Orcadian Energy have one of the largest development ready projects in the North Sea now with the prospect of a ‘free carried to first oil’ deal with Orcadian’s share worth $200M at todays oil price.
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, the War in Ukraine and of course the N Sea O&G tax regime.
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.60% discount to the 40p/s IPO price!
In this blog I’ll briefly cover the announcement Orcadian have recently made regarding a potential farm-in to the Pilot project which upon completion will transform the valuation, along with key milestones to look out for.
Before doing so, its also worth noting the latest announcement whereby the company have just raised more funds at a modest discount that based upon reported monthly cash-burn should see them with a significant cash runway.
Pilot Resource Upgrade – Jan 2023
The Orcadian management Team completed an update of their estimate of technically recoverable resources for the Pilot field yielding an 18% increase to 97MMbbl (P50 case) in 2022 – this increase is not mentioned in the potential farm-in deal as it’s not an official CPR. Orcadian do however expect under the FDP to yield an additional 5-10% resource so based on 7.5% increase that would push up Orcadian’s share to c15.5MMbbls.
The Numbers…
As mentioned in my research note, the company report a c.$40bbl break-even so at todays oil-price with say a $50 margin the current before tax value of Orcadian’s share of Oil would be c.$775M (free carried to first oil). Free carried means Orcadian don’t have to stump up any of the development costs including the significant capex requirement for an FSPO!
If we assume no EPL (Energy Profits Levy) as its due to expire in 2028 and apply a tax rate of 40% and then discount this we arrive at c.$220M
Lastly if we provide a risk factor of the deal completing and say there is a 50% chance this reduces the valuation to $110m which equates to around 120p per share based on shares in issue.
An even more conservative 25% risk factor would equate to a 74p per share.
These numbers are somewhat ‘fag-packet’ and don’t use a forward oil price curve but you can see that under various scenarios the deal is worth many multiples of todays 14p per share.
The terms of the Deal
The deal is currently at a non-binding Heads of Agreement (HoA) stage so early days however, there are good reasons to believe this deal will come to fruition which I’ll cover a bit later on…
Orcadian has granted the Operator a commercial exclusivity period until 30 November 2023. to complete definitive documentation for the overall deal
If the deal completes as documented in the HoA:
Orcadian and the Operator will be able to progress the development of the Pilot field, one of the largest undeveloped discoveries in the Central North Sea (“CNS”),
The Operator will become operator of the Pilot development and will acquire an 81.25% interest in Licence
Based upon the Competent Person’s Report (“CPR”) prepared by Sproule in 2021, the Operator will acquire net reserves or resources of 63.4 MMbbl on completion of the deal, with Orcadian retaining 14.6 MMbbl of 2P reserves, carried to first oil. (as mentioned above the resource share for both companies is expected to be c5-10% higher than these numbers)
Orcadian will retain an 18.75% carried interest in the Pilot development with the Operator paying 100% of the pre-first oil scope of work. After first oil, Orcadian will pay its working interest share of expenditure.
On completion of milestones relating to license extension and approval of the FDP, Orcadian would receive a cash consideration of up to $3.2m
What is significant from the above is that Orcadian still retain a healthy 18.75% of the Pilot project with not a penny to spend until first oil whereby they will pay their share of ongoing Opex etc. Notably, Orcadian will not have to contribute to the bulk capex item cost for an FSPO (a floating production and storage vessel)
Obviously due to commercial reasons, Orcadian cannot yet announce who the likely partner is but one can assume it’ll be a major N Sea player and possibly one with Polymer flooding experience such as Ithaca, but that’s a pure guesstimate on my part!
Reasons to be optimistic…
The UK is quickly waking up to the fact that we need to address energy security and there is a renewed focus on domestic oil and gas production as evidenced last week by the announcement that the UK regulator (NTSA) has given the go ahead for the UK’s largest untapped oil field, Rosebank. Approval notice here
In fact Ithaca Energy will be a joint investor with Equinor energy in the development!
Spear-heading greener Oil & Gas production ?
Just because the UK wants to and needs to re-establish North Sea Oil & Gas production it doesn’t mean doing so with disregard to emissions. Orcadian’s approach will be at the forefront of cleaner Oil & Gas production in fact the Pilot field development would put the emissions within the lowest 5% globally, this has been derived by using the Stanford University dataset.
This is brought about by operating a shorter field life (helped by the use of the Polymer approach), lower fluid handling, process and power generation optimisation and the use of renewables such as wind turbines with highly efficient back-up gas power when needed. The combined effect is an 80% reduction in emissions.
Not just a one-trick pony…
Whilst the focus of this blog is on the potential farm-in, because quite frankly its a huge step forwards its also worth remembering that Orcadian are active in the 33rd licensing round
33rd Licensing Round
The company announced earlier in the year 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.
Orcadian have advised that they expect to hear on these license applications Q4/2023 so anytime now basically.
Steps to a significant re-rate
It seems some smarter investors have already cottoned on to just how significant the farm-in news is and will be for the company and its shareholders as evidenced by the recent share price move, however
I’ll draw your attention to the fact that Orcadian still trades at just shy of £10m Market Cap. If you look at the comparison to peers graph I published in my original research note as a guide you’ll see Orcadian was hugely undervalued by comparison yet it had the largest of 2P reserves.
Perhaps this was due to lack of knowledge in Polymer flooding or perhaps it just wasn’t a retail favourite but the latest news of a potential partner at the table should change this I reckon!
Look out for…
For the farm-in deal to progress and become binding we need the NSTA to extend the second term of licence P2244 and also approve an out-of-round application for the area of former Licence P2320 to support the overall Pilot development. With a potential partner now at the table and the NTSA under pressure to ramp up N Sea developments, I suspect this is likely.
The two milestones above should hopefully come quite quickly (with a milestone payment of US$200K Orcadian can add into the coffers) which will then lead on to obtaining formal approval of the Pilot FDP (Field Development Plan) which Orcadian have already been progressing behind the scenes. On approval of the FDP, Orcadian will receive the US$3M milestone payment.
Lastly, as mentioned earlier we should receive some news on the 33rd licensing round anytime from now.
If the above come to fruition which is becoming more likely perhaps Orcadian is set to join its peers as a retail favourite with what I’d consider to be huge upside from its current sub £10M market cap level when comparing against peers trading at multiples higher but with fewer and/or less developed resource, some in riskier jurisdictions!
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
Disclaimer
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.
