Challenger Energy Group plc (LON:CEG), the Caribbean and Atlantic-margin focused oil and gas company, with oil production, appraisal, development and exploration assets across the region, has announced its Interim Results for six months to 30 June 2023.
CHIEF EXECUTIVE OFFICER’S REPORT
Dear fellow Shareholders,
The dominant themes of the first half of 2023 were the technical work program and farm-out process in relation to our AREA OFF-3 licence in Uruguay, ongoing efforts to reshape and improve our oil production business in Trinidad and Tobago, and the implications of these two activities on the financial position of the Company, as reflected in the unaudited interim financial statements for the half year ended 30 June 2023.
Exploration Acreage in Uruguay – primary focus and near-term value driver
Challenger Energy secured the AREA OFF-1 licence, offshore Uruguay, in May 2020. This was in the midst of the Covid-19 pandemic, when Uruguay was not yet on the global industry’s radar. At that time, this made us the sole licence holder in Uruguay.
Since the start of 2022, however, Uruguay has rapidly emerged as a global exploration “hotspot”. This followed directly as a result of sizeable discoveries made by two global supermajors (TotalEnergies and Shell) from respective “wildcat” exploration wells drilled offshore Namibia. Those successful Namibian wells greatly de-risked the presence of a high-quality, oil-prone source rock and charge, not just in Namibia but on the other side of the South Atlantic conjugate margin, and in particular in Uruguay’s offshore area, which is the geological “mirror” of where these Namibian discoveries were made.
As a result, and immediately following these Namibian discoveries, the industry view on Uruguay changed dramatically. Thus, in the first Uruguayan bidding round after the Namibian discoveries (May 2022), three licences were bid on and awarded to majors Shell and APA Corporation (formerly, Apache). Then, in November 2022, a further two licences were bid on and awarded, one to a consortium of Shell and APA, and the other to YPF, the Argentinian national oil company. The new entrants offered significant work program to secure their licences (as compared to the very modest work program we had bid to secure AREA OFF-1), and a number of other energy majors also registered to bid in the two Uruguayan open rounds held in 2022, but were unsuccessful.
These industry developments – globally significant discoveries offshore Namibia, interest from several majors in Uruguayan offshore acreage, and a resulting surge in Uruguayan licensing activity – validated our first-mover, low-cost entry into Uruguay, and confirmed that we had secured highly prospective frontier acreage, on advantageous terms, and with potential for considerable near-term value uplift. We thus rapidly moved to prioritise our Uruguay business through the first half of 2023, and achieved the following:
· First, we undertook an accelerated work program on the Area OFF-1 block (over and above the minimum work obligations), with a view to generating proprietary intellectual property and upgrading technical knowledge of the area, specifically in light of the new conjugate margin discoveries. The program of work included reprocessing of legacy 2D seismic data, advanced attribute variation with offset (AVO) analysis, seabed geochemical and satellite seep studies, full reinterpretation and remapping of all data, and an initial volumetric assessment. This work was largely completed during the period under review (January – June 2023), and was a resounding success, in that we have identified three technically robust primary prospects in the AREA OFF-1 licence area, that in aggregate represent a prospect inventory of approximately 2 billion barrels (Pmean) and up to 5 billion barrels (P10) – thus establishing that AREA OFF-1 is a material, world-class asset.
· Second, in view of the fact that taking AREA OFF-1 forward to 3D seismic acquisition and ultimately exploration well drilling, especially on an expedited basis, will be a technically demanding and capital-intensive undertaking, we resolved to seek an industry and funding partner. Thus, through the first half of 2023, we began preparing for a farm-out process, and commenced a formal, adviser-led process in June 2023. Since then, this process has proceeded well, and we have seen a high level of interest form a wide variety of industry participants. We remain confident that we will succeed in our effort to secure an industry partner by the end of 2023.
· Finally, we sought ways to expand our presence in Uruguay, given our developing knowledge base and energy understanding, the excellent working relationship established with ANCAP, and the attractive conditions in that country for hydrocarbon industry activity. In furtherance of this objective, in April 2023 we made an application for another shallow water offshore exploration block in Uruguay, AREA OFF-3, and in June 2023, we were awarded the block. AREA OFF-3 was the last available offshore acreage in Uruguay, and were able to secure it on attractive terms. The block has existing 2D and 3D seismic coverage, and based on initial assessment an estimated resource potential of up to ~500 million barrels of oil equivalent (“mmboe”) and up to ~9 trillion cubic feet gas (“TCF”), from multiple exploration plays. Formal signing of the licence is expected by the end of 2023, and once formalised, our Company will be the second largest acreage holder in Uruguay, with two high-quality assets in what has fast become a global exploration focus area.
In summary, therefore, the first half of 2023 represented a period of exciting progress for our operations in Uruguay. We undertook excellent technical work on AREA OFF-1 that firmly established the block’s prospectivity, we moved into a formal farm-out process for that block which we hope to conclude in the coming months, and we secured a second high quality block, AREA OFF-3, thus cementing our long-term position in Uruguay.
Focused Production onshore Trinidad and Portfolio Rationalisation
In August 2020, the Company completed the acquisition of Columbus Energy Resources Plc (“Columbus”), which significantly expanded the Company’s business through the addition of a portfolio of assets in Trinidad and Tobago and Suriname, including oil fields in active production.
During 2021 and 2022, work focussed on the task of integrating and operating those assets, “cleaning up” various legacy issues, and seeking to achieve organic growth in production from the existing onshore fields. However, as I observed in our last Annual Report, while we have been reasonably successful on the first two items, we struggled to achieve our objective of organic production growth. This was because our oil fields are mature, and having produced oil for many decades they are characterised by depressurised reservoirs, where the rate at which the remaining resource is produced cannot easily be increased. Thus, despite our efforts – which have ranged from application of efficient mature oilfield management practices and field improvements to enhanced oil recovery (EOR) initiatives and targeted production enhancement activities – production growth has proved elusive.
On the other hand, what we did observe is that notwithstanding field maturity, our production performance is reasonably consistent and predictable. And consequently, in late 2022 we reassessed our Trinidad operations and decided to focus on areas where we have a competitive advantage. This meant dividing our Trinidad portfolio in two parts, being “core” – consisting of the Goudron and Inniss-Trinity fields in south-east Trinidad, which represented about 85% of our production along with vast majority of resource allocation (manpower, rigs and so on), and “non-core” – consisting of our assets in central and south-west Trinidad, and our appraisal block in Suriname.
In relation to those assets considered “core”, we continued our focus on stabilising production, while at the same time looking for ways to increase production from “new oil” opportunities in and around our core area of operations in south-east Trinidad, with the following results during 1H 2023:
· core production from the Goudron and Inniss-Trinity fields averaged approximately 300 barrels of oil per day through the period, almost exactly the same as in the same period in 2022, and
· With a view to growing production in our primary geographical area of focus, we bid for the Guayaguayare block, one of the largest onshore exploration and production blocks in Trinidad (c. 306 km2). Our bid for this block was premised on (i) the fact that it is strategically and operationally synergistic with the Company’s existing presence in south-east Trinidad, (ii) we see good prospectivity in the block, it being amongst the largest remaining underexplored / undrained contiguous onshore areas in Trinidad, and (iii) the block contains approximately 65 historic wells, many of which the Company believes can be reactivated and serviced from existing operations, thus offering the opportunity for near-term production uplift at minimal incremental cost. In May 2023 we were notified that the Government of Trinidad has authorised the Trinidadian Ministry of Energy and Energy Industries to enter into negotiations for the potential award of the licence to the Company – these discussions are ongoing, and we will advise further on completion of negotiations with MEEI.
In relation to those assets considered “non-core”, we began a process to either monetise or exit from the assets, and made considerable progress during the first half of 2023. Thus, in Q1 2023 we completed the sale of South Erin asset, and through the period we continued to advance discussions with the Trinidadian Ministry of Energy and Energy Industries in relation to the proposed sale of Cory Moruga asset, which we hope to be able to complete in the coming months. We also continued to work on similar exit options for the remaining non-core assets we hold and most recently, in August 2023, we exited the Weg Naar Zee (“WNZ”) block onshore Suriname. The rationalisation of our portfolio is allowing us to focus fully on those assets of much higher potential impact, that offer greater scale and opportunity for near-term value creation from deployment of the same capital.
It is worth noting that our HSE&S performance in this period remained exemplary with zero LTI or reportable incidents. Following extensive preparatory work and audit, the Company achieved a two-year STOW-TT (“Safe to Work in Trinidad & Tobago”) certification in 3Q 2021, and through the first half of 2023 we prepared for the recertification process and audit, which has now commenced. STOW certification provides a standardised, independent system for certifying operators and contractors with respect to Health, Safety and Environmental delivery, which Heritage Petroleum Company Limited (the state-owned entity) requires of all contractors/operators, and is a central component of our “licence to operate” in Trinidad.
Therefore, in relation to our Trinidadian operations, the first half of 2023 represented a period of measured progress: core business production was constant and consistent, we began the process of monetising or exiting form non-core assets, we were able to advance new business opportunities in support of growing core business production, and we maintained our excellent performance track record when it comes to HSE&S. Overall, we continue to believe that an opportunity exists to create a profitable and growing production business in Trinidad, but to do this we need to be able to access “new oil” – that is, either finding places within our existing fields that have not been drained effectively and drilling new wells, or by getting new licences, and we saw the first successes in this journey during the first half of 2023.
Financial Review
The unaudited interim financial statements for the half year ended 30 June 2023 present details on the financial performance of the Company for the period, to which I add the following commentary, so that shareholders may better be able to contextualise the figures presented:
· The Company sold approximately 58,000 barrels (“bbls”) of oil during 1H 2023 (1H 2022: approximately 60,900 bbls), equating to approximately 320 barrels of oil per day (“bopd”) (1H 2022: 336 bopd). However, the Company divested its South Erin field in February 2023, resulting in lower oil sales during 1H 2023 as compared to 1H 2022. Oil sales from the Company’s fields excluding the South Erin field were approximately 56,000 bbls during 1H 2023 – in comparison, 1H 2022 oil sales excluding the South Erin Field were approximately 53,800 bbls. In other words, on a like-for-like basis, there was a 4% increase in barrels of oil sold, reflecting operational efficiencies achieved as a consequence of the Company’s strategy to focus on core assets.
· The Company’s revenue for the period was $1.9 million (1H 2022: $2.7 million). All revenue is attributable to oil sales in Trinidad, net of Government-take and other deductions and therefore reflect the Company’s cash revenue entitlement from oil sales. This represents a decrease of 30% as compared to the comparable period in 2022. Again, on a like for like basis (i.e., excluding the South Erin field), 1H 2023 revenue was approximately $1.8 million compared to $2.3 million in 1H 2022 representing a decrease of approximately 22% compared to 1H 2022. The reduction in revenue is largely attributable to approximately 30% lower average realised oil prices in 1H 2023 (of $63.52 per barrel) as compared to $90.50 per barrel in 1H 2022. Oil prices have since risen in 2H 2023, and we thus expect higher realised oil prices and revenues during 2H 2023.
· Through the period, the Company’s Trinidad business operated on a roughly “break-even” basis, in that total cash revenues met total cash costs, which ranged between $275,000 – $325,000 per month, the variance depending on field activity and the level of workovers, repairs and maintenance required in response to field performance each month. In an accounting sense however, certain non-cash charges (including depreciation, abandonment provisions and accrued interest on outstanding taxes (which the Company does not expect to crystalise in cash, in view of submissions made during Trinidadian Tax Amnesty period to offset against refunds due to the Company) are reflected in the income statement, which give rise to the reported operating loss.
· Excluding Trinidad, the Company’s net cash spend during 1H 2023 was approximately $2.3 million. Of this, approximately $1.2 million was in relation to the Company’s AREA OFF-1 licence in Uruguay ($0.5 million retained as restricted cash collateral for the work program performance bond, and the balance of $0.7 million spent on accelerated and expanded technical work program as described earlier in this report). The remainder $1.1 million largely reflects the Company’s corporate overheads and miscellaneous expenses, reflecting a corporate overhead run rate ranging between $175,000 and $200,000 per month.
Cash Position & Funding
In March 2022, in conjunction with completion of a comprehensive corporate restructuring, the Company raised approximately US$10 million, which was at that time “sized” for approximately 12 months of future operations. However, as a result of prudent management of capital, a significant reduction in corporate overheads, and the sale of identified non-core assets, the Company did not require any additional external funding during the first half of 2023, and ended the period with available cash of $1.6 million.
Subsequently, in August 2023, the Company established a £3.3 million unsecured convertible loan note funding facility (the “Facility”) to provide financing flexibility for various initiatives being pursued by the Company as well as to bridge working capital needs through to delivery of a number of cash generative options in the near-term, including those that may result from a successful Area OFF-1 farm-out process, and those anticipated from completion of the sale of the Cory Moruga asset in Trinidad.
In addition, the Company has approximately $0.8 million in restricted cash, being cash held as collateral in support of performance bonds for the various assets – notably, this includes $0.5 million in support of minimum work obligations for the Company’s AREA OFF-1 licence offshore Uruguay which have largely been satisfied.
Strategic Direction
In Uruguay, our early entry has transformed from being little more than “option value” to being a near-term opportunity for substantial value-creation. Looking ahead, the focus for the balance of 2023 in Uruguay is unambiguously on securing a farm-out partner for the AREA OFF-1 block, such that we can expedite future technical work program on the block and in particular a 3D seismic acquisition – we see this as the path to significant near-term value creation for shareholders.
In Trinidad the focus for the remainder of 2023 will be to continue the work of the last two years: maintain current production, drive improved financial performance, dispose of remaining non-core assets, and seek to strategically access “new oil” opportunities so as to expand the production base and create a bigger, more sustainable business.
As a significant shareholder myself – I now hold over 6% of the Company – I am fully aligned with all shareholders, and I remain optimistic about the prospects of Challenger Energy. We will continue to work diligently towards delivering on our objectives, and I am confident that eventually the equity market will pay attention and reward the value we are creating.
Eytan Uliel
Chief Executive Officer, Challenger Energy
29 September 2023
