United Oil & Gas Plc (UOG) is pleased to provide an operational and corporate update to shareholders including the commencement of gas production at the Al Jahraa Field in the Company's 22%-owned Abu Sennan concession, onshore Egypt, and measures taken in response to the COVID-19 pandemic and ongoing oil-price volatility.
· Completion of low capital expenditure gas pipeline project at Al Jahraa
· Production of gas and elimination of flaring increases gross production in Egypt to c. 8,400 boepd (c. 1,850 boepd net) - more than doubling the production compared to 12 months ago
· All Egyptian production, including new gas supply, has positive operational cashflow, even at current low market prices
o Low operating costs at Abu Sennan of around $6.5/bbl provide solid operating margins even at low price levels
o The Company's pre-payment facility with BP provides downside price protection by effectively hedging 6,600 bbls of oil per month at $60/bbl for the next 30 months
o c. 20% of United's net production is gas which is sold under a fixed contract that is relatively insensitive to oil-price changes
· Drilling operations are continuing at the El Salmiyah 5 infill well within the El Salmiyah field
Response to Market Conditions
· Proactive measures taken by United and its partners to reduce near-term Capex commitments during current oil-price uncertainty and the impact of Covid-19
o Deferral of Italian Capex improves cash flow and moves expected first gas slightly to H1 2021
o Deferral of Egyptian Capex reduces 2020 infill campaign from 4 to 2 wells, significantly reducing gross 2020 Capex estimates. Further optimisation of the Capex and Opex budgets is being considered.
o Completion of post-Egyptian-acquisition licence review sees divestment plans for selected non-core assets in the Wessex Basin and a decision not to exercise the farm-in option in Benin
o Substantial cut in administrative expenditure resulting in further cost savings
· Measures taken to minimise the impact of oil-price uncertainty and Covid-19 will help safeguard the company during the current industry challenges, with the aim of putting it in a position to take advantage of future opportunities
Brian Larkin CEO, United Oil and Gas
I am delighted that production in Egypt continues to rise, helping to compensate for the lower oil prices. Since the effective date of the acquisition, gross production at Abu Sennan has now more than doubled to c. 8,400boepd which, thanks to low operating costs, remains profitable at today's oil prices. The completion of the gas pipeline at Al Jahraa was achieved at low cost and based on current projections, will pay for itself within months. The associated reduction in flaring has also improved the environmental performance of the licence. We are currently drilling the El-Salmiya 5 infill well and we look forward to updating our shareholders on progress shortly.
"Post completion of the Egyptian acquisition, we indicated our intention to review our portfolio and to optimise our investment strategy. The economic and political uncertainty created by Covid-19 and the current low oil prices have created considerable challenges for our industry. United's leadership team have reviewed our business in-depth and have mapped out what we believe is a sensible course through the months ahead. We are focussing on investment which we believe will deliver the most immediate return for our business. Where expenditure can be deferred with limited impact, we are doing so. Where expenditure or indeed where licences offer a more uncertain or marginal return, we are being prudent and stepping away.
"United's goal is to focus expenditure where it can deliver immediate benefit, maintain cashflow and emerge from this period of uncertainty in a position of strength, relative to the industry. We believe that this strategy can achieve that. We will continue to keep shareholders briefed on developments as they happen."
Al Jahraa Gas Pipeline and Production Update
The construction of a 10km gas pipeline, linking the Al Jahraa Field, which lies within the Abu Sennan concession, to the neighbouring KPC facility has been completed. The project made use of existing facilities, and total gross costs were kept to below $350k. Gas was brought onstream through the pipeline on the 22nd March, and since then the rate has increased to over 650 boepd (143 boepd net to United's 22% working interest).
Not only has the completion of the pipeline reduced the amount of flaring on the asset, it has also increased the overall gross production levels from the Abu Sennan concession to c. 8,400 boepd on a gross basis (1,850 boepd net to United's working interest). The current production levels are more than double where they were 12 months ago, and this has in part been driven by the recent success at the ASH-2 Well, which continues to produce at over 3,000 bopd. Plans to further develop this field are still being progressed.
Current Drilling Operations
The El Salmiyah 5 drilling operations continue. This is an infill well targeting multiple undrained reservoirs within the El Salmiyah field. The well is making good progress and we look forward to updating the markets on this well in due course.
2020 Drilling Schedule
Kuwait Energy Egypt (KEE), the operator of the Abu Sennan concession, has indicated that due to the current low oil price, they plan to reduce the 2020 Capex costs on the licence significantly. This will include deferring at least two of the four planned 2020 infill wells.
United are fully supportive of this approach, which will enable the asset to remain cash-flow positive in the current low oil-price environment. It is worth re-stating that the operating costs on the Abu Sennan concession are low, at around $6.5/bbl, providing solid operating margins even at low price levels.
In Italy, although Selva is continuing to progress through the approval process, this process has understandably slowed with the Government's critical focus on fighting the Covid 19 epidemic, and the target for first gas from the field is now H1 2021.
Although the Company had previously been keen to expedite this development programme, and we would wish the circumstances were otherwise, the delay and associated Capex deferral ($0.5m net) will help sustain cash reserves in the current low-price environment.
Markets will be aware that the licence operator, Tullow Oil plc has written down the value of the Walton Morant licence in their most recent Preliminary Results schedule.
United has indicated to the Jamaican authorities that it wishes to explore options for continuing to progress what United believe to be a transformative licence. Discussions have been initiated with the Government, and we will update the market in due course.
Review of Licences
Following completion of the Egyptian acquisition, United is now a full-cycle E&P company with net production of over 1,800 boepd. The Company had stated its intention to review the asset base and against the backdrop of uncertainty created by Covid 19 and low oil prices, is taking decisive action to rebalance the portfolio.
United will therefore not be continuing its option on Benin. Furthermore, when market conditions improve, United will be looking to divest its Wessex Basin portfolio. While the Company sees value in both of these licences, the Directors do not believe that they offer the best return for United at this time.
At completion of this process United will have strong production in Egypt, with short term production gains to be added in Italy. This is augmented by excellent development opportunities across Italy and Egypt, the low-risk Zeta prospect in the UK North Sea, and exceptional exploration potential in Jamaica.
United will continue to evaluate new venture opportunities during the current industry challenges, with the aim of putting the company in a position to move quickly should conditions improve.
United adopts a conservative financial strategy as evidenced by both the commodity price hedging and the mix of the capital structure. The Company's pre-payment facility with BP is based on a floor price of $60/bbl for c.6,600 bbls of crude oil production per month for the next thirty months. This provides downside price protection by effectively hedging this portion of production. Coupled with this, c. 20% of United's net production is gas which is sold under a fixed contract that is relatively insensitive to oil-price changes.
The Company has worked with the Operators of its key assets to reduce and defer capital programmes. The Company has also made significant decisions around the cost base of the Company and has implemented some significant changes which are expected to realise approximately $0.5m of annualised savings.
Under the terms of the Crown SPA, and subject to FDP approval, United expects a further $2.85m of net payments during 2020 from the sale of this asset.