IOG Southwark – A never-ending terror story

Independent Oil and Gas (IOG), delivered a blow to investors today with the news that the Southwark well is not commercially viable. Despite efforts to reduce water production, stabilized gas rates were limited to just 2.5 mmscf/d, leading IOG to suspend operations at the A2 well and evaluate alternative production and remediation strategies.

The company now faces a crucial decision on the future of its operations in the area. It needs to meet with its joint venture partner and decide shortly on whether to directly resume the Southwark A1 well or prioritize the Blythe H2 well. The latter is intended to increase production rates, increase reserves recovery, and limit water production, which would reduce onshore water handling requirements.

We should remember that they have only one asset in production (Blythe) and it is producing much less than initially expected due to water filtration. Furthermore, Elgood is currently offline and the timing to be back online is still unknown.

As of December 31st, 2022, IOG’s cash position is 32.4 million pounds. Currently, it is generating approximately 2 million pounds net per month. But it has to face the cost of the Blythe H2 drill is 13 million pounds, which will have to be added to the cost of completing Southwark A1 and the expenses incurred in Southwark A2. The company has not announced any new hedges for February

The outlook for IOG is not looking positive, as the company is facing a major obstacle in the form of a €100 million bond maturing in September 2024. Without a production increase, bond’ repayment is not possible, and refinancing is challenging. A capital increase could be an option in case neither A1 nor H2 is successful, but at the current share price levels, it may not produce enough funding without killing shareholders. On the other hand, IOG’s bond is secured and trading at a high yield but far away from a distressed one.

Summary of the Southwark setback for IOG

The Southwark setback has put IOG in a critical state as the funds are dwindling and a bond needs to be repaid, but current production is insufficient. IOG must make crucial decisions in order to stay afloat. Specifically, IOG must consider its options regarding Southwark A1, as it holds a crucial position in the reservoir and is situated close to a successful appraisal area. With limited resources available, IOG must be prudent in its expenditures.

IOG’s survival depends on A1 and H2 results. In the meantime, natural gas prices could add a bit of relief or drive another knife into this wounded company