ANGUS ENERGY: small exploration plc, big production ambitions
Angus Energy PLC - LON:ANGS
Foreword: A Point on Estimates and Expectations
This report bases its production, oil-in-place (OIP) and revenue estimates on a Competent Persons Report authored by Xodus Group in September 2016. Nutech Energy had compiled an earlier report suggesting Brockham shared similar characteristics to Horse Hill. While not dismissing the Nutech report, Xodus felt there was not enough scientific data to draw definitive conclusions and forecasted what to some readers will be pessimistically low estimates. Xodus and the Angus Board seem to take the view that conservative forecasting is prudent, this approach is replicated in the writing of this report.
That said, let us take a moment to consider the Angus Energy RNS on 3 March 2017 stating Brockham displayed analogous characteristics to Horse Hill. Main points from the RNS:
- No fracking required: ANGS can produce using conventional techniques
- Significant OIP: Brockham (BR-X4Z well) has access to same reservoir as Horse Hill (HH-1 well)
- Potentially 1500bopd: for production purposes, both BR-X4Z and HH-1 share similar reservoir content properties, could mean significantly higher production rate than 128 bopd estimated by Xodus for both Brockham wells
- Better than HH-1: geochemical analysis gives the normally bearish ANGS Board "confidence the well will be similar to HH-1 and potentially ... could be even better"
The market has currently priced-in the estimates of the Xodus report and arguably, it has done same for the potential of a Horse Hill look-a-like at Brockham. Tests and analyses currently being conducted, will scientifically prove or disprove that well BR-X4Z has a production capacity close to (or even greater than) HH-1. If the congruity is proven, it would mean BR-X4Z alone will quadruple the total production for the whole company as forecast in the Xodus report. When the anticipated market update confirming production capacity is announced, expect a rapid share price reaction as the market prices-in the confirmed flow rates.
A note to the reader: there is sound reason behind the Board's patient approach to market updates. A misinformed statement with inaccurate estimates would be detrimental to shareholder trust and long term share price. Angus Energy experienced this first hand in 2015 when its then-partner in Horse Hill, UKOG, had to publicly walk back a claim of 100bn barrels of OIP at Horse Hill (for context, this would have been more than all the oil produced in the North Sea, ever), the actual figure being closer to 8bn barrels. The discovery was significant in its own right, but the shine was taken off. The Angus Board are wise in trying to avoid a similar scenario again by managing expectations and delivering accurate, substantiated market updates. The Board will likely not issue a statement confirming production capacity (good or bad) until they are in possession of a detailed Competent Persons Report. Until then, shareholders will need to adopt the same patient approach employed by the Angus Energy team.
Background on UK Oil Production
UK oil production and the North Sea have been synonymous since the first rig was drilled in 1967. Offshore production requires substantial infrastructure expenditure for drilling, extraction and transportation. Often decisions are not made for one platform, but a network of interdependent platforms. The cost of the operation from exploration to decommissioning means production costs of offshore fields is considerably higher than its onshore counterparts. Most of UK production is offshore and this is a considerable factor in the UK having the highest per barrel cost of production amongst major oil producing countries. A 2016 Rystad Energy study published in the Wall Street Journal suggested a barrel of UK-produced oil has a production cost of $45 and up. For context, fellow North Sea producer Norway has a cost of $21 and an average onshore Saudi Arabia barrel is under $9.
Fifty years and tens of billions of barrels later and despite a year-on-year production increase in 2015, the region may finally be approaching an era of declining returns as reserves in operational fields are exhausted and areas of new exploration on the UK Continental Shelf (UKCS) become increasingly challenging and costly. Symbolically, plans to decommission the iconic Brent oilfield off the coast of Shetland are being put in place.
With that in mind and spurred on by the UK being a net importer of oil since 2005, some smaller UK oil and gas companies have been exploring other options both offshore and onshore. The Weald Basin in southern England in particular has seen an explosion of exploration. The basin was drilled in 1980s by super-producers like BP. However, much of their findings at the time suggested Weald basin production was non-viable: not enough OIP to warrant the cost of production. In 2015, UKOG plc and a consortium of other O&G companies including founding member Angus Energy (not publicly listed at the time) announced they had discovered a monumental amount of OIP at the Horse Hill-1 well, dubbed the "Gatwick Gusher" by the media. While it is not clear when production might begin, one certainty is production costs for an onshore well at Horse Hill field will be significantly lower than those for the offshore platform at Brent field.
How did little ANGS and UKOG find what a giant like BP could not? Well, over thirty years of technological and technical advances do help. The Board has extensive experience in the upstream (oil exploration and production) industry which has helped Angus Energy build a portfolio of wells that can deliver near-immediate production.
ANGS Production & Exploration Portfolio
Angus Energy is relatively new on AIM, having operated as a limited company until its listing. Aided by a steady flow of positive news, ANGS share price has doubled since launching at £0.06 in mid-November:
- 14 Nov '16: listing day was also the day ANGS announced it had received permission to drill a sidetrack well at Brockham field
- 15 Dec: ANGS announces both the approval from Surrey Council for commencement of oilfield works and increased stake in Brockham field
- 30 Dec: sale of ANGS interest in nearby Horse Hill 1 oilfield for £2m ensured final results announced on the day showed ANGS in the black
- 26 Jan '17: announcement that oil and gas have both been encountered in well testing
- 3 Mar: Brockham well update, shared characteristics with Horse Hill
There are other operational and financial events that are also pertinent to Angus Energy, but it is the aforementioned series of events which have investors awaiting news from flow tests which will help determine production capacity and thereby potential income.
While Brockham is certainly the big news, Angus Energy has other projects that will help fulfil its ambition to become one of the leading UK onshore oil and gas production companies.
Horse Hill
Though Angus Energy no longer has an interest in Horese Hill, it does provide an apt starting point. Angus Energy was the founder of, and minority stake holder in, this collaborative project which in 2015 was nicknamed the "Gatwick Gusher" due to its proximity to the airport. Discovery of hydrocarbons and better-than-expected flow rates at HH-1 reinforced ANGS belief the nearby Brockham field would display similar characteristics.
Having made the discovery and thereby increasing the value of HH-1, ANGS earned £3m from divesting its 22% stake to UKOG (12%), Alba Resources PLC (5%) and Regency Mines PLC (5%).
The reason for divesting out of a lucrative project? Time and a viable alternative. It would take over two years to commence production and ANGS also has Brockham which it calculates can tap into the same resource potential as HH-1.
Brockham
The current headline maker of the Angus Energy portfolio. Having conducted well testing in January, and some OIP estimates announced in early March, flow rate results for oil and now gas are expected to be announced soon and likely to be followed by regular updates on production progress.
Like many of the oilfields in the Weald Basin, Brockham has many stakeholders including ISDX-listed Doriemus PLC (10%) and Calculus Capital-owned Terrain Energy Ltd (10%). The majority stakeholder is ANGS which has a 65% working interest (having increased its stake in December 2016 from 55%).
Brockham had originally been drilled by BP in 1987 but the field was deemed non-viable and abandoned. ANGS acquired Brockham as a non-producing field in 2012. Thirty years on from the field's first exploration Angus Energy has more than a hunch Brockham will deliver a significant find of extractable hydrocarbons. New technology and the data it helped gather informed the Board's decision to reenter the well. On 26 January 2017, this informed hunch was validated as initial well testing revealed hydrocarbons in all targeted zones.
Brockham is of further importance because it had been an operational oilfield, well BR-X2Y was producing 35 bopd until it was shut-in on 31 January 2016 for works. Much of the infrastructure for production and transit is in place, ready for a swift return to full capacity operation. Delivering production this financial year is high on the Board's agenda, progress at Brockham should help realise that ambition.
Angus Energy intends to drill a second well (BR-X4Z). A mid-range forecast for combined production at both wells is a rate of 128 bopd in the first year, steadily declining over ten years to 29 bopd having produced with cumulative production being in the region of 180,000 to 200,000 barrels.
One risk Brockham does face is license expiration in October 2017, though the Board is more than confident that a new license will be issued. In August 2013 Angus Energy entered into a ten year lease with the landlord.
Lidsey
While currently all the focus is on Brockham, Lidsey is forecast to be a higher producing asset on the Angus Energy portfolio - if base forecasts prove true, it can potentially produce more oil and at a higher rate than the former.
ANGS owns a 50% interest in Lidsey with an option on an additional 10% from Terrain (currently 20%) for what could be about £700,000 and possibly a share issue. Doriemus also owns a 20% stake in the oilfield.
Lidsey-X1 well was originally drilled in 1987 but, like Brockham, was abandoned due to concerns of its commercial viability. Angus Energy acquired the field in 2012 and carried out the necessary upgrades to allow production to begin. Until January 2016 the well was producing at 25 bopd. It was shut-in when work started at Brockham field.
ANGS intends to drill a new 1500m horizontal production well (Lidsey-2) by mid 2017, the original Lidsey-X1 will be converted to a water injection well. The geology of the second well would allow Lidsey oilfield to increase production more than tenfold to 279 bopd declining to 77 bopd over ten years with cumulative production being in the region 400,000 barrels (base case scenario). It should be pointed out Lidsey-2's elevated position and the relative location of Lidsey-X1 would result in minimal water production - a real boon to cost of production.
Like Brockham, Lidsey also faces a license expiration in December 2017, though the Board feels confident here too.
Angus Energy Production Forecast - Xodus Report
Holmwood
Angus Energy recently acquired a 12.5% stake in the drill-ready Holmwood prospect from Europa Oil & Gas (Holdings) PLC in return for funding a proportion of the exploration work which could cost it up to £800,000 plus extras. The field is located 5km south of Brockham and work is expected to commence later this year. A discovery announcement might not arrive until early 2018 and if positive, production would not begin for some time later. While this acquisition may not seem in keeping with Board's strategy of delivering immediate production, it is a forward thinking move by a Board confident its strategy is reaping rewards. Or it might be the Board have a similar idea to HH-1 in mind. Buy in, deploy exploration expertise, make discovery, divest at a premium, finance production wells. Of course there is the chance of no discovery and shouldering the cost burden. The Angus Energy team though, have a track record of using innovative techniques and advanced technology to identify high probability well prospects in the Weald - it is reasonable to infer they have done their homework on Holmwood too.
Revenue and Cash Position
The HH-1 divestment brought in an additional £3m and allowed ANGS to turn the previous financial year's pro-rata loss of £2m into last year's modest profit of £109,000. The £3.5m generated from the AIM-listing allowed the Board to finance the works at Brockham and contribute towards its increased stake in the oilfield.
In February, ANGS made use of its AIM listing to generate financing twice. On the 6th of February ANGS raised £2m by way of a private placing of shares. The proceeds being used towards the Holmwood exploration costs, paying the balance of the Brockham stake increase and financing the potential Lidsey stake increase. Two weeks later ANGS was approved for access of up to £3.5m on the NEX bond market. As yet no bonds have been issued, it does seem likely though, that a first tranche of bonds will be issued mid to late March. The Board maintains all projects are fully financed at forecasted levels of cash flow and production. Access to this finance does allow for some wiggle room and more importantly, allows ANGS greater scope to develop its future interests and strategies.
The fall in price of oil has necessitated an industry wide tightening of cost belts. There have been shut-ins and downsizing, but there has also been improvement in production efficiencies which ANGS is looking to profit from, for example its recent use of Weatherford's LWD (logging-while-drilling) acoustic imaging tool at Brockham.
Market News and Share Price
ANGS has been a hive of activity since its listing. Regular, positive market updates and a profit in its first annual report has helped the share price rise. While financing secured through share and bond issues has had a downward impact on share price, a rapid rebound on each occasion suggests the market has confidence in the Angus Energy project. There is no one day price jump of 200% followed by drop a la UKOG circa 2015, but there is a steady 100% increase over six weeks. The ANGS Board have a measured and confident approach to market updates with the share price reaping rich rewards.
The market has currently priced-in the estimates of the Xodus report and arguably, it has done same for the potential of a Horse Hill twin at Brockham. Tests and analyses currently being conducted, will scientifically prove or disprove that well BR-X4Z has a production capacity close to (or even greater than) HH-1. If congruity is proven, it would mean BR-X4Z alone will quadruple the total production for the whole company as forecast in the Xodus report. When the anticipated market update confirming production capacity is announced, expect a rapid share price reaction as the market prices-in the confirmed flow rates.
On the Horizon
Revenue Projections
In the year before listing, Angus Energy earned £446,000 from both wells pumping at a total of 60 bopd. Last year it earned only £73,000 due to shut-ins from Jan 2016.
If the Board's hunch is right, Brockham alone could produce twice that rate leading to a significant increase in revenue being realised this financial year. The ANGS P&L though, will show the largest boost to income when production at Lidsey-2 commences. Not only because Lidsey can potentially produce at twice the rate of the Brockham forecast, but also because the two oilfields work in tandem. The Brockham 28˚API is blended with the Lidsey 40˚API to produce a Brent blend 38.06˚ API and sold at a slight discount against the benchmark.
It would be a fool's errand to project revenues for ANGS without all the requisite data in what is currently a volatile market. But early indications are positive for ANGS and that is a good thing for earnings, December 2017's annual report will be telling.
Future Developments
Angus Energy has ambitions of being amongst the top UK onshore oil & gas companies. The Board seem to have a clear vision for the future and a strategy they are adhering to. Having secured access to additional financing via the NEX bond issue, ANGS now has the ability to move quickly and decisively on future opportunities, for example Holmwood.
The experience of the Angus Energy team and the technology at their disposal gives rise to optimism as the Board displays a controlled environment in which costs and expectations are managed effectively. As the government seeks to secure economic stability in the post-referendum period, there is as great a need for energy sovereignty now as there is for national sovereignty. The upside for ANGS could be greater state support through fiscal tools and legislative measures.
Factoring in Brent Crude and FX
It is worth pointing out Angus Energy ceased production just as Brent was hitting its lowest level in January 2016, hovering at $30. It would seem Board have managed to avoid selling its inventory on the cheap while taking the opportunity to improve capacity and efficiency just in time for a rebound in Brent which is now around $55. Point of note: revenue from production is not simply at bopd x Brent price - that assumption would be to forget factors like the blend stage. That said, any production which increases ANGS revenue of £73,000 in FY 2016 to a level close to or above the £446,000 of FY 2015 will be be well received by shareholders, though that is unlikely this financial year.
The other global factor to take into account is foreign exchange. As oil is priced in US dollars and ANGS reports in sterling, the latter's current weakness lowers production margins for Angus.
Final Thoughts
Energy sovereignty should be high on the government's list of priorities. This does not necessarily mean that UK production is used domestically. The UK refines too much petrol and not enough diesel, jet fuel and kerosene for domestic demand. Energy sovereignty means a return to being a net exporter of oil by replacing the North Sea peak production era of the late 1990s.
The prospect of declining North Sea production coupled with the high costs of offshore fields makes the Weald Basin an attractive option for patient investors with an appetite for risk seeking significant returns. Amongst the varied companies operating in the Weald Basin, Angus Energy is possibly best poised to commence immediate production from an area made famous as the Gatwick Gusher at Horse Hill.
With a recent share issue, access to bond market financing and substantial production revenue imminent at Brockham, the Board is in a strong cash position. It has medium and long term production projects, at Lidsey and Holmwood respectively, that can be funded using current cash resources. There is the prospect of further developments which may be financed through the markets, though this may only temporarily depress share price as it seems longterm shareholders have confidence in ANGS.
The Board have a clear strategy in mind and have adhered to it. Since publicly listing in November 2016, the Board has come across as assured and in control. The volume and quality of market updates it has issued shows a company that is implementing a clear strategy for earnings and share price. ANGS has survived the historic low levels of Brent crude and the market wobbles in the aftermath of the EU Referendum. While there will be turbulence in the future, it seems Angus Energy has an ability to weather most storms. There is also the prospect of brighter news further ahead as the UK government may soon be able to provide fiscal and legislative support to the onshore industry.
And of course, we will soon find out whether Brockham can actually deliver 1500 bopd, a flow rate twelve times greater than the Xodus estimate of 127 bopd for the oilfield. I will leave you with a chart of production levels as currently forecast against what production might be if HH-1 congruity is proven. It takes the initial projected HH-1 flow rate 1500 bopd with a diminishing returns rate based on the Xodus model. Please keep in mind the chart is an informed hypothetical (based on reason, not science), the simple purpose is to illustrate the significance of the production increase should BR-X4Z mimic the HH-1 model. The implications and magnitude of the eventual discovery announcement (either confirming or rejecting HH1 model forecast) I will leave for you to consider.
