Morning View - Oil prices retreat as US/Iran tensions ease

Oil & Gas Daily Flow Non-Independent Research; Marketing & Sales Commentary - MiFID II exempt information – see disclaimer below Market Update: Thursday 9 January 2020  JKX Oil & Gas* (LON:JKX): Strong production base underpinned by a robust liquidity position Jadestone Energy (LON:JSE): Award of damages from Total Columbus Energy Resources (LON:CERP): Saffron reaches TD, onshore Trinidad Cairn Energy (LON:CNE): Senegal approval received   Energy Prices          Brent Oil US$66.0/bbl vs US$69.1/bbl yesterday WTI Oil US$60.1/bbl vs US$63.3bbl yesterday Natural Gas US$2.16/mmbtu vs US$2.14/mmbtu yesterday     Oil Price News Oil prices have retreated following due to an apparent ease of tensions between the US and Iran An upbeat Trump tweet served to defuse tension on the oil market, at least temporarily, with prices falling back from their initial highs that followed the Friday assassination Oil prices gained over 4% in the past week as the market priced in the potential of further attacks which may disrupt global energy supplies 20% of global oil supply flows through the Strait of Hormuz, a narrow shipping route between Oman and Iran. It was targeted last year by Iran, which seized two oil tankers in the strait and is an area of clear focus Heightened geopolitical risk is also underpinning fundamental support for oil prices The global inventory indicator reported a build of 50MMbbls of oil for Q418, while the last quarter came it at only 9MMbbls, indicating that the market is in an already tighter situation with regards to the supply demand dynamic Brent futures were down 0.8% to $67.3/bbl, whilst WTI futures were down 1.1% to US$60.7/bbl Gas Price News Natural gas prices traded flat yesterday and are attempting to stabilise after falling 1.7% last week   Demand rose last week despite mixed weather as it was driven by power generation and buildings sectors The weather over the next 6-10 and 8-14 days is expected to be colder than normal in the west and much warmer than normal in then east of the US, which is keeping prices capped  UK Sector Backdrop We enter 2020 with renewed optimism over the small-to-mid cap E&P space following a year of significant volatility 2019 saw the majors and independents curtail upstream investment relative to historical levels against a challenging macroeconomic backdrop Nevertheless, we have seen a shift in sentiment over the course of the year, with access to capital improving, and importantly, more generalist institutions returning to the sector UK equities in the Oil & Gas sector finished 2019 up 4.2% (2018: -16%) AIM Oil & Gas indices were flat in 2019 despite some volatility, yet stabilising 2018’s 13% decline These indices have largely tracked the oil price, and with the futures market also suggesting further upside and that current geo-political risk has not been fully priced in What does this mean for 2020? Significant volatility in commodity prices has given rise to unique investment opportunities in our view The small/mid cap constituents of the sector are due to engage in an active year of operational activity in 2020, with a number of high impact drilling catalysts including UJO LN**, ECO LN, RRE LN, SDX LN, HUR LN See our take on 2020’s outlook at: https://www.proactiveinvestors.co.uk/companies/news/909122/sp-angel-s-sam-wahab-discusses-hurricane-energy-eco-atlantic-tullow-and-union-jack-oil-909122.html** ** SP Angel acts as Nominated Advisor and Broker to Union Jack Oil Company News JKX Oil & Gas* (LON:JKX): Strong production base underpinned by a robust liquidity position Share price: 26.2p, Market Cap: £45.0m Link to Research Note JKX saw a 20% overall yoy increase in production from 8,937boepd to 10,748boepd, which includes a 52% increase in the Ukraine, following a total US$26m investment across the portfolio – entirely financed by operational cash flow. With production in Russia running broadly flat (currently 5,258boepd), we are encouraged by the company’s prudent approach to capital discipline ahead of an active 2020 work programme in the Ukraine.The company’s new WM4 well, located in the West Mashivska field, Ukraine, was completed in December and is now producing gas from the deepest of three hydrocarbon bearing intervals encountered, with a current rate of c.100boepd.  Production from the other two hydrocarbon bearing intervals is scheduled for later in 2020 which should see further incremental increases to this high margin production. NN82 is also now complete, and production is expected to start imminently. The rig is relocating to IG143, a follow-up well to the successful IG103 sidetrack and IG142 wells. Drilling of the R101 sidetrack by a second rig continues and is scheduled to complete in Q1 2020. In Russia, the workover and sidetrack of Well 18 has been completed and the well is currently producing at a considerable 1,282boepd. Well 5 production has been stable through Q4 at 400boepd with no further acid jobs carried out. The successful workovers of these two wells increased the number of producing wells to six and more than offset the production decline in Well 20.  Average daily production in 2020 is expected to exceed 5,250boepd without the need for further workovers.  JKX has confirmed a FY19 cash position of US$20.5m (FY18: US$19.2m). It is anticipated that the company will be debt free after the final bond payment of US$5.8m scheduled for February 2020. Access to undrawn credit facilities is maintained, although management is confident that execution of field development plans in Ukraine can continue to be financed from operational cash flow.  Conclusion: Today’s quarterly operations update will come as welcome news for shareholders and underlines the considerable progress made by JKX across its enviable Eastern European portfolio in our view. Recent drilling activity in the Ukraine has already added incremental value accretive barrels to the company’s production base, whilst declines in Russia at well 20 have been largely offset by Wells 18 and 5. 2020 will see a greater focus on the company’s Ukrainian acreage with the company fully funded ahead of an active work programme. *SP Angel acts as Corporate Broker to JKX Oil & Gas Jadestone Energy (LON:JSE): Award of damages from Total Share price: 88.2p, Market Cap: £412.6m Jadestone has announced an award of monetary damages, plus a portion of the legal costs and expenses, as a result of an arbitration action with Total. The company commenced the arbitration action in response to a breach of the 2012 farm out agreement with Total claiming that Total failed to drill an exploration well on the deepwater Halcon prospect, located within the block covered by Service Contract 56 in the Sulu Sea, offshore the Philippines. The tribunal found in favour of Jadestone, concluding that Total breached the FOA, awarding (i) monetary damages of US$11.1m and legal costs of c.US$4.3m.  After costs, the company anticipates it will not experience a significant change to its cash position. Total remains the operator of SC56 with a 75% interest, with Jadestone holding the remaining 25%.   Conclusion: Whilst a positive outcome for Jadestone’s shareholders, the fact that the issue couldn’t be resolved by the partners and little economic benefit to the company’s cash position does not bode well for the future of this relationship in the Philippines in our view. Elsewhere, Jadestone continues with its production-led growth strategy, cutting costs and continuing with selected M&A opportunities backed by a strong balance sheet, still well capable of paying dividends this year. Columbus Energy Resources (LON:CERP): Saffron reaches TD, onshore Trinidad Share price: 3.3p, Market Cap: £27.6m Columbus has updated the market on the much anticipated Saffron well, onshore Trinidad. The company has successfully completed drilling and casing operations for the Saffron well, reaching a total depth of 4,634ft as planned. The company completed open hole logging to a depth of 2,545 feet, with cased hole logging to TD currently underway with processing and interpretation to be completed in the coming weeks. In the Upper, Middle and Lower Cruse (the tertiary, secondary and primary targets), the company drilled multiple sand packages with high sandstone content and multiple oil shows to TD.  Management has confirmed that the full potential of the well will be evaluated in the coming weeks upon the processing and interpretation of the cased hole logging. The company is planning to complete and test the Saffron well in Q1 2020. Conclusion: Saffron represents a potentially material field for Columbus with unrisked STOIIP of 77MMbbls (Pmean) inferring a 11.5MMbbls recoverable in a success case. The company placed a pre-drill 45% CoS ahead of drilling and today’s update suggests all is running to plan with oil shows encountered. The waiting game continues. Cairn Energy (LON:CNE): Senegal approval received Share price: 204p, Market Cap: £1,200.3m Cairn has announced that the Government of Senegal has approved the Rufisque Offshore, Sangomar Offshore and Sangomar Deep Offshore joint venture and granted the Exploitation Authorisation for the Sangomar Field offshore Senegal. Commencement of the execute phase of the Sangomar Field Development Phase 1 (Sangomar Development) is subject to final execution of the Government of Senegal and the approval and award of key contracts. The Sangomar Development concept is a stand-alone FPSO facility with 23 subsea wells and supporting subsea infrastructure. The FPSO, expected to have a production capacity of 100,000bbl/d, will process the oil before it is exported to market via tankers. Conclusion: As expected, approval has been granted for the preliminary stage of this potentially transformational project for the joint ventures. First oil is targeted in early 2023, and importantly in our view, there will be scope for gas export to shore and future subsea tiebacks. Research – Oil & Gas Sam Wahab - 0203 470 0473 sam.wahab@spangel.co.uk Sales Richard Parlons – 020 3470 0472 Abigail Wayne – 020 3470 0534 Rob Rees – 020 3470 0535     SP Angel                                                             Prince Frederick House 35-39 Maddox Street London W1S 2PP   +SP Angel employees may have previously held, or currently hold, shares in the companies mentioned in this note.   Sources of commodity prices Oil Brent, WTI       ICE Natural Gas          NYMEX