LONDON (Alliance News) - Oil and gas explorer Ophir Energy PLC on Monday said it has struck a deal to introduce US oil services group Schlumberger Ltd to the Fortuna floating liquefied natural gas project in Equatorial Guinea which will cover Ophir's costs to first gas.
The company provided a mixed bag of news on Monday. Alongside revealing the signed heads of terms with Schlumberger to be its upstream partner on the Fortuna project in central Africa, Ophir also warned that production is expected to fall substantially this year.
FTSE 250-listed Ophir said Schlumberger, subject to the agreement being definitively agreed and to government approval in Equatorial Guinea, will get a 40% economic interest in the project. Ophir currently holds an 80% stake in the Fortuna project, which is not expected to be producing until the middle of 2019.
"We are very pleased to welcome Schlumberger into the Fortuna FLNG project. Innovative partnering in the upstream is increasingly important to deliver world-class projects that can create value throughout the cycle," said Nick Cooper, chief executive of Ophir.
The government of Equatorial Guinea looks to be supportive of the deal, with the director general of hydrocarbons in the Ministry of Mines, Industry & Energy, Mercedes Eworo Milam, saying he "continues to lend full support" to the project.
Ophir is shortlisting the offtake offers it has received for the liquefied natural gas from the project, and said this, alongside the final investment decision, is on track to be completed before the end of the first half of 2016, by which time a binding deal should be in place between Ophir and Schlumberger.
Importantly, Schlumberger will reimburse half of Ophir's past costs for the project in the form of a development carried interest. Ophir said this is expected to cover its share of capital expenditure up until first sales of liquefied natural gas.
"Ophir's cost to first gas is fully funded by this transaction, and we can now evaluate the other funding and offtake proposals that we have received to select at (the) final investment decision the combination that creates most value for shareholders," said Cooper.
Houston, Texas-based Schlumberger is farming into the project after cutting 10,000 jobs in the last three months of 2015 as it prepared for weaker business in early 2016, adding to job cuts announced earlier in 2015.
Schlumberger also said it potentially is interested in extending its partnership with Ophir and other partners on the Fortuna project, meaning further deals including existing or potentially new assets owned by Ophir could be in the pipeline.
Ophir also released a short trading update Monday, with its production for 2015 averaging 13,000 barrels of oil equivalent per day for the year, ahead of guidance, after its Bualuang and Sinphuhorm fields in Thailand performed ahead of budget.
Bualuang is one of Ophir's prime assets, with a lower cost per barrel than Ophir's other assets. The company completed a programme to increase the field's water disposal capacity ahead of schedule back in December, which led to higher daily production from the field.
However, the company is expecting a steep fall in overall production this year, providing a guidance range of 10,500 to 11,500 barrels of oil equivalent per day. That guidance also is reliant on the Kerendan gas field in Indonesia coming on stream in the second half of the year.
The plant at the Kerendan gas field began processing gas just before Christmas so commissioning operations could begin. Commercial production will start once the construction of the transmission lines and power plant are complete, Ophir said.
Although production will fall in 2016, Ophir reiterated its low cost base, with all of its producing assets having an average post-tax operating cashflow breakeven price of around USD15 per barrel - way below current oil world prices, with Brent trading at well over USD31 a barrel Monday morning.
Ophir will will cut capital expenditure in 2016 after spending USD250.0 million in 2015. The company plans to spend in the region of USD175.0 to USD225.0 million in 2016.
At the end of 2015, the oil and gas company reported a net cash balance of USD360.0 million, with USD620.0 million in cash, leaving it with gearing in the region of 12%.
Ophir is targeting USD75.0 to USD100.0 million of operating cashflow from its producing assets in 2016, which, along with its plan to refinance its debt facilities, will lead to its net cash position falling to between USD225.0 milliion and USD275.0 million but a significant rise in its cash balance to USD550.0 to USD600.0 million - pushing the gearing level up to 17% from 12%.
"These are tough times for the upstream sector, but this transaction will free up our balance sheet and further increase our financial flexibility. Through prudent capital discipline, an innovative approach and a strong balance sheet, Ophir remains convinced of the value creation potential of its asset portfolio throughout 2016 and beyond," said Cooper.
The company has already started to reshuffle its exploration portfolio to focus solely on "assets that are appropriate in the new, lower commodity price environment," it said, and Ophir has exited, or is in the process of exiting, eight license across Africa and Asia.
Ophir did not detail what licences in the two continents it has sacrificed, with the company holding assets in Kenya, Tanzania, Gabon and Equatorial Guinea in Africa, and in Thailand, Myanmar and Malaysia in Asia.
However, it is likely its assets in Malaysia, Tanzania and Equatorial Guinea are safe, as Ophir is not just reducing its portfolio.
In addition to deal with Schlumberger in Equatorial Guinea, Ophir said it also has agreed terms to enter new exploration licences in the Ivory Coast and in Malaysia, which are subject to final approvals. No further details on those new licenses were released by the company.
In Tanzania, the company said its partner, Tanzania Petroleum Development Corp, has announced the location of the LNG site at Machenga Bay and is in the final stages of securing the land for the midstream facilities.
"Further high grading of the exploration portfolio is expected during 2016 as Ophir concentrates its efforts on plays that can deliver transformational and, importantly, monetise-able upside at current prices," said the company.
Ophir shares were trading up 4.3% to 87.80 pence per share on Monday morning.
By Sam Unsted; samunsted@alliancenews.com; @SamUAtAlliance. Updated by Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance.
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