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Angus derivative contract drills GBP110m hole in balance sheet

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Angus Energy [LON:ANGS] the AIM-listed, junior oil and gas exploration and production company has had a busy 2023.

And given the narrative of 2022 and the energy crisis generated by the War in Ukraine, one would expect Angus would be experiencing halcyon days, but the company’s stock has fallen 10.2% already this year.

Having opened the year at 1.5p, Angus shares had fallen to 0.91p by 16th February, opening at 1.3p this morning (8th March). Over the longer term, investors could cheer about a 81.5% one-year return. However over the year Angus’ shares have ranged from 0.74p to 2.95p over a 52-week period, giving the London-based explorer a current market cap of GBP50.5m.

So, as the snow flutters down over the UK once again, what has been going on with Angus in the short-term that has affected its share price in 2023, when logic dictates a company supplying gas to an energy-starved country should be living its best life?

Over-optimism

Well part of it may have been over-optimism in 2022 and this year has been a correction in the share price. It’s not like Angus hasn’t had its problems. In October 2020, Angus Energy was ordered to temporarily halt production at its Saltfleetby gas field by the Oil and Gas Authority (OGA), due to concerns about the company’s ability to safely operate the facility. The OGA cited a series of regulatory breaches and non-compliances as the reason for the suspension.

Finance has also been a past issue, in November 2020, Angus Energy announced that it was facing a cash shortfall and would need to raise additional funds to continue its operations. The company said that it had been affected by the COVID-19 pandemic, which had reduced demand for oil and gas, as well as by the temporary shutdown of the Saltfleetby gas field.

Its main backers have also been somewhat querulous, in December 2020, the firm was embroiled in a dispute with two of its largest shareholders, who called for an extraordinary general meeting to remove the company’s CEO, George Lucan, and three other board members. The shareholders accused the board of mismanagement and questioned the company’s strategy.

This was followed by legal issues. In January 2021, Angus announced that it was facing legal action from two of its former directors, who were seeking damages for alleged breaches of contract and unfair dismissal. The company said that it would defend the claims vigorously.

Uncertainty and instability

Overall, there has been an air of uncertainty and instability swirling around Angus Energy in the last few years, which has made it difficult for the company to achieve its goals and objectives. However, the company has said it is taking steps to address these challenges, and 2022’s rally indicated that the gas producer might be putting some of its problems behind it.

Angus has also faced a number of production issues in recent years, particularly at its Brockham and Lidsey oil fields. In 2018, Angus Energy experienced mechanical problems at its Brockham oil field, which caused the company to temporarily suspend production. The company said that it was working to repair the equipment and resume operations as soon as possible.

The following year the firm was dealing with issues of water ingress at its Lidsey oil field, which led to a decline in production. The company said that it was implementing measures to manage the issue, including the installation of additional equipment.

As mentioned earlier, Angus Energy has faced regulatory issues related to its production operations, particularly at its Saltfleetby gas field. The Oil and Gas Authority (OGA) ordered the company to temporarily halt production in October 2020, due to concerns about the company’s ability to safely operate the facility.

In its 2020 annual report, Angus acknowledged that it had faced challenges with maintaining and repairing its production equipment, which had led to some production delays and downtime. The company said that it was implementing measures to improve its maintenance processes and reduce downtime.

Regulatory scrutiny

All these issues have affected Angus Energy’s output and profitability and have also led to some regulatory scrutiny and public criticism. Covid-19 hit the sector overall, as lockdown led to a reduction in demand globally, and in the UK, for oil and gas, which caused problems for juniors and majors alike.

But the (so-called) post-lockdown bounce-back, combined with Russian gas being taken out of the mix following the invasion of Ukraine, has more than compensated for Covid losses, and regardless of windfall taxes the oil sector has been experiencing a period of record highs and record profits. This shot in the arm has given Angus a path to redemption – but remember all ships rise in an incoming tide and it’s down to the investor to sift the good from the bad.

Financial pressure

Back in December, Angus went back to the market for more money, to fund ongoing operations and settle a hedge liability, raising GBP7.1m, of which GBP1.48m was conditional on shareholder approval. The placement saw Angus issue 115 million shares raising GBP1.89m, a further GBP3.7m through a subscription placement of 226 million shares and – subject to approval by shareholders – another 89 million shares that would raise GBP1.5m through subscription.

The placing shares were accompanied by the issue of 57.5 million warrants. The initial and conditional subscription shares will be accompanied by the issue of 158 million warrants, which entitled the holder the right to subscribe to one additional new ordinary share at the fundraising price, exercisable for three years. This was also subject to investor approval.

Angus has, for a while been casting far and wide for funding. It has approached institutional investors for debt financing and taken on strategic partners, but the company’s financial position remains somewhat precarious and in the past has acknowledged that it is dependent on external funding to support its operations. The success the management has in finding financial support will likely be a key factor in determining its long-term prospects.

The company was considering putting itself up for sale in January 2021.

Positive signalling

Despite this, management seemed quite chipper in the financial report they released yesterday, with Patrick Clanwilliam, Angus’ chairman saying: “With gas production at Saltfleetby increasing the company looks forward to positive cashflows for the year ahead. The board will focus on maximizing the potential from our existing portfolio, including its geothermal projects and accelerate its evaluation of new projects to complement production from Saltfleetby.”

The group realised GBP3.1m from production in 2022 and did not recommend the payout of a dividend.

The company reported a loss of GBP112m for the year ended 30th September 2022, which included a loss of GBP110.3m resulting from a derivative instrument based on future production and calculated using forward gas prices as at 30th September 2022. The derivative will be realised to a profit or loss when the payments under the derivative instruments become due. Excluding the derivative the company made an adjusted operating loss of GBP1.6m, slightly less worse than in 2021 where it lost GBP2.5m, but 2021’s figure didn’t have the derivate contract overhanging.

Derivative danger

Although derivates and swap contracts are quite common in the industry, the contract that Angus entered with Mercuria Energy Trading Services (METS) in June 2021, as part of a GBP12m loan agreement is quite significant for the company and was agreed originally to mitigate price risk on the expected future cash flow from the production of Saltfleetby Gas Field. Under the swap contract, Angus Energy Weald Basin no. 3 Limited (AWB3) will pay METS the floating price while METS will pay AWB3 the fixed price on the sale of gas from the field.

At year-end the expected cash flow on the sale of natural gas amounted to GBP186.3m, resulting in a loss of GBP158.7m which Angus recorded a 100% share on its new working interest due to the acquisition of Saltfleetby Energy Limited. The resulting loss on the swap contract was a result of the steep rise in the prices of natural gas affecting the company, as the floating price payer as of reporting date.


Angus was forced to recognize the gross liability at 100%, due to the acquisition of Saltfleetby Energy Limited (SEL) with working interest of 49% plus the group’s working interest of 51% prior to acquiring SEL. The company said: “The loss on these contracts as at 30th September 2022 represents the forecast spot-price value of the gas to be extracted against the value fixed to be provided to the group. Under projected gas production volumes, these arrangements will fix the amount payable to the group for the contracted volumes, with any excess of volume being able to be sold at the available spot price.”

However, if Angus does not meet its production timetable, the swaps will crystallise as a liability at the dates at the proposed periods of gas production in the swap agreements.

Production delays

And here’s the kicker: Angus has been having issues getting into production on Saltfleetby, an onshore facility in Lincolnshire only coming back into production in September 2022 after a five-year hiatus. The onshore operations it has in the Weald Basin have been vigorously opposed by local residents and environmental campaigners. Approval was given from the Oil & Gas Authority in June 2021, but then Angus was hit by further financial complications and Covid.

Although the company has subsequently reported successful drilling, dropping a new sidetrack well at the site earlier this month, and telling the market that installation of equipment is imminent, with the derivative contract ongoing, the clock is ticking.

And that is before considering its other ventures, including the plans to drop a fracking well near Balcome in West Sussex – a project that again has been vigorously opposed by local residents and environmental campaigners. The Balcome project twice had its planning application unanimously rejected by West Sussex Country Council in March 2021, but overturned the decision on appeal last month. The company is also planning to use the site to reinject liquid waste from oil and gas production at its other projects – protestors say the liquid wastes will be radioactive.

The company also has ambitions to start drilling Geothermic wells.

Bridgewise rate Angus Energy as an ‘Underperform’. The analyst said: “Angus’s financial reports for Q1 showed some underwhelming results. Their negative income, growth, and value factors indicate that the company is finding it increasingly difficult to produce impressive numbers. These results indicate a weak growth potential for Angus’s stock’s price moving forward […] Typically, results like these translate into sustained negative momentum and strong downward pressure on stock price. Therefore, we assessed them with a rating of 54 and an ‘Underperform’ recommendation.”

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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