And that is where their hands are very likely to stay for some considerable time, since the management believe the existing assets, primely located in a well established, very high performing O&G basin, have the potential for the company to organically get to 10,000 boepd within 3 years. Such is the recent interest in this area of the Llanos basin, Canadian mid Cap Parex(45,000 boepd in-country production), purchased every block to entirely surround Arrow's block during a recent Government auction, despite NONE of these blocks actually being included in the auction, so keen where they to acquire the assets.
AXL shareholder's investments are in very capable hands going by the outstanding track record of the senior management in creating repeatedly from scratch over the last 30 years, exceptional shareholder returns wherever they plied their trade. It's why the shareholder register has an exceptionally high level of investment from HNW individuals, as many follow the management from company to company, as a result of building from scratch or either buying 8 small companies over the last 30 years, that were all subsequently grown substantially and sold on to release shareholder's profits. With Parex now surrounding Arrow's high potential, high performing, primely located asset, even Stevie Wonder could see the likely future trade sale route in 2-3 years.
IMO at the current valuation Arrow has the asset potential and management to be the best performing investment in the portfolio over the next few years. Continue to add on pullbacks since I've been unable to find better value and growth prospects elsewhere.
Posted an extended version with links to the Crux Interview/Q&A of the following on my Advfn MTB blog and a few other selected investment sites today:
For a still early stage opportunity in the O&G sector(current m/c only £34m), it's likely to be a big few weeks for news at Arrow Exploration (AXL).
An operations update and new reserves report is imminent, following the outstanding early success of its 2022 Rio Cravo field infill well drilling campaign, where the first two wells of a five well programme have both significantly exceeded expectations, by finding a number of new producing sands(one very high performing) in addition to the expected targets.
The primary target C7A reservoir is producing at over 40% ahead of expectation in the RCE-2 well, while the new discovery C7B sand(which materially increases the aerial size of the field) in the RCS-1 well is currently producing some 3 times ahead of the well's primary target, the C7A's net 360 bopd management expectation, that was also found along with four other reservoirs ...... such is the strength of the aquifer support, the management are currently struggling to reduce the C7B production down to the circa 650 bopd net they would ideally like to operate the RCS-1 well at.
These wells typically have a circa 20% annual decline rate - but such is the amazing cleanliness of the water produced in wells drilled in the the Llanos Basin(its rainwater straight off the Andes), AXL are currently giving it straight from the first well drilled on the field in 2019 - the RCE-1 - for free to delighted local farmers to irrigate their fields.
The production development results since the London IPO have placed high growth Arrow comfortably on course to achieve the management's then stated target of delivering 3,000 boepd by March 2023 - which will represent a five fold increase in production in the 18 months from shortly before the IPO in late 2021.
However, where Arrow stands out from virtually every other small cap in the sector is that ALL their production growth through to 3,000 boepd will be ORGANIC. With likely lifting costs on the Rio Cravo production in the $7-9/bbl range by year end.
The management, despite having a peerless industry reputation as a second phase acquirer, operator and developer of highly accretive assets; such has been the high expectation and stunning success of the infill well drilling campaign on their Llanos Basin asset(100sq miles - and the only block in the basin to have 6 separate faults running North to South through it - next highest is 2-3), the cash rich, debt free Arrow management is yet to put their hands in their pockets for other assets.
The following slowed down average rate of cargo and ballast tank corrosion:
* Crude oil cargoes in long term storage cause a waxy or other protective layer to form on the cargo tank steel structures and this layer will help inhibit corrosion.
As a consequence of the above, since FPSO's are stationary over the field throughout their commercial lives, the classification Societies expect these ships to generally sustain a lower rate of cargo and ballast tank corrosion, and so permit their use with rolling five year Inspection and Maintenance Programs in lieu of dry dockings.
Reading between the lines, it sounds like Paul Blakeley, with an eye on further acquisition aspirations at major second phase opportunities like the North West Shelf Project and elsewhere, has elected to carry out the remaining FPSO inspection and remediation work scheduled for this year in parallel with the tank repairs, in order to put this matter to bed in its entirety by/during September.
Its the behaviour of not just a savvy commercial and political mind but that of a highly professional operator, since it goes beyond the minimum requirements of the rolling Inspection & Maintenance Programme in Lieu of dry-docking under which the Classification Societies control, manage and monitor the commercial use of FPSO's and FSO's.
Some industry information on the management of cargo and ballast tank corrosion in Oil Tankers - kindly provided by a friend and fellow Jadestone investor, a Shell veteran of 45 years, with responsibility for managing their Ship Risk Management and Quality Assurance Programme.
Ongoing in-service cargo and ballast tank inspection and steel thickness monitoring for selected structural members in selected cargo tanks at 30-month intervals, is part of the corrosion control program, required by the Classification Societies to provide an adequate database for developing the mitigation strategy and maintenance methodology, to keep corrosion within accepted limits.
Of main interest are the results for deck and bottom plating. For VLCC's the Classification Societies found that in light of experience, previously used 0.1 mm / year corrosion rates were a little optimistic, and increased the upper bound estimate to 0.2 mm / year for deck plating and 0.15 mm / year for tank bottom. VLCC deck and bottom plating is a minimum thickness of 17mm.
Particular attention is given to known 'hotspots' like the tank bottom plating close to where cargo pump suction is situated, as this can experience a higher corrosion rate.
The following has been found to accelerate the rate of corrosion in VLCC with uncoated cargo and ballast tanks:
* Double Hull ships - they raise the cargo tank temperature
* Crude oil cargo containing high concentrations of sulphur created higher levels of general and pitting corrosion, since sulphur is cathodic by nature
* Frequency of cargo tank cleaning
* Ship structural behavior itself is a factor in the corrosion rates - when steaming at normal service speed in moderate/heavy sea conditions the ship's structure will naturally flex during the alternate compression and tension cycle of riding over each sea/swell wave. Surface rust or scale on internal tank structures can become dislodged, exposing further new bare steel. As the material thickness diminishes, the stress on the component is incrementally raised. These effects can contribute to localized increases in corrosion.
The following slowed down average rate of cargo and ballast tank corrosion:
* Crude oil cargoes in long term shortag
Thank you - You've highlighted it.
Phil now works for JSE, so I would expect JSE management to have told him to politely decline to answer enquires and correspondence related to his previous employment, and if this fails, to pass the matter over to the Company's General Council - as it's not what Phil is now paid to do .
Long experience suggests the way forward is to take personal responsibility for your investment mistakes - having a personnel vendetta against an individual that had no responsibility for decisions made by the Board of his previous employer is not a productive use of time - carrying out better research before making a new investment and especially after making it is.
NW Shelf Oil Project - is the second largest Oil Field Development in the history of the Australian O&G Sector - "Big fields get Bigger"
The primary characteristic Jadestone looks for in a potential acquisition is the re-investment potential. In this respect, at the mid life stage of the NW Shelf Oil Fields, what is material to Jadestone is very unlikely to now even move the needle for their heavyweight field partners.
What the early operation of the NW Shelf Oil Fields had shown is that its light oils were reservoired in turbidite sands whose high permeabilities allowed for individual well performances of up to 40,000 bbl/d.
In 2001, after 6 years of production and still little or no water cut and minimal decline.....an upward revision in reserves was indicted so an intensive subsurface study was undertaken including new 3D seismic .....the result: recovery factors of 50%-80% were indicted, far higher than previous estimates.
The “Cossack Pioneer” Oil Fields: New Subsurface Insights after Eleven Years on Production
“This acquisition is another example of our strategy in action, acquiring low-cost barrels at less than US$3/bbl, while establishing an entry position into a very high-quality long-life asset with very low decline rates. We believe that over time we can exercise increasing influence and deploy our skills in mid-life oil field management. In particular we see material upside potential through INFILL DRILLING INTO RESERVOIRS with VERY SIGNIFICANT oil-in-place...." Paul Blakeley announcing the Acquisition.
Jadestone's research must strongly indicate to them that a second phase of 'Infill' drilling across these very large, high performing oil fields is likely to deliver highly material production volumes.....'with significant original oil in place, which Jadestone estimates at approximately 890 mmbbls, and which provides the opportunity for further investment to increase recovery factors.'.....when individual wells have produced up to 40,000 bopd, and the total number of wells drilled across all the fields to date is just 13, and with each of the fours fields currently producing from just a single well.
What is remarkable is the low OPEX of the North West Shelf Oil fields considering their age and production profile.
The Catcher field in the North Sea has a BW FPSO on charter at a cost of circa $210m a year for the initial 10 year fixed charter period - which at circa production of 26k bopd in 2020, indicates an operating cost JUST for the FPSO of $26.7/bbl. At a production level similar to the circa 14k bopd for the assets JSE has just acquired, it would increase to $41.2/bbl, just for the FPSO.
The North West Fields have a current OPEX of $21-22/bbl INCLUSIVE of the finance and operating cost of the new FPSO deployed in the field in 2011 with a minimum 20 year operating life.
FPSO Okha is a double hulled former tanker and the first converted FPSO to be built with hydrocarbon tank blanketing, primarily to reduce corrosion rates in the cargo tanks of a converted vessel - by replacing the conventional inert gas cargo tank blanketing.
In addition, hydrocarbon tank blanketing reduces an FPSO's emissions and overall environmental impact......so, I'm sure all the environmentally conscious shareholders JSE has on it's ownership register will be delighted to know the company has bought into an asset with a fully WOKE FPSO!
The design specifies that fuel gas is used for cargo tank blanketing in line with Australian regulatory requirements....this meant it became necessary to implement a totally enclosed flare system collecting all continuous hydrocarbon releases – a first for Australian production facilities.
At the time of the conversion - Offshore Mag presciently said: "In an effort to reduce greenhouse emissions, countries are increasingly imposing regulations that require flare-less oil and gas operations.
Flare-less operations can be implemented with relative ease if required from the beginning. With drivers that include environmental regulations, emissions reduction, production optimization and improved working conditions, it is expected that flare-less designs will become the new standard for FPSOs and platforms."
This deal provides a blueprint for the industry to provide Governments/Regulatory Authorities with the comfort necessary to enable the future transfer of large company mid/late life O&G assets to smaller players.
By implication, it also means from a competition perspective that only smaller players with considerable cash resources and industry experience are likely to be considered for such assets ....... meaning a very small pool of potential buyers for a very large pool of mid/late life assets.
Great news for a well respected, cash rich company like Jadestone that has a very hearty appetite for high quality mid/late life assets!
Last Tapis price premium to dated Brent was around $15/bbl - Montara and PM production is sold off this.
Last Stag heavy sweet crude premium was circa $23.75/bbl to dated Brent - but this will have increased to a circa $35/bbl premium going by the premiums achieved in the latest round of auctions for Australian heavy sweet crude.
Using a blended $17 premium to dated Brent across the production - sees JSE in a current position at $98 Brent of having circa 45% of its market cap in cash, while generating circa $180m a quarter in revenue and circa $144m a quarter( a third of its market cap and 55% of its enterprise value) in operating cash flow (pre capex).
Exxon are a company with a reputation for decisiveness - taking business decisions and then cracking on with implementing their plans and delivering results.
With the deal sorted with Savannah and a handover in place on the ground, to then be frustrated when they attempt to get the formality of a final sign off made, through an attempt to shake them down for an extra $15m would have surely infuriated the World's largest O&G company.
So, direct by nature, it would not be a surprise if they had a quiet word in the ear of the top man in Chad as to what his so called representatives were doing with respect to this deal and had been getting up to over the years - which resulted in this clean out of the stables.
The brief given to the Minister by the top man could not have been simpler - get the Parenco and Savannah deals over the line asap, the cash back flowing into the treasury and the new asset owner's investing in new production.
To attempt to delay the transfer of ownership at the last minute by demanding another $15m of cash was a huge mistake - particularly when it's probably as certain as night following day that were Exxon to have paid, the proposed recipients of it, will have likely seen nothing more than loose change.
You come across as a near petrified nickel and dime trader worried about losing money - any investor with a 3-5 year investment outlook would describe the current valuation as a once in a generation investment opportunity.
Observation of L2 over the last few weeks among stocks trading on SETS(allowing DMA) suggests there is, an invisible hand pressing down on the valuations of the entire O&G sector, such that even news extremely positive to the business case almost without exception does not generate any valuation upside never mind what would be reasonable to expect.
However, what that invisible hand is unable to do is impact the FCF generation of the sector which was at an all time record in Q4/2021 when Brent averaged $73/bbl, and is in the stratosphere this year with Brent averaging $34/bbl more at $106.92/bbl YTD.
One way or another value investors will see the benefit to the business of this cash generation either via s/p progression and/or enhanced dividends, special dividends and share buy-backs. So, similar to Buffet and Monger but unlike the overwhelming majority of the market, I see current O&G market valuations as a major buying opportunity - offering with rising interest rates much better value over a 2-3 year investment outlook than any other sector, as a result of its incredible FCF yields YTD at an average Brent price of $106.92/bbl, and all time record FCF generation down at $73/bbl.
The concept of 'value' investing has proved the test of time over 95 years, yet bizarrely, is probably as unfashionable today as it's ever been.
With an investment in SAVE/JSE/AXL/PTAL/TXP you get icing(Production Growth) on the 'Value' Cake as well!
On average, US value stocks have outperformed growth stocks by a 4.1% annual average rate since 1927 - this is a massive difference in terms of Capital Growth returns when compounded over 95 years.
Long Stockmarket history has shown investors are best served by making decisions based on sound economic principles supported by high quality research/evidence. Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return. Its one of the most fundamental tenets of stock market investing - and the current O&G industry is offering investment value based on FCF yields at $73 oil superior to any time seen in its long history.
The Callizales Norte Prospect(CN) - scheduled for drilling in late 2022.
Some comments from the Nov 2021 Investor video presentation given by Marshall, as to why "we are very excited to drill the CN prospect":
ARROW EXPLORATION CORP - Investor Presentation
"The Carrizales Field Complex (immediately to the south of the CN prospect) has produced just under 9m bbls to date, peaking at 7,500 bopd. The discovery well which is only 1.5km away from our block boundary came on at 2,500 bopd. CNC Energia drilled this field and ultimately sold it for US$500m.
CN has three zones on the way down to 10,000ft these are HIGHER and THICKER than what was encountered in the Carrizales Field Complex. We are only budgeting for 360 bopd net coming out of these pools."
Video Presentation - CN section starts at 24m 40s.
Well worth revisiting the Tapir Block part of the presentation too - "we like drilling for oil where it already exists" which starts at circ 20m 00s and in particular the Rio Cravo Este(RCE) section(starts 22m 30s), to see how the infill well drilling results have exceeded the original expectation/geological modelling significantly to the upside, leading to Arrow recently submitting a full field development plan for RCE.
While Petro’s electoral victory has, rightfully so, unnerved financial markets, investors, and Colombia’s petroleum industry, his plans to end oil exploration the immediate fallout is likely to be minor because of his intentions to allow existing contracts to continue operating.'
Colombian Oil Industry - Matthew Smith / Latin American based O&G Investment Management Professional who writes for Oilprice.com
'Petro’s policies have sparked a frenzied debate in Colombia about the future of the Andean country’s oil industry which is a key driver of the economy. For the first four months of 2022 petroleum exports generated $6.6 billion, making crude oil responsible for 36% of all export earnings for that period.
Total petroleum and derivative products exported represent around 70% of Colombia’s petroleum production. According to Colombia’s peak hydrocarbon industry body, the Colombian Petroleum Association(ACP), crude oil is responsible for nearly a fifth of the central government’s fiscal income. Those numbers emphasise how critical the oil industry is to Colombia’s economy and for ensuring the crisis-driven country’s energy security.
A key aspect of Petro’s plan for Colombia’s oil industry that is often overlooked is his plan to allow existing contracts to continue operating for as long as Colombia’s proven reserves are sufficient to justify commercial operations. That means, over the short to medium term, there will likely be little to no material impact on Colombia’s oil production.
Indeed, there are signs that with the oil rally driving greater investment in Colombia’s industry that production will expand even after Petro takes office on 7 August 2022. The ACP stated at the start of 2022 that forecast investment in oil and natural gas production will reach $4.4 billion during the year, which is 42% greater than a year earlier.
According to the industry body spending on hydrocarbon exploration during 2022 will reach $1.1 billion, which is 2.2 times greater than in 2021 and the highest since 2014. This is reflected by the forecast 2022 budgets of drillers operating in Colombia. National oil company Ecopetrol, which is 88.5% owned by the state, announced plans to invest up to $5.8 billion in 2022, which represents a 45% increase over 2021.
Colombia’s largest privately owned oil producer Parex Resources boosted 2022 capital spending by 98.6% year over year to $550 million with most of that amount directed to exploration and development drilling.
That marked increase in exploration and development drilling is reflected by the latest Baker Hughes rig count, which shows that at the end of May 2022 there were 29 operational drill rigs in Colombia. While that is one less than a month earlier it is significantly higher than the 16 operational rigs for the same period a year earlier and the 25 rigs operating at the end of May 2019.
Those numbers indicate Colombia’s oil production will grow over the immediate future, even once Petro takes office and is able to successfully implement his plan to end contracts for oil exploration. It is likely that Colombia’s crude oil output will return to over 800,000 barrels of crude oil per day at some time in the immediate future.
The Commodity Cycle at Work:
Average Brent Price - adjusted for inflation
$75 - 1975 to 1990 - led to supply heavily outstripping demand
$35 - 1990 to 2000 - led to demand heavily outstripping supply
$96 - 2000 to 2014 - led to supply heavily outstripping demand
$57 - 2014 to 2021 - led to demand heavily outstripping supply
$104 - 2022 - tight supply situation likely to continue for years
'Louis-Vincent Gave of Gavekal estimates that a $40 drop in the price of a barrel of oil would release $400bn of liquidity into the global economy. This in turn should reverse the recent strengthening of the dollar. Lower fuel prices in 2023 could bring not just lower inflation but also higher living standards, a weaker dollar, improved liquidity, a pick-up in growth and corporate profits and rising equity markets.'
That size drop in the oil price would simply return Brent to a level in Q4/2021, when the industry generated an all time record level of FCF.
'Longview Economics is almost a lone voice arguing that a coming oil glut will drive prices down again. “If oil prices remain at current levels, there will be a significant supply response over the coming 12-18 months which will generate a global supply surplus /rising oil inventories in 2023,” say analysts there.'
If this were the case the oil majors would have already been investing heavily in large, 'long cycle barrels' offshore projects - outside of Guyana there is little market evidence to support this view, certainly not on the scale necessary to deliver a material supply response over 12-18 months. Few, if any on the oil price bear case has been able to realistically demonstrate where this massive short term supply response is going to be coming from.
The only two times in history when oil hit an inflation adjusted price of $100/bbl, 1979 and 2010, it went on to average around that price for 4-6 years before new supply caught up and went on to outstrip demand, leading to a long period of falling oil prices. Is history likely to be any different this time around? When considering the oil market fundamentals and the deteriorating geopolitical situation, then, on the balance of probabilities, I suspect the smart money will probably be on history repeating itself.