Orcadian Energy Advancing North Sea Projects with farm-in opportunity transformed

With the UK’s renewed focus on energy security, North Sea Oil & Gas stocks have been getting attention with a number of retail micro cap favourites seeing significant share price increase. The relatively new kid on the block Orcadian could trump the lot.

It’s a tough market but some sectors are going to flourish

There is no denying for the average retail investor and even bigger players it’s a bleak market at the minute, but even in hard times like this there are opportunities. Some aren’t so obvious, but Orcadian Energy which I recently wrote a research note on has just effectively benefitted from the new UK Energy profits levy!

So much so that what might have initially seemed a tall order in terms of raising Capex investment for its Pilot field, looks like it just got a lot easier with effective finance 75% cheaper!

How? Well the new levy returns 75% of tax paid by energy companies paying the new Energy Profits Levy and UK ring fence corporation tax. This would mean for example, a farm-in partner to Pilot could spend $1bn on Capex (the total amount) and receive tax relief of $750m, this effectively reduces the Capex investment to $250m

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This is truly significant for Orcadian who control the Pilot field license but also for any larger energy company (farm-in partner) wanting to claw back the energy tax by way of a 75% reduced investment cost. Given the size of the Pilot field (79MMbbls 2P reserves) with an NPV of over $1bn today, any investing company (partner) would see large effective increase in the project IRR.

For Orcadian who have just announced they have initiated the structured farm-out process this could result in a partner footing a large chunk of the development bill or even free carry with no costs to Orcadian allowing them to progress other licenses. Speculation on my part but the point is the game just changed for N Sea Oil & Gas juniors and particularly Orcadian who have a fully appraised development ready field that can produce up to around c.30k bopd at a cost of under $40bbl.

You can read a lot more detail in my research note here about Orcadian, its licenses and its market leading approach to low emissions that would put its Pilot development on an emission basis at an eighth of other N Sea Oil and Gas project emissions (so I want regurgitate that here). The UK NSTA (Oil and Gas Authority) have already sent a letter of no objection to Orcadian regarding its low emission development approach.

Field Development Plan submitted

The company have also just announced they have submitted the draft Field Development Plan (FDP) for Pilot to the NSTA. This is a key milestone and the company will now liaise with the NSTA to refine and finalise it. To fully complete it, will require a finance plan to be confirmed hence the initiation of the Pilot farm-out process which given the new Tax Levy we discussed earlier could come pretty quickly.

Seismic Acquisition deal announced

If the firm haven’t been busy enough already, they’ve just announced a deal with TGS who own seismic data over a large chunk of Orcadian’s licenses and nearby licenses.

This high quality data will be used to better understand other prospects in Orcadian’s portfolio. Orcadian has 79MMbbls of 2P reserves in the Pilot field, 78MMbbls of 2C Resources in Elke, Narwhal and Blakeney discoveries, and 191MMbbls of Prospective Resources across its Western Platform licences.

Many probably don’t realise that the Pilot field sits within the Top 5 Pre-FID Liquids Fields in the North Sea by resource size, if you add in the 2C resources and the other prospective resources they probably come in the top 2.

Hence the importance of this seismic acquisition which comes with a deferred payment deal until the Pilot FDP is approved. In fact this also gives Orcadian high quality data to assess other potential licenses due to come up in the 33rd licensing round.

Orcadian is sitting at a valuation currently c.2-3x lower than other N Sea peers with either less overall resource or importantly ‘2P reserves’ (meaning the project is de-risked having completed all appraisal drilling and flow tests to progress onto financing and finalising the FDP).

Given the renewed focus on the North Sea Oil & Gas sector, the Tax Levy incentivising project investment, Orcadian with a development ready project and other advanced projects and prospective licenses, Orcadian and its shareholders look well set to benefit.

You can read more in my research note here

As always, I welcome feedback and you can follow me and message on twitter. https://twitter.com/TheMoneySponge


Research materials prepared based upon my own analysis and research. Accuracy cannot be guaranteed and research notes should not be taken as investment advice. Please always do your own research.


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