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Cabot Energy* (CAB): Update on Financial Position
Cabot Energy
We are discontinuing coverage of Cabot Energy, due to a reallocation of analyst resources. All prior production and financial estimates, as well as research ratings and target prices must no longer be relied upon.
Oil prices continue to rise on news that two explosive drones had hit two pumping stations on a Saudi Aramco pipeline; The terrorist drones are reported to have created minor damage and a fire but caused Saudi Aramco to close the pipeline as a precaution; The drone attacks follow attacks on two Saudi oil tankers in the Straights of Hormuz though it is not known who launched the attacks. Iran has distanced itself from the shipping attacks describing the US military presence as a target rather than a threat.
Cabot’s shares have been subject to extreme volatility in the last month following (1) the disclosure of liquidity issues; (2) an equity funding that may need to be boosted by further issue of new equity; and (3) uncertainty in Italy following a moratorium on exploration licences. Therefore, until we have more visibility on the outlook for the company, we will put our rating and target Under Review.
1H18 production was 761 bbl/d in Canada (GMP FEe 1H18: 826 bbl/d). Cash at 30 June 2018 was US$6.2 mm (GMP FEe: c. US$10.0 mm). Canadian activity for 2H18: high-grading sufficient well targets for a 2019 drilling programme, targeting cost savings of new wells by 30% through simpler designs; lower cost drilling rigs and supply chain efficiencies; and implementation of strengthened capital project reporting and control processes
Cabot Energy (CAB LN)1 : Speculative Buy, £0.10; 2Q18 operational update | Trinity Exploration & Production (TRIN LN) (not covered): 2Q18 operational update in Trinidad &Tobago | SDX Energy (SDX LN/CN)1,6: BUY, £0.80; Gas discovery at SD-3X well, Egypt
CAB 3BE SDXEF
FY17 gross oil production stood at 411 bbl/d, up 42% from 2016.The company continues to expect to produce 1.6-2.0 mbbl/d in Canada by YE18 and 1.0-1.2 mbbl/d on average during 2018. The acquisition of the the Civita gas field in Italy is expected to complete in 2018. At the end of March, Cabot held US$10.3 m Revenue was up 33% to US$4.8 million from US$3.6 mm in 2016.
April production in Canada has averaged 950 bbl/d so far. An additional 200 bbl/d is expected to be in production in 2Q18 following (1) the repair of a pump, (2) production optimisation on two wells and (3) the replacement of a pipeline section.
In Canada, three further good sidetracks individually flowed 100-626 mbbl/d on test. These wells are expected to add a total of 420 bbl/d. January production was 827 bbl/d. Including the latest wells (+420 bb/d), with one more sidetrack expected this winter and up to six during the summer, the company production guidance of 1.0-1.2 mbbl/d FY18 average and 1.6-2.0 mbbl/d at YE18 looks very achievable. The 2P case (2.9 mmbbl at YE18) assumes only 18% recovery factor. Historically, 3D seismic has not been used to guide wells within the reefs. Boosting recovery factor to 30% could add c. 3 mmbbl reserves to the Kegg River Reef play only. In addition, the overlaying Zama horizon could be continuous and full of oil. While it has not been drilled extensively, achieving 15% recovery factor could add another 17 mmbbl recoverable resources. In Italy and with funding now in place, the company plans to shoot 3D seismic in 4Q18. This will unlock a potential farm-in process for two very high impact assets. Unrisked, Italy is worth over £4.00 per share. While production growth is gathering pace and materiality and newsflow in Italy exploration is getting nearer, the story should get much more traction.
Average production in Canada for the first half of January 2018 was 827 bbl/d, reflecting downtime due to scheduled pipeline inspection work. In December 2017, Canadian production peaked at 951 bbl/d with an average of 653 bbl/d for the month, given an inspection programme combined with extremely low temperature.
The 10-32 sidetrack well flowed at an estimated rate of 408 bbl/d of fluid, of which 344 bbl/d was oil during the final four hour flow period. The well is expected to produce dry oil once all the completion fluid has been recovered. The initial rate is expected to be c. 200 bbl/d to manage the longer term production potential of the reservoir.
Cabot is acquiring the 25% WI in the Rainbow/Virgo assets in Canada held by H2P, taking Cabot’s stake to 100%. Cabot is also buying H2P’s option to acquire a further 25% in the Canadian assets for US$4.0 mm. The consideration is US$8.71 mm, to be paid through new shares and deferred cash of US$1.75 mm. Cabot is also raising up to US$16.5 mm (£12.3 mm) at 5p/sh. The equity raise includes £8.9 mm from H2P. The funds will be invested in work programmes in Canada to double production by YE18 to 1.6 – 2.0 mbbl/d with US$18 mm FY18 Capex. At the completion of the transaction, Cabot will hold more than US$17 mm in cash. Overall, with H2P holding only a c.56% equity in Cabot (and no interest in the assets) on completion, this transaction simplifies the ownership structure while maximizing materiality and providing growth funding. Our new ReNAV for the firm stands at £0.07 per share.
Cabot has increased its gross 2P reserves in Canada from 1.9 mmboe to 2.9 mmboe (2.2 mmboe net) with NPV10 of US$36 mm (US$27 mm previously) as of 30 September 2017. The new 2P reserves are net of 0.13 mmboe produced over the previous year. All the reserves previously classified as probable have been upgraded to the proven category. The company has also converted 1 mmboe contingent resources into the 2P category. A seismic programme has established a large resources base that Cabot is looking to benefit from.
Northern Petroleum (NOP LN); SPECULATIVE BUY, £0.10: Transformational transaction | Mitra Energy (MTE CN): Speculative Buy, C$1.60: Results for the 6 months ending 30 September 2016
Cabot Energy Montanaro European Smaller Companies Trust PLC
Market reaction: positive on solid production but as well on a production outlook twice our expectations (we estimate 418 bbl/d in 2017).
slightly positive. With the addition of the latest wells at 9-25, production is now over the level achieved in the first part of April (449 bbl/d). The Company has now achieved its goal to increase production to over 400 bbl/d and is looking at the next step of growth. Importantly the cost of the associated programme was only US$0.5 mm, which is half what was initially budgeted. Note that variable costs per barrel of incremental production above 400 bbl/d are forecasted to be between US$4-10/bbl.
Production continues being strong with potential upside. The materially lower cost of incremental barrels is a good surprise which we had not factored in to such a large extent.
Market reaction: neutral, as operations are on track.
Market Reaction: Slightly positive. The Company continues delivering on its programme. With additional opportunities to grow production, our 2H16 forecasts of 400 bbl/d might be too low. The assets bought from Chinook are behaving well and have generated the low hanging fruit the Company hoped for. The increased production will allow the Company to recover the abandonment deposit freeing up some cash for a summer work programme. Net oil production in Canada in March was 432 bbl/d. Three additional wells are to come on-stream in April following completion of the workover programme. The 9-25 battery is awaiting regulatory approval before start-up which will initially add another three producing wells. Near term production will support the return of the US$1.4 mm abandonment deposit paid to the Alberta Energy Regulator in January. The Company now forecasts that these funds will be returned in three monthly payments starting in June.
Market reaction: neutral as its winter programme is on track to deliver 400 bbl/d on average for 2016, however the Company delivering on its plan in what is a difficult environment in good news.
Market Reaction: positive given that the cost of the programme to double production is now less than half the previous guidance.
Market reaction: Neutral. This is in line with expectations.
Market Reaction: Neutral. However the fact that some existing shareholders are following their money is encouraging.
We reiterate our Speculative Buy recommendation on Northern Petroleum with a target price reduced from £0.30 per share to £0.15 per share to reflect the dilutive nature of the £1.2 mm new equity issue. Northern is acquiring 1.2 mmboe 2P reserves in the Rainbow area in Northwest Canada with 200 boe/d production. The Company is funded to double production by next year. Overall production from the Company’s Canadian assets could support 2.5 mboe/d by 2019 through the development of c. 5.0 mmboe. Given synergies with existing operations, opex in Canada could drop from C$25-30/boe to C$15-20/boe over that period and the associated near term cashflow is enough to cover all the Company’s costs including G&A, which allows the group to move its very high impact assets in Italy forward.
Market reaction: positive as it buys the company more time to progress its high impact assets in Italy.
Market Reaction: Neutral.
Market Reaction: Slightly positive as this highlights what appears to be an improvement in the regulatory environment in Italy.
Market Reaction: Slightly positive.
Market Reaction: Very positive. Having EIAs now in place is expected to facilitate the farm-out process for these two assets. Our total RENAV for Giove and Cygnus is £0.32 per share.
Market Reaction: Slightly positive. The imminent return to production of two wells is encouraging and in line with our expecations.
