Orcadian Energy

Orcadian Energy LSE:ORCA – When the market loses the patience

Date: 25th Nov 2022 – Orcadian Energy

Capital Structure

1Common Shares£16MM
2Preferred Shares0
3Debt£0.8MM

Main Shareholders

Orcadian Energy shareholders

 Stock Information

66.6MMnº shares
36k3mth avg vol
0.1Beta
    23 – 59.5p     52 Week Range

Orcadian Energy share price

Introduction to Orcadian Energy

Orcadian Energy (AIM: ORCAO) is a North Sea focused oil and gas development company. The Company’s key asset is the 100% interest in the Pilot oilfield, with proven and probable reserves of 78.8 million barrels (audited by Sproule BV). The Company also has 77.9 million barrels of 2C contingent resources (development on hold) in the Elke, Narwhal and Blakeney discoveries.

Why is Orcadian Energy special?

It is an exploration and development company in the North Sea with several promising discoveries and prospects, including some appraised fields. The main asset is the Pilot field and adjacent discoveries, and it is at the development stage with an ongoing farm-out process.

Orcadian has been at the forefront of the decarbonisation of the sector. In December 2021, Orcadian received £466,667 from the NSTA – North Sea Transition Authority – (former OGA) to “evaluate a new concept for the electrification of key producing oil and gas fields initially focussing on Central Graben area fields owned and operated by others”. The conclusions of this study were presented to NSTA in May 2022, which included the “Orcadian’s Microgrid Concept” for the electrification of offshore infrastructures. The measures included aiming to reduce scope 1 and 2 emissions of oil and gas production by minimising the supply of energy from onshore or the use of fossil fuel to power offshore facilities.

The company has embraced the use of enhanced oil recovery (EOR) techniques using polymer flooding from the start of production. This will greatly enhance the recovery factor (RF) above the UK North Sea average of 43%. This technique has been rarely used in the UK and seems particularly promising with high-viscosity oil like the one from the North Sea.

Consequently, Orcadian combines a set of unique characteristics that makes it a different player in the North Sea. It is well placed to combine low operational cost, and high RF O&G production with lower scope 1 & 2 emissions, which is fundamental for the future of the sector in the North Sea.

Assets

The company owns rights over a large number of fields and discoveries, including Pilot, Blakeney, Elke and Narwhal. Other discoveries include Pilot channels, Elke satellites, Bowhead, Tiberius and Bottlenose. Prospects include Feugh, Dandy, Crinan, Harbour and Fynn (Beauly and Andrew), and potential prospects include Titchwell, Carra, Ree, Thornham, Gill and Fullmar Lead.

The most important one is the Pilot field (Main and South), which has been fully appraised by 7 wells and its design concept has been approved by NSTA, who also extended the license to November 2023. This extension will allow Orcadian to complete the farm-out process while securing the approval of the NSTA for the Field Development Plan (FDP). The oil is viscous with API gravities ranging from 12° to 17°. Whilst the oil is viscous when compared to typical light oils in the North Sea, it is well within the limits where polymer flooding is considered to be effective. The estimation of the development cost varies from $720 million to $1,140 million (Sproule’s CPR).

The NPV10 of the reserves and resources were calculated in the Competent Person’s Report elaborated by Sproule. The calculations included gas purchases for power generation (equivalent to $36.9 million with a 10% discount rate), which has been eliminated in the concept design with in-situ power generation from wind and associated gas. Also, the USD-GBP exchange rate used was 1.35, when at this moment is 1.19, which increases the value in GBP. The reserves and resources (all 100% to Orcadian) for the Pilot and main fields are as follows:

Reserves

NPV10 of $159 million of Proved reserves and $654 million of Proved + Probable reserves. The Break-even oil price is estimated at $31.65 on an undiscounted basis and $38.65 on a 10% discounted basis.

  • Pilot Main: 230 OIIP MMbbls, appraised by 6 wells.
  • Pilot South: 33 OIIP MMbbls, appraised by 1 well.
 

Contingent resources 

NPV10 of $49 million of 1C risked resources.

  • Blakeney: P50 OIIP 91 MMbbls, discovered by 1 well (produced ~1,850 bopd), risk factor 72%
  • Elke: Best OIIP 130 MMbbsl, discovered by 1 well, excellent reservoir quality, risk factor 79%.
  • Narwhal: P50 OIIP 26 MMbbls, discovered by 1 well and 1 dry well, excellent reservoir quality, risk factor 79%.
Contingent resources - Orcadian Energy

Prospective resources 

NPV10 of $12 million of 1U risked resources

Pilot Channels: incised feeder channels connected to the Pilot Main and Pilot South accumulations and mapped from seismic.

  • North: P50 OIIP 31 MMbbls, 50% CoG.
  • Central: P50 OIIP 17 MMbbls, 50% CoG.
  • South: P50 OIIP 11 MMbbls, 20% CoG.
  • Far South: P50 OIIP 24 MMbbls, 40% CoG.
Elke satellites:
  • Updip West: P50 OIIP 51 MMbbls, 87% CoG.
  • North: P50 OIIP 30 MMbbls, 66% CoG.
  • Area 2: P50 OIIP 35 MMbbls, 64% CoG.
  • Area 3: P50 OIIP 38 MMbbls, 64% CoG.
  • Main Channel: P50 OIIP 20 MMbbls, 64% CoG

Bowhead: P50 OIIP 123 MMbbls, 49% CoG

Tiberius: P50 OIIP 63 MMbbls, 19% CoG.

Bottlenose: P50 OIIP 76 MMbbls, 18% CoG.

Oil price Sproule

Other discoveries and prospects include

  • Dandy: Best OIIP 12.2 MMbls, 3 wells (2 wells produced 1,016 and 1,080 bopd, resp.).
  • Crinan: Best OIIP 14.9 MMbls, 1 well.
  • Feugh: Best OIIP 30 MMbbls, 1 well.
  • Harbour: Best OIIP 9 MMbbls, 1 well.
  • Fynn – Beauly (50%): Best OIIP 137.4 MMbbls.
  • Fynn – Andrew (50%): Best OIIP 49.5 MMbbls.

What is the current situation of Orcadian Energy?

Orcadian is completing the farm-out process for the Pilot field, which is a requisite for the approval of the FDP by the NSTA. The concept design has been already approved by the NSTA and the license was extended to November 2023. The draft FDP was submitted in June 2022.

The company has continued to improve its knowledge of its licenses, acquiring seismic data from TGS (in exchange for a 1% royalty) for the Narwhal-Elke area and Carrick (a cashless 50% farm-out in exchange for a deep review of ORCA’s and Carrick’s combined data) for the Carra prospect.

The “new” Energy Profit Levy and its allowances

The outcome of Orcadian’s study to decarbonise UK oil and gas production was included in its concept design for the Pilot field. The design contains floating wind turbines backed by highly responsive gas-powered generators, acting as battery power, which will use the associated gas produced in the oil extraction. As a result, the need for an energy (gas or electricity) supply from shore will be eliminated, which lowers the development expenditure and operating costs.

The addition of a floating wind turbine will allow Orcadian to benefit from the maximum allowance of 109% of capital expenditures without incurring additional costs or changes in the FDP. Thus, the discounted development expenditure greatly benefits from the changes introduced in November.

What is the Financial Situation of Orcadian Energy?

Orcadian is pre-revenue, and recently completed two placings in June 2021 (£3 million at 40p/share) and June 2022 (£1 million at 35p/share). The company lacks the necessary funds to complete the development of Pilot or any other field.

In July 2021, Orcadian converted all 2020 and 2021 Convertible Loan Notes into 3,928,572 ordinary shares for 28p each, which were valued at £1.1 million in total. The only debt the company has as of today is a “STASCO Loan” with a value of £815,185.

The expenses in the second semester of 2021 reached £519,650, with £666,822 in purchases of exploration and evaluation assets, totalling £1.18 million in outflows. The cash position was over £1.5 million the 31 December 2021.

We have not identified any relevant or exceptional expenses during 2022; the opposite, the income to complete the study for the NSTA should have covered an important share of the total personnel expenses during the first months of 2022. However, the expenses in the second semester of 2021 were 286% higher than in the previous year, due to the concept design preparation, quotation process for the FPSO, continuous technical analysis for the different discoveries and ongoing preparation of the FDP and farm-out processes.

Currently, there are 66,612,317 shares outstanding, after the placing completed in June 2022. In July 2021, the company issued 40,000 warrants with an exercise price of 40p and an expected life of 3 years. Fully diluted, the total number of shares of the company is 66,652,317.

Hence, the company shall be fully funded for completing the farm-out process for the Pilot field and continue the preparation of other assets. However, the financial results for the first semester of 2022 have not been published when this report was written.

Management Orcadian Energy

Orcadian was founded by his current CEO, Stephen Brown, who is a petroleum engineer and held positions in BP, Halliburton, Challenge Energy, Petrofac and Setanta Energy. The CFO, Alan Hume, held positions in Halliburton, Brown & Root, Rockwater, Xtract Energy plc, Elko, Zenith Energy, and Edison Mission Energy. The CTO, Greg Harding, has held positions in BG, Gaffney Cline, Union Texas, Kerr McGee, Challenge Energy & Setanta Energy. The Chairman has held several executive and non-executive positions in O&G companies in the UK, including Setanta Energy.

Orcadian Energy management

Other scenarios

Using the data from Sproule’s CPR (OPEX of $31.65/barrel and capital costs of $702 million ex-FPSO) for the development of the 1P reserves and using a chartered FPSO with a day rate of $150,000, the NPV is lower in exchange for a significative reduction of the capital requirement. Also, the CPR has not considered the reduction of the OPEX due to replacing the purchase of gas from onshore with 1 or 2 wind turbines. Hence, the NPV for the three scenarios (building FPSO, chartering FPSO and chartering FPSO with lower OPEX) are shown below, considering construction to begin in 2023 and the first production in early 2025, an average GBP-USD exchange rate of 1.30, a cost of the wind solution of $30 million and an average inflation of 6% since 2021:

As it is shown above, the reduction in CAPEX due to chartering the FPSO gives room for lower, targeted CAPEX aimed at lowering OPEX. As a result, there can be a balance between the initial costs and the value of the project.

Orcadian Energy NPV

Conclusion about Orcadian Energy

The Pilot field is a low-risk development (7 appraisal wells), with the potential to produce more than 150 million barrels of oil with an RF of 60%, 15% above the North Sea average, thanks to the use of

polymer flooding. In addition, its “Microgrid” concept to power offshore infrastructures is aligned with the maximum allowance (109% of CAPEX) in the last Energy Profit Levy. This will also strengthen the negotiating position of Orcadian, reducing the working interest to be granted to the farm-in partner. However, we lack clarity on the impact of the measures included after the completion of Sproule’s CPR, such as the use of wind turbines and the chartered FPSO, but the numbers given above show that there is a margin for optimising the total capital cost of the project.

The company has minimised the dilution since the IPO in June 2021. Financially, no major expenditure has been done since IPO, but administrative expenses have increased significantly. The current share price of 24p (24/11/2022) is 30% below the price of the placing completed 5 months ago and 38% below the IPO finished 17 months ago. The current market cap of £16 million with a single loan of £815,185 makes the Enterprise Value amount to £16.8 million.

Management owns more than 60% of the shares, which aligns them with the rest of the shareholders.

The company is out of the radar of virtually all professional and retail investors, as the activity in advfn.com, lse.co.uk or Twitter shows. Furthermore, the share price didn’t even react to the extension of the license. However, it is important to consider that the daily volume is low and it has surpassed a daily volume of 100,000 shares only once in the last 3 months.

The main concern is the final conditions of the ongoing farm-out process. A successful completion of the farm-out process is difficult under the current economic and political conditions, thus, chances that the project is completely funded whilst Orcadian retains >30% of the ownership are low. Nevertheless, the sale of the Pilot project to a major (Shell, BP or Total) or medium-sized company (Serica, Harbour, Tullow or Perenco) seems the most likely option. However, higher oil prices are foreseen in the short term (Brent 2024 futures in the range of $77-$80/bbl) giving an additional upside compared to the base case of Sproule’s CPR.

In summary, Orcadian Energy is a forgotten stock with low-risk, high-reward assets like Pilot, a stable financial position, a motivated management team and further growth opportunities. At 24p the company is a bargain, the EV of £16.8 million does not reflect the potential of Pilot and other fields. Orcadian is an opportunity to buy an O&G business with the potential to become a multibagger in just 3 years.

 

Author: Alejandro Varas (Alxo)

Disclaimer: The author has a long position in the company. This article expresses a personal opinion and it is not investment advice, nor a recommendation to buy or sell this stock.

 

Note: Every week, we publish several articles about the companies in our portfolio (analysis of quarterly results, the impact of events,…),  macroeconomy, new investment thesis and quarterly letters about the evolution of the portfolio.

Follow us on Twitter!