IOG.L Regulatory News (IOG)

12 July 2023

IOG plc

Half-Year Operational Update

IOG plc ("IOG", or "the Company"), (AIM: IOG.L) provides an operational update in advance of the Company's half-year 2023 results. The information contained herein has not been audited and may be subject to further review. An accompanying presentation is available on the IOG website and can be accessed via this link: https://bit.ly/3LuKbPW

Rupert Newall, CEO, commented:

"Following the successful intervention and production ramp up, the Blythe H2 gas rate has stabilised at 32 mmscf/d, within the 30-40 mmscf/d pre-well guidance range, with no indication of formation water. As expected, initial H2 production data indicates better reservoir quality than at H1 and supports our existing Blythe gas in place and reserves estimates. We expect 2H23 production to average in the 20-30 mmscf/d range.

The team has significantly improved operating performance over 1H23, delivering 93% operating efficiency and a cost reduction programme tackling both opex and overheads. In parallel we continue the constructive dialogue with bondholders to address balance sheet challenges caused by the Southwark A2 result and the sharp fall in the gas market.

As a new management team, we have been reassessing the most efficient strategy to create value for our stakeholders based on operating data since First Gas in 2022 and updated technical evaluation of the risks and rewards across the portfolio. In addition to the established Saturn Banks production infrastructure position, the portfolio comprises high permeability conventional reservoirs as well as tighter gas reservoirs which require stimulation. Whilst the latter have clear potential, the conventional fields can deliver more compelling returns on capital with lower development risk. Strategically, therefore, we plan to prioritise these opportunities, from the Western Cluster (Blythe and Elgood) to the Southern Cluster (Kelham, Abbeydale, Orrell) and the Central Cluster, where our latest technical work indicates conventional discovered gas development potential at Grafton and Tenby.

Our "Conventional Core" incremental investment case illustrates this potential for efficient capital deployment. This has a management estimated unrisked pre-tax IRR of over 90% at an average gas price of 75 p/therm (well below today's forward curve), which would be substantially derisked by a successful Kelham appraisal well. The broader portfolio has also extensive value to unlock beyond this, which could be further enhanced if we are successful in our nine 33rd Round block applications."

1H23 Operating Highlights

Blythe Production

· The H2 well gross gas rate tested at 42 mmscf/d directly after the faulty downhole valve had been fully opened. The subsequent gas rate ramp-up has stabilised at 32 mmscf/d, within the pre-well 30-40 mmscf/d guidance range.

· Initial H2 production data is in line with pre-well expectations:

o  Better reservoir quality at H2 than at H1 area

o  Indications that communication exists between H2 and H1 area

o  No indication of formation water production from H2

o  Consistent with remaining reserves estimates (FY2022: 1P / 2P / 3P 24.6 / 42.3 / 46.8 billion cubic feet equivalent (BCFE) 

· Gross 2H23 production is expected to average in the 20-30 mmscf/d range, based on initial decline rate expectations

o  Perenco Bacton terminal annual maintenance shutdown expected in Q3

· Reduction in water production is expected to reduce unit opex

· Shelf Drilling Perseverance rig has demobilised from Blythe with the associated mandatory shut-in completed within three days

o  Rig and associated vessel contracts in process of being terminated

Initial 1H23 Financial Information 

· Revenue before sales deductions in the period of £9.5m, impacted by lower production rates, lower gas prices and higher partner royalty payments

o  In periods of declining production and gas prices, the joint venture royalty formula increases the reduction in effective net economic interest beyond 20.2% of IOG's net 50% working interest, however in periods of higher production and gas prices this effect can reverse

o  The royalty is applicable to revenues from Blythe, Elgood and Southwark and is capped at £91m; total aggregate royalty paid to date is £16.1m

· Cash balance at 30 June 2023 of £20.3m, of which £7.3m restricted

· Maximising near-term cash flow remains a key priority; capital expenditure being minimised

· Ongoing constructive engagement with bondholders on near-term liquidity and longer-term capital structure solutions

Saturn Banks Portfolio: strategic focus on conventional gas

Conventional discovered gas opportunities

· Blythe: Potential for limited periodic H1 gas flow later in 2023, in addition to H2

· Elgood: Further production targeted from existing well by 2024 from limited remaining reserves

· Kelham: subject to funding, successful appraisal would open up the Southern Cluster that includes the conventional gas discoveries Abbeydale and Orrell

o  Dual-lateral appraisal well would test both Kelham North and Kelham Central structures

· P2589 licence (part of Central Cluster): ongoing subsurface re-evaluation indicates two conventional discovered gas opportunities with development potential as subsea tiebacks to the Southwark platform c.17km to the southwest:

o  Grafton (formerly Sinope South)

o  Tenby (previously Callisto North, initially developed in 2000)

o  Both to be further defined technically and economically

o  Additional conventional exploration prospects on block: Forest Row and Brockley

· Positive 33rd Licensing Round interviews held in May 2023 for nine SNS block applications which could add further conventional and tight gas resources to the Saturn Banks portfolio

Ongoing re-evaluation of tight gas assets

· Southwark re-evaluation continues; further technical and economic justification required for any return to A1 or A2 wells

· Nailsworth and Elland subsurface and deliverability to undergo further technical review over 2H2023 in light of Southwark A2 learnings

· Goddard due to be appraised by 31 March 2024 pursuant to licence terms and up to 50% has been offered for farm-out by the IOG-CalEnergy Resources (UK) Ltd joint venture

Incremental investment cases

Based on the latest subsurface and engineering work, two incremental investment scenarios have been worked up that demonstrate the significant value in the Saturn Banks portfolio. The economics benefit from extensive synergies given the established production infrastructure already in place.

Both scenarios also benefit from IOG's material tax loss and investment allowance position, which as at 31 December 2022 included ring fence³ tax losses of £239.3m and Energy Profits Levy losses of £21.0m and non-ring fence losses of £24.2m.

Conventional Core incremental development scenario

· Southern and Central Cluster conventional fields only (includes Kelham North/Central which is subject to appraisal)

· Base case gross unrisked recoverable resources of 239 BCF

· Entirely focused on higher permeability reservoirs that do not require stimulation

· 6 conventional subsea wells (3 per cluster): IOG classification: Tie back developments

· Tied back to Southwark platform and delivered into Bacton via Saturn Banks Pipeline System (SBPS)

· Base case monthly peak gross gas rate of 142 mmscf/d

· First gas 26 months from initial Final Investment Decision

· Estimated pre-production gross capex of £284m; total capex including compression, decommissioning and contingencies of £368m (15.4 p/therm)

· Gross project pre-tax Internal Rate of Return (IRR):

o  92% at average gas price of 75 p/therm

o  124% at average gas price of 100 p/therm

Full Portfolio incremental development scenario

· Southern, Central and Northern cluster conventional and tight gas assets (includes both Kelham North/Central and Goddard, both subject to appraisal) plus certain 33rd Round assets (subject to successful award)

· Base case gross unrisked recoverable resources of 591 BCF

· 7 conventional and 11 tight gas wells

· Two additional unmanned platforms, with tiebacks via the Blythe and Southwark platforms into the SBPS and on to Bacton

· Base case monthly peak gross gas rate of 239 mmscf/d

· First gas 23 months from initial Final Investment Decision

· Estimated pre-production gross capex of £743m; total capex including compression, decommissioning and contingencies of £1,091m (18.5 p/therm)

· Gross project pre-tax Internal Rate of Return (IRR):

o  63% at average gas price of 75 p/therm

o  89% at average gas price of 100 p/therm

¹TRIR is a 12-month rolling measure including all incidents reportable by law to UK regulators, irrespective of size or consequence, whether involving IOG personnel, duty holders or contractors, per 200,000 hours worked

²Emissions intensity measures Scope 1 and 2 emissions in kilograms of carbon dioxide equivalent per barrel of oil equivalent produced

³Ring-fence tax losses are losses applicable under the Ring Fence Corporation Tax (30%) and Supplementary Charge Tax (10%) that are levied on companies involved in exploration and production activities on the UK Continental Shelf

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the company's obligations under Article 17 of MAR.

Enquiries:

About IOG:

IOG is a UK developer and producer of indigenous offshore gas. The Company began producing gas in March 2022 via its offshore and onshore Saturn Banks production infrastructure. In addition to its production assets, IOG operates several UK Southern North Sea licences containing gas discoveries and prospects which, subject to future investment decisions, may be commercialised through the Saturn Banks infrastructure. All its assets are co-owned 50:50 with its joint venture partner CalEnergy Resources (UK) Limited. Further details of its portfolio can be found at www.iog.co.uk.