SMALL CAP IDEA: Deltic Energy gas discovery marred by tax hike

Oil and gas exploration by small companies in the North Sea is no longer as easy as it used to be.

A look at the London AIM market also shows us that it is no longer as popular among speculators as it used to be.

In fact, at another time or if their assets were in another country, the team went to Delta energy would currently be sitting at a much more substantial valuation.

At around 6 pence per share, or £5.8 million, the company’s paltry valuation is five times lower than the value assigned by Charlie Sharp, an oil and gas analyst at broker Canaccord.

The fact is that Deltic’s team of geologists is on a roll with a 100 percent success rate and two of the largest discoveries in the southern North Sea in more than a decade – even though the projects are quite different from each other.

The Deltic team engineered the Pensacola discovery, which was announced in February 2023.

The Shell-operated well has discovered almost 100 mmboe in the emerging Zechstein exploration project, which has yet to produce large quantities of hydrocarbons in Britain.

AIM-listed Deltic owned 30 percent of Pensacola before it was forced to abandon the project earlier this year after being unable to attract further industry or equity market funding to continue with its planned appraisal program.

Deltic’s withdrawal came after investors in the sector were put off by the possibility of further fiscal and regulatory turmoil ahead of the general election in July this year.

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

No favors from the British government

Chancellor Rachel Reeves on Wednesday further increased the energy tax (which when oil and gas prices were higher was more commonly referred to as the windfall tax) and eliminated some (but not all) exemptions for capital investments.

“Last week’s Budget did the sector no favors and has reinforced Britain’s reputation as an unattractive destination for new investment in the UK oil and gas industry,” Andrew Nunn, CEO of Deltic Energy, told Proactive.

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

“The best we can hope for is a period of stability that will at least allow operators and investors to make decisions on high-value projects like Selene with a degree of confidence.”

New gas discovery near Selene

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

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

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

Nunn added: ‘The Leman Sandstone is a well-known reservoir, having been producing in the SNS for over 60 years, and this long production history means that the final investment decision on a Selene development can be made without further dedicated appraisal drilling and there is abundant production infrastructure in close proximity.

‘All this reduces the investment hurdle required to reach FID and ultimately production, which in turn gives Deltic more options regarding a possible sale or run-down of the asset or retaining the option to roll it over 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 properly rewarded for the team’s efforts.

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

The company could monetize all or part of the asset in the short term, further reduce some of its 25 percent equity stake or possibly participate in the project during the development phase and monetize through production.

In the meantime, 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 bring the project to a final investment decision.

Time will tell.

What next for Deltic?

If divestment is preferred, it is likely that Selene’s payout will happen sooner rather than later as FID could come relatively quickly.

So the question is what will Deltic’s proposal be in the longer term?

According to Andrew Nunn, the answer is quite simple. And even more relevant: it does indeed seem to be his job.

“Our key investors recognize the technical achievements of the Deltic team, but they want to see these proven hydrocarbon discovery skills deployed in other jurisdictions where investors can have greater confidence in the return on their investment.

‘As a team we have global experience and we will focus on those areas with the right balance between underground opportunities and a supportive political and fiscal regime where we can leverage our 100% exploration success rate to secure access to opportunities .’

When asked about the types of projects it is targeting, Nunn added: “Deltic will always be an exploration company first and foremost and the majority of our investors are looking for the significant upside that can come from achieving exploration successes.

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

Looking ahead, much of the investor communication will naturally focus on Selene’s progress towards that key FID trigger and the potential extraction of value from the asset.

Investors, meanwhile, will wait for deal news to inspire further value catalysts as Deltic reinvents itself abroad.