SMALL CHAPTER IDEA: Deltic Energy gas discovery marred by unexpected tax hike

Small-cap oil and gas exploration in the North Sea is not as simple a business as it used to be.

A look at the London AIM market also tells us that it is also not as popular among speculators as it used to be.

In fact, at another time or if your assets were located in another country, the Deltic Energy currently it would have a much more substantial valuation.

At around 6p a share, or £5.8m, the company’s meager valuation is five times lower than the value attributed by Charlie Sharp, an oil and gas analyst at brokerage Canaccord.

The fact is that Deltic’s team of geologists is on a roll with a 100 per cent success rate and two of the biggest discoveries in the southern North Sea in more than a decade, although the projects are quite different from each other.

The Deltic team originated the Pensacola discovery that was announced in February 2023.

The Shell-operated well discovered almost 100 mmboe in the emerging Zechstein exploration field, which is yet to produce material volumes of hydrocarbons in the UK.

AIM-listed Deltic owned 30 per cent of Pensacola before being forced to abandon the project earlier this year after failing to attract further funding from industry or the stock markets to continue with the planned appraisal programme. .

Deltic’s withdrawal came after investors in the sector became discouraged by the prospect of further fiscal and regulatory turbulence in the run-up to the general election in July this year.

Given this context, it is surprising that Deltic’s second major discovery in the North Sea came within twenty-four hours of the UK government’s decision to make the tax environment even less attractive for oil and gas companies.

No favors from the UK government

Chancellor Rachel Reeves on Wednesday further increased the energy tax (which when oil and gas prices were higher was more commonly known as the “windfall profits” tax) and removed some (but not all) relief on capital investments.

“Last week’s Budget did a disservice to the industry and has reinforced the UK’s reputation as an unattractive destination for new investment in the UK’s local oil and gas industry,” the chief executive of Deltic Energy, Andrew Nunn.

‘Our experience with Pensacola has shown that even decent projects with an element of development complexity or risk are very difficult for investors to support due to the regulatory and tax environment.

“The best we can hope for is a period of stability that at least allows operators and investors to make decisions about high-quality projects like Selene with some degree of confidence.”

New gas discovery in Selene

The morning after the budget, Deltic announced a successful outcome from the Selene exploration well, which unearthed recoverable resources in the range of 95 to 176 billion cubic feet (BCF).

Deltic acknowledged that the discovery was at the low end of pre-drill estimates, but Nunn put the result in context saying that “although 131 recoverable BCF was at the low end of pre-drill estimates, we understand that it is still the second or third largest discovery. “Discovery, Pensacola being the largest, in the UK’s southern North Sea since Tolmount was discovered in 2011”.

Deltic also noted that the quality of the reservoir found was significantly higher than anticipated before drilling, which should lead to better production rates and could partly offset the impact of lower gas volumes.

Nunn added: “Leman Sandstone is a well-known deposit, having produced for over 60 years in the SNS, and this long production history means that the final investment decision on a Selene development could be made without further dedicated appraisal drilling. and there is abundant production infrastructure nearby.

“All of this lowers the investment hurdle required to get to FID and ultimately production, which in turn gives Deltic more options regarding a potential sale or downsizing of the asset or retaining the option. to bring it to development”.

The upshot is that Selene should be an easier proposition for the industry and investors to get behind this time around and Deltic could be in line to be adequately rewarded for the team’s efforts.

How Deltic extracts that value remains to be seen, but having made a material discovery clearly gives the company options it didn’t have before last week.

It could partially or fully monetize the asset in the near term, further reduce an element of its 25 percent stake, or potentially participate in the project through the development phase and monetize through production.

Meanwhile, Deltic will work with project partners Shell (until Viaro takes control of Selene from Shell in the first half of 2025) and Dana Petroleum to advance the project to a final investment decision.

Time will tell.

What’s next for Deltic?

If divestment is preferred, perhaps Selene’s reward is likely to arrive sooner rather than later, as FID could arrive relatively quickly.

The question then is what will be Deltic’s long-term proposal?

According to Andrew Nunn, the answer is quite simple. And more pertinently, it actually appears to be your competition.

‘Our key investors recognize the technical achievements of the Deltic team, but want those proven hydrocarbon search skills to be implemented in other jurisdictions where investors can be more confident in seeing a return on their investment.

“As a team, we have global experience and will focus on those areas with the right balance of subsurface opportunities and a supportive political and fiscal regime where we can leverage our 100% exploration success rate to ensure access to opportunities” .

When asked about the type of projects he is targeting, Nunn added: “Deltic will always be, first and foremost, an exploration company and most of our investors look for the significant benefits that can come from successful exploration.”

“At the same time, we recognize that we cannot continue to rely on equity markets to provide financing while we incubate those high-impact, longer-term opportunities, so we will initially focus on those smaller opportunities that will result in access to cash flow.” cash in the short term”. .’

Looking ahead, obviously much of the communication with investors will focus on Selene’s progression towards that key FID trigger and potential value extraction from the asset.

Meanwhile, investors will wait for deal news to inspire more value catalysts as Deltic pivots and reinvents itself overseas.