Orcadian Energy have one of the largest development ready projects in the North Sea although you wouldn’t think so given the apparent lack of visibility in the marketplace today – but will that change soon?
So, who are Orcadian…?
Orcadian are a relatively new entrant to the market having IPO’d at 40p back in 2021 so you’ll not likely have heard of them and a scan on social media reveals there isn’t much chatter on the company right now.
Arguably they came to the junior market at one of the worse times in recent history given the relative carnage caused by Covid and the War in Ukraine.
It’s been a tough time for investors but even in hard times like we have experienced of late there are opportunities and importantly some interesting ‘valuation disconnects’ that seem to be emerging.
I covered Orcadian in a research note last year and you can get a full overview of the company and its projects which includes its flagship development-ready Pilot field sporting 79MMbbls of 2P reserves and a significant oil in place total of 263MMbbls, in that note.
Amazingly the company’s shares now trade at a c.70% discount to the 40p/s IPO price!
In this blog I’ll briefly cover what Orcadian have been up to since my last blog as a ‘number of cogs’ have been turning and recent news-flow appears to have gone un-noticed!
So let’s talk about what they’ve been up to...
MOU with SLB – Nov 22
An important step towards finalising the Field Development Plan (FDP), Orcadian entered into a binding MOU with SLB (formerly Schlumberger) for the provision of core services for the proposed thirty-four well Pilot field development.
SLB bring renowned industry expertise and presented a strong commercial/technical proposal to Orcadian which would contribute to a lower cost and importantly lower emission field development using the latest technical approaches.
Orcadian’s MO is to spearhead lower emission North Sea development and SLB in this regard are a perfect partner. Orcadian and SLB are now working on a more comprehensive project agreement that should underpin the technical approach within the FDP.
Pilot Resource Upgrade – Jan 2023
The Orcadian management Team have completed an update of their estimate of technically recoverable resources for the Pilot field yielding an 18% increase to 97MMbbl (P50 case).
The uplift builds upon an independent CPR produced by Sproule in 2021. Sproule assigned 78.8 MMbbl of 2P reserves to the project, 1P reserves were 58.5 MMbbl and 3P reserves were 110.5 MMbbl. Orcadian will probably update the CPR at some point so 2P reserves could be c. 92MMbbl then (based on an 18% uplift).
Since listing Orcadian (with support from Axis), interpreted newly reprocessed seismic data over Pilot, which resulted in an uplift to the developed area oil-in-place. TRACS then constructed a range of geological realisations and the Orcadian team ran multiple dynamic reservoir simulations to establish a new range of technically recoverable resources.
A near 20% uplift in technically recoverable resources should further strengthen and enhance the economics of the project which at today’s spot price of $80 barrel is well in excess of $1bn NPV!
Near-term cash-flow opportunity…
Proposed Disposal of Crinan and Dandy Discoveries – JAN 2023
Again, seemingly un-noticed by the market, Orcadian have announced an interesting deal with Rapid Oil that if you take a deeper dive could be worth up to c. £12m (NPV at today’s oil price) in royalties over the coming years.
The deal suits both parties, Orcadian, as the assets are non-core with the potential to provide near-term cash-flow and Rapid as they are in the process of developing the close by Fyne field for which Crinan and Dandy would be obvious follow-on phase developments due to proximity and logistical synergies.
The company haven’t provided specific numbers at this stage but some basic ‘fag-packet’ calculations assuming a mid-royalty case of 3% an $80 oil price and resource of c. 7MMbbls (Rapid reserve estimate) would yield around £10m NPV payable annually from first oil which could be as early as late 2024 (subject to FDP approval). At $100 oil the NPV figure would be close to £12m!
On signing of a binding agreement, Orcadian will receive an up-front $100,000 payment with a further $400,000 on Crinan FDP approval.
This deal, should it complete, would be welcome cash-flow for the company as it progresses its plan to bring Pilot into production.
33rd Licensing Round – Jan 2023
The company have also announced this month that they have made an application for three licenses in the UK’s 33rd licensing round, part of the UK Governments renewed focus on increasing investment in the UKCS and securing domestic energy supply.
One of the licenses pertains to a more viscous oil type project building upon Orcadian’s expertise in this field and the two remaining licenses relate to gas opportunities totalling a potential 637 bcf, (114 bcf discovery) and one of which includes a gas to wire project on an appraised discovery which could deliver electricity with minimal emissions. This again is in-line with Orcadian’s approach to be a low emissions O&G company.
Further updates on whether the applications are successful are expected this year and would further diversify Orcadian’s portfolio.
Farm Out Process – Pilot Field
Last Summer Orcadian announced they had initiated a structured farm-out process on the Pilot field which could result in a partner footing a large chunk of the development costs or even free carry with no costs to Orcadian allowing them to progress other licenses.
With the EPL Tax relief situation still favourable for UK Energy companies (with 47% relief or 77% relief for CT payers meaning an investment in Pilot could cost just 23c in the $) Pilot is a highly attractive opportunity for a larger player to invest in at this stage with a view that the majority of field production and profits would fall outside of the 2028 EPL termination date.
The data room is open and of course recently Orcadian have upped the total resource estimate and progressed a core services partner – all of this will culminate in the final FDP.
I’ve been scratching my head somewhat as to why Orcadian has slipped under the radar and sits at now less that £10m Market Cap especially when you consider its resource size compared to peers and that it in fact has c.80MMbbls of 2P reserves with no further appraisal required. (You can see a peer comparison I did in my research note here) The likes of retail favourite Jersey Oil & Gas trading at 7x Orcadian’s Market Cap.
Perhaps it’s because the Pilot field is a heavier oil and there is a lack of understanding around this. Ithaca who operates the Captain field in the North Sea are already using a polymer flooding process to extract oil commercially which started in 2017 by then operator Chevron, in fact they are now progressing Phase 2 with a plan for seven new wells – Ithaca plans seven new wells in next phase of Captain EOR project
With Pilots costs at around $40 barrel you can see there is healthy margin at todays oil price. Perhaps Ithaca are one of those in the data room now?
So with the shares trading at around a 70% discount to IPO price, a resource upgrade, technical partner announced, active data room, EPL Tax incentives, a royalty deal struck that could be worth £10-£12m (NPV) and new license applications in progress, Orcadian could be ‘this years’ O&G play to watch and with the very low free float (Directors alone holding >60% of stock) will respond to heightened interest when it comes.
You can read more in my research note here
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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.