Proactive Investors - Tough equity markets and the government playing politics with the North Sea mean that one of AIM’s most promising junior oil and gas companies is now at risk of losing its place in a project that would be worth $200 million to the firm.
Deltic Energy PLC (LON:DELT) today gave investors feedback from its ongoing farm-out process, which indicates that “continual tinkering” with the Energy Profits Levy (otherwise known as the ‘windfall tax’) has created fiscal uncertainty that has discouraged potential investors – this is exacerbated by “rhetoric emanating from the Labour Party”, it added.
The politicisation of the North Sea has had a severely negative effect on the ability of UK Exploration and Production (E&P) companies to commit to long-term investments in the North Sea, Deltic said.
The risk is increasingly acute for Deltic as it has until the end of May to demonstrate to Shell PLC (LON:SHEL), its venture partner, that it is capable of funding its share of costs for the next phase of work at the Pensacola discovery.
"The struggle to find a way forward on a project like Pensacola, which is one of the largest discoveries in the North Sea in recent decades, is a real-world consequence of our political leadership using the nationally important oil and gas industry as a political football at a time when energy security is of paramount importance,” Deltic chief executive Graham Swindells said in a statement.
Deltic added that the ‘difficult state’ of the UK equity market, especially for smaller companies, coupled with the political and fiscal regime, means that the board believes that accessing traditional equity capital is unlikely to be a viable option.
Deltic’s 30% share of the upcoming Pensacola well costs is estimated at around £15 million.
The company is continuing to consider alternative sources of capital and non-traditional funding structures, but it said there’s no guarantee that such capital will be available or available on acceptable terms.
It noted that its position is particularly frustrating given a recent independent assessment of Pensacola found its 30% stake to be worth an estimated $200 million (net present value), which its multiple times the company’s current market capitalisation – at 38.5p upon Monday’s close it was valued at £27.93 million in the market.
In January, consultant RPS Energy determined that Pensacola was a regionally significant hydrocarbon discovery, estimating Deltic's share of the resource amounted to some 21.8 million barrels (contingent resources), ascribing up to $205 million for a gas and oil field development which would equate to around 174p per share for Deltic shareholders.
Ths apparent validation was followed in February by Shell's update on its plans for a summer drill programme to push ahead with the discovery.
Shell inked a rig contract to drill one well at Pensacola and one well at the Selene project, where Deltic is also a partner. Drilling was slated to start between June and July.
It was described, at the time, as a "significant step forward for Deltic and a key milestone” for the project.
With the funding deadline now looming, the company warned investors: “If an industry and/or funding solution is not in place by the end of May 2024, being the point at which Deltic will be required to demonstrate its capacity to fund its share of costs, Deltic will be required to take steps to ensure the Company is not exposed to further expenditure on the Pensacola well … in such circumstances, Deltic will be required to withdraw from the Pensacola licence and transfer its interest in Pensacola to the Joint Venture partners.”
Graham Swindells, meanwhile, noted the remaining ‘lower risk’ value and potential in Deltic’s portfolio and said that the separate farm-out process for the Selene project has seen “an enhanced level of interest”.
“Given the impact of fiscal and political uncertainty on investment decisions we have seen a shift away from investment in larger standalone projects, like Pensacola, towards more affordable, lower risk opportunities which defer decommissioning or increase infrastructure life such as Selene, and the company's Syros prospect in the Central North Sea, where we have seen an enhanced level of interest,” Swindells said.
“We look forward to the start of drilling operations on the high-impact Selene exploration well, in which Deltic is fully carried for the estimated cost of the success case well, which remains due to spud in July 2024.
“In the meantime, we will continue to pursue all avenues to progress Pensacola and will update the market in due course."