Oil price, Sound Energy, SDX Energy, Trinity Exploration & Production, Cabot And finally...

Monday, 23rd July 2018 13:42 - by Malcy

It’s still the same old same old reasons for activity on the oil Bources, Libya recovering, US production arrives at 11m b/d and the Saudis cutting back by 100/- b/d next month.With further worries about trade wars between the USA and China, this time concerning whether the latter will be buying Iranian crude after November 4th, markets are jittery.

The Baker Hughes rig count on Friday showed a fall of 8 units overall to 1046 and by 5 units in oil to 858, talk remains that it is due to pipeline capacity constraints rather than a lack of ability to produce more.

WTI $70.46 +$1.00, Brent $73.07 +49c, Diff -$2.61, NG $2.76 -1c

Sound has announced that it is ‘initiating the process of converting the Schlumberger existing synthetic 27.5% interest in the Tendrara and Lakbir permits’ into a JV licence participating interest of 27.5%. Sound will remain operator with its 47.5% operating interest but this is a very important demonstration of confidence by SLB in this project and bodes very well for the future. #Deliveringdreamsinthedesert

SDX has announced yet another gas discovery at South Disouq in Egypt. Well SD-3X revealed 32.6 feet of net conventional gas pay in the Abu Madi and Kafr el Sheik horizons with average porosity of 21.7%. The company will initially complete the Abu Madi horizon before re-entering the well to complete and produce the Kafr el Sheik horizon. Assuming success this too will be ready to start-up production in the 4th quarter of this year.

The completion of the drilling programme at South Disouq has yet again showed that SDX has an outstanding operational record of success in its chosen parts of the portfolio. Here in Egypt this success will shortly be monetised as will drilling success be in Morocco where high margin production is already achieving significant commercial progress. With backing from the World Bank and revenues continuing to rise, SDX is trading at a huge discount to asset value and the shares are way too cheap.

A Q2 update from Trinity after a momentous few weeks in which the company completed its $20m fund-raise and  production commenced from 2 new infill wells, a ‘pivotal period’ indeed. The raise will accelerate onshore activity as well as repaying all outstanding debt making the company a very attractive prospect in the sector. The 2nd quarter saw a 4% rise in production, up an impressive 16% y/y.

An initial six new onshore infill wells are to commence 2H 2018 as the company get set to start increasing production even more. With a strong balance sheet and increasing production across a largely fixed operating cost base shareholders can expect a ‘step change’ in earnings in future.

Whilst it is understandable that there has been some post-raise indigestion it has to be realised that this was way the best way of sorting out the finances going forward and the company are now set fair for some time to come. With significant  cash flow and high margin production the shares look distinctly on the cheap side, my target price, adjusted after the raise is still above 30p per share making it one of the most attractive in the sector.

There are more warning signs in this RNS than on most British motorways, starting with the dreaded strategic review, suspension of drilling activity in Canada whilst ‘high-grading’ occurs and hiring of a British former army officer (educated at Sandhurst and Exeter University of course) called Hugo d’Apice as Business Development Director responsible for Italy.

New CEO Scott Aitken, has said that the company will ‘evaluate its ongoing capital requirements in Q4 2018’, enough to send shivers down the spine of investors. The CEO also states that ‘the critical first task is to upgrade the financial planning, reporting and controls procedures to the standard expected by shareholders of a publicly quoted company’ which must be pretty galling to the previous board whom I thought had been doing a pretty good job on that front. I hope that the company realise how things work in Italy and that Hugo has plenty of patience as this is a slow burning process, if you get my drift.

The announcement comes as no great surprise and after the sacking of the previous board only what was to be expected. There is little value in the company at the moment but expect things to get worse given this grim statement, the only question is probably how low will it go before the major shareholder loses patience and buys in the remainder? It is rare to see value destruction on such a large scale, the shares have halved since November, it could easily happen again.

In a thrilling German Grand Prix with Vettel on pole and Lewis starting in 14th posi the Silverstone tables were turned when Lewis triumphed on German soil and Vettel had a dnf after visiting the tyre wall without an appointment.

The Open Championship ended with a brilliant display by Francesco Molinari who cleared the chasing pack on the 18th just when he virtually couldn’t get caught.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.