack of visibility on both the timing of pipeline exports resuming and the re-establishment of a reliable record of payments, Genel has suspended its dividend programme
• In addition, the Company will assess the timing of further investment in Somaliland following the completion of civil engineering work, based on the financial outlook at the time
• Work on assessing the future plans for Sarta, with a goal of making operations profitable, has been made more challenging by the investment environment, and consequently Genel has informed the Ministry of Natural Resources of its intention to surrender the asset and terminate the Sarta PSC
• Significant cash balance of $425 million at 30 June 2023 ($496 million at 31 March 2023) is prioritised for addition of new assets
• Net cash of $158 million at 30 June 2023 ($229 million at 31 March 2023)
  • Total debt of $273 million at 30 June 2023 ($274 million at 31 March 2023)
• A socially responsible contributor to the global energy mix:
  • Zero lost time injuries (‘LTI’) and zero tier one loss of primary containment events at Genel and TTOPCO operations
  • Three million work hours since the last LTI

Outlook

• As a consequence of the reduction in operational activity, Genel has right-sized the organisation and reduced spend compared to expectations at the start of 2023
  • Genel currently expects full year capital expenditure to be c.$70 million (original guidance $100-125 million), with two thirds of this already spent
• Limited local sales are ongoing from the Tawke licence
• Genel continues to actively review and work up opportunities to invest our cash to build a business that delivers resilient, reliable, and diversified cash flows that support a repeatable dividend programme in the long-term
• The London-seated international arbitration regarding Genel’s claim for substantial compensation from the KRG following the termination of the Miran and Bina Bawi PSCs is progressing. The trial remains scheduled for February 2024

Chariot

Chariot Green Hydrogen Limited, a subsidiary of Chariot Limited, the Africa-focused transitional energy group, Mohammed VI Polytechnic University (UM6P) and Oort Energy Limited (Oort), are pleased to have signed further Partnership Agreements to extend their collaboration, as previously announced in November 2022, to test the production of green hydrogen in Morocco. The agreements are focused on the construction, commissioning and operating of an electrolyser pilot project as well as further development of skills and training within the sector.

The pilot ‘proof of concept’ project will utilise a 1MW polymer electrolyte membrane (“PEM”) electrolyser system, patented by Oort and it is intended that this project will be hosted at UM6P’s Research and Development facility in OCP Jorf Lasfar, Morocco, the largest fertilizer complex in the world.

The partnership will concurrently develop education and capacity building at UM6P to support the growth of a green hydrogen economy alongside evaluating the feasibility of the implementation of large-scale green hydrogen and ammonia production, consistent with the timetable initially envisaged.

“The signing of these two agreements is key for UM6P, indeed the first one concerns the test of a new electrolyser technology with a better performance to be more competitive in green hydrogen production and second one concerns collaboration in education to prepare skilled people for the need of this new activity in green hydrogen and ammonia,” stated Mohamed Bousseta, Director of Innovate for Industry at UM6P.

“Testing the capacity of our electrolyser in an industrial setting is a crucial part of our development planning. The efficiency and durability of electrolysers will be integral in ensuring that green hydrogen can be produced economically and on a scalable basis. We are excited about this phase which will help inform our future growth strategies.” said Nick van Dijk, CEO of Oort.

“This partnership pools key resources as we are looking to develop our knowledge and expertise in this sector for the benefit of all involved. This endeavour is another step forward in Chariot becoming a green hydrogen producer and will be of real value to our project developments in Morocco and Mauritania as we confirm electrolyser performances.” added Laurent Coche, CEO of Chariot Green Hydrogen.

Further interesting news from Chariot where they have signed further partnerships for green hydrogen projects. Success here would lead to upsizing and be applied to Chariots projects across Africa.

Gran Tierra Energy

Gran Tierra overnight announced the Company’s financial and operating results for the quarter ended June 30, 2023. All dollar amounts are in United States dollars, and production amounts are on an average working interest before royalties basis unless otherwise indicated. Per barrel  and bbl per day amounts are based on WI sales before royalties. For per bbl amounts based on net after royalty production, see Gran Tierra’s Quarterly Report on Form 10-Q filed August 1, 2023.

Gary Guidry, President and Chief Executive Officer of Gran Tierra, commented:

“During the first half of 2023, Gran Tierra completed its development campaign with the drilling of 21 development wells in three of our major fields which have been producing oil at rates in line with and at times exceeding our expectations. Currently, our third quarter-to-date 2023 total average production levels stands at an impressive ~35,300 BOPD. Now that our development campaign has been completed, capital expenditures are expected to decrease significantly in the second half of 2023, which should allow the Company to focus on the generation of free cash flow.

Gran Tierra is pleased to provide a mid-year reserves update that we announced today in a separate press release. The positive results announced in the reserves update are a testament to the Company’s operational success and our in-country relationships that have allowed the Company to secure the Suroriente Block continuation agreement. We invite you to read the reserves update press release in its entirety.

Looking ahead, we are entering an exciting phase of growth. With the 2023 development campaign now completed, we are gearing up to drill exploration wells in Ecuador. This represents a promising opportunity for Gran Tierra to follow-up on existing exploration success achieved in Ecuador during 2022. Our Company’s financial position remains robust, which gives us the flexibility to make strategic investments and seize opportunities that drive long-term value creation for our shareholders as they arise. We continue to focus on maximising operational efficiency and managing costs effectively to ensure sustainable growth and profitability.

We are also pleased to announce that we plan to continue our investment in the protection and conservation of the Andean-Amazon rainforest in the Putumayo Basin of Colombia by extending our support to the NaturAmazonas project. The project, founded by Gran Tierra and world renowned non-governmental organization Conservation International, has grown into an alliance of public and private institutions working together to address the root causes of deforestation. We began our reforestation work nearly a decade ago because one of our longstanding goals is to leave the environment in a better condition than when we arrived. During the first 6 years of the project, Gran Tierra’s initial investment of $13 million has already produced impactful results that have benefited the environment and local communities, including the reforestation and restoration of over 1,400 hectares of land and the planting of over 1.2 million trees.”

As I start to follow GTE and I am more impressed all the time, production is now 35,300 b/d and with the campaign now completed capex will fall leaving revenue to rise. There is also an updated reserves report alongside these numbers which I will look at tomorrow, in the meantime the recent rally is justified but the shares are still very cheap indeed.

Key Highlights of the Quarter:

• Production:
  • Gran Tierra’s total average production was 33,719 BOPD, an increase of 7% compared to first quarter 2023 and up 10% from second quarter 2022. Gran Tierra’s production in the Quarter was the Company’s highest quarterly average total production since the second quarter of 2019.
  • The Company’s third quarter-to-date 2023 total average production ⁽¹⁾ has been approximately 35,300 BOPD.
• Quality and Transportation Discounts: The Company’s quality and transportation discount narrowed to $14.10 per bbl, down from $18.45 per bbl in the Prior Quarter and up from $13.00 per bbl one year ago. The Castilla oil differential narrowed to $9.41 per bbl, down from $15.17 per bbl in the Prior Quarter and up from $7.82 per bbl one year ago (Castilla is the benchmark for the Company’s Middle Magdalena Valley Basin oil production). The Vasconia differential narrowed to $5.53 per bbl, down from $7.87 per bbl in the Prior Quarter and up from $5.09 per bbl one year ago (Vasconia is the benchmark for the Company’s Putumayo Basin oil production). Differentials to Brent pricing have continued to narrow as 2023 has progressed. The current⁽¹⁾ Castilla differential is approximately $6.64 per bbl and the Vasconia differential is approximately $3.96 per bbl.
• Net Income: Gran Tierra incurred a net loss of $11 million, compared to a net loss of $10 million in the Prior Quarter and net income of $53 million one year ago, which was primarily due to the $13 million of realized foreign exchange loss mainly associated with the strengthening of the Colombian peso by 9% in the Quarter and the payment of the Company’s 2022 income taxes in the Quarter, which are paid in Colombian pesos. The Company’s net income over the last 12 months was $51 million.
• Oil Price: The Brent oil price averaged $77.73 per bbl, down 5% from the Prior Quarter and down 31% from one year ago.
• Realized Foreign Exchange Loss: During the Quarter, a $13 million realized foreign exchange loss was recognized primarily as a result of the strengthening of the Colombian peso by 9% in the Quarter and the payment of the 2022 income taxes in the Quarter, which are paid in Colombian pesos.
• Basic Earnings Per Share: Gran Tierra incurred a net loss of $0.33 per share, compared to a net loss of $0.28 per share in the Prior Quarter and net earnings of $1.44 per share one year ago.
• Diluted Earnings Per Share: Gran Tierra incurred a net loss of $0.33 per share, compared to a net loss of $0.28 per share in the Prior Quarter and net earnings of $1.42 per share one year ago.
• Adjusted EBITDA⁽²⁾: Adjusted EBITDA⁽²⁾ was $85 million compared to $89 million in the Prior Quarter and $140 million one year ago. Adjusted EBITDA⁽²⁾ was negatively impacted by the $13 million realized foreign exchange loss. Twelve month trailing Adjusted EBITDA⁽²⁾ to Net Debt⁽²⁾ was 1.2 times.
• Funds Flow from Operations⁽²⁾: Funds flow from operations⁽²⁾ was $53 million, down 12% from the Prior Quarter and down 49% from one year ago. Funds flow from operations⁽²⁾ was negatively impacted by the $13 million realized foreign exchange loss. Over the last 12 months, Gran Tierra’s funds flow from operations⁽²⁾ was $288 million.
• Free Cash Flow⁽²⁾: During the Quarter, the Company’s capital expenditures exceeded funds flow from operations by approximately $12 million as a result of the Company’s front-end loaded 2023 development program which saw the drilling of 7 development wells in the Quarter, which completed the development program for 2023, which consisted of a total of 21 wells. The majority of the Company’s capital expenditures were incurred in the first half of 2023 and with the current Brent oil price, narrowing of differentials and current production levels, we expect to meet our free cash flow⁽²⁾ targets for 2023.
• Share Buybacks:
  • During the Quarter, pursuant to Gran Tierra’s current normal course issuer bid, Gran Tierra purchased 20,439 shares, for a total purchase price of $107,810, at a weighted average price of approximately $5.27 per share. Since the commencement of the NCIB on September 1, 2022, Gran Tierra has purchased 3.6 million shares, representing approximately 9.8% of Gran Tierra’s outstanding shares as of June 30, 2022. The NCIB was completed and expired when the 10% share maximum of Gran Tierra’s public float as of August 22, 2022, was reached in May 2023.
• Cash: As of June 30, 2023, the Company had a cash balance of $69 million and net debt⁽²⁾ of $503 million. With the forecasted free cash flow in the second half of 2023, we expect to exit 2023 with over $150 million of cash.
• Undrawn Credit Facility: Gran Tierra’s credit facility, with a capacity of up to $150 million, remains undrawn.
• Oil Price Hedges: Gran Tierra does not currently have any oil price hedges in place and expects to fully benefit from any increases in oil prices.
• Additional Key Financial Metrics:
  • Capital Expenditures: Capital expenditures of $66 million were lower than the Prior Quarter’s level of $71 million and slightly up from $65 million compared to one year ago. During the Quarter, Gran Tierra drilled 7 development wells in Colombia.
  • Oil Sales: Gran Tierra generated oil sales of $158 million, up 10% from the Prior Quarter and down 23% from one year ago. Oil sales increased compared to the Prior Quarter primarily as a result of an 8% increase in sales volumes, partially offset by a 5% decrease in Brent price. Lower oil sales relative to one year ago were driven primarily by the decrease in Brent oil price and the widening of quality and transportation discounts compared to the same period, which were partially offset by the increase in the Company’s oil production over the same timeframe.
  • Operating Netback⁽²⁾⁽³⁾: The Company’s operating netback⁽²⁾⁽³⁾ was $34.58 per bbl, down 2% from the Prior Quarter and down 42% from one year ago. As with oil sales, changes in operating netback relative to the Prior Quarter were driven by a decrease in Brent oil price. Compared to one year ago the change in operating netback were largely driven by the decrease in Brent oil price and higher quality and transportation discounts over the same time period.
  • Operating Expenses: Gran Tierra’s operating expenses increased 9% to $15.86 per bbl, up from $14.59 per bbl in the Prior Quarter, primarily due to higher road maintenance and environmental activities, partially offset by a lower number of workovers. Compared to one year ago, operating expenses increased by 10% on a per bbl basis, due primarily to increased Ecuador operations, higher environmental costs and partially offset by a lower number of workovers.
  • General and Administrative (“G&A”) Expenses: G&A expenses before stock-based compensation were $3.12 per bbl, down from $3.95 per bbl in the Prior Quarter due to lower legal and information technology costs, partially offset by higher consulting fees attributed to optimization projects and up from $2.86 when compared to one year ago.
  • Cash Netback: Cash netback per bbl was $17.37, compared to $21.16 in the Prior Quarter as a result of a decrease in Brent price of $4.37 per bbl and a $4.18 per bbl realized foreign exchange loss in the Quarter due to the strengthening Colombian peso and payment of the 2022 income taxes paid in the Quarter. In the Prior Quarter, the realized foreign exchange loss was of $0.42 per bbl. Compared to one year ago, cash netback per bbl decreased by $20.34 from $37.71, despite a $34.25 per bbl decrease in the Brent oil price over the same period.

Exploration Campaign:

• Gran Tierra has secured a drilling rig to begin the Ecuador exploration campaign that is expected to now start in the fourth quarter of 2023. Gran Tierra expects to drill two to three exploration wells in 2023.

Financial and Operational Highlights (all amounts in $000s, except per share and bbl amounts)

⁽¹⁾ Gran Tierra’s third quarter-to-date 2023 total average production is for the time period from July 1 to July 31, 2023.
⁽²⁾ Funds flow from operations, operating netback, net debt, cash netback, earnings before interest, taxes and depletion, depreciation and accretion (“DD&A”) (“EBITDA”) and EBITDA adjusted for non-cash lease expense, lease payments, unrealized foreign exchange gains or losses, stock-based compensation expense, unrealized derivative instruments gains or losses, inventory impairment, gain on re-purchase of Senior Notes and other financial instruments gains or losses (“Adjusted EBITDA”), cash flow, free cash flow and net debt are non-GAAP measures and do not have standardized meanings under generally accepted accounting principles in the United States of America (“GAAP”). Cash flow refers to funds flow from operations. Free cash flow refers to funds flow from operations less capital expenditures. Refer to “Non-GAAP Measures” in this press release for descriptions of these non-GAAP measures and, where applicable, reconciliations to the most directly comparable measures calculated and presented in accordance with GAAP.
⁽³⁾ Operating netback as presented is defined as oil sales less operating and transportation expenses. See the table titled Financial and Operational Highlights above for the components of consolidated operating netback and corresponding reconciliation.
⁽⁴⁾ Reflects our 1-for-10 reverse stock split that became effective May 5, 2023.