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Canadian Overseas Petroleum (LSE:COPL/CSE:XOP) has put out an upbeat report to investors this morning which included an operations update on its Barron Flats Shannon Unit. It has been working on mitigation of high surface pressures which it says should bear fruit later this year, positive results which should become apparent as early as this quarter.

COPL also confirmed that it is planning for the delineation of the deep oil discovery at Barron Flats Federal (Deep) and permitting of 16 well locations is underway. Late in Q1 COPL secured an agreement with the Bureau of Land Management of the Department of the Interior for a minimum yearly drilling program to satisfy leasehold drilling obligations. This covers the drilling of at least three vertical or two horizontal wells. COPL said that it plans to drill at least two horizontal wells and that drilling could commence as early as August.

Resource statement on the horizon

We are also anticipating a resource statement which should be forthcoming in June. COPL has commissioned Ryder Scott to conduct a resource assessment of the deep discovery in the form of a Canadian compliant resource report. This should include the additional assets of the recently acquired JV partner Cuda Oil & Gas.

“The purchase of the Wyoming assets of Cuda has been approved by the Canadian courts, with approval by the US Federal Court expected later in the month,” said Arthur Millholland, President and CEO of COPL. “Our finance team is working on the re-finance of COPL America Inc’s senior credit facility with commercial banks. This will reduce our cost of capital in these times of increasing interest rates.”

From a financial standpoint, net crude oil sales before royalties remained consistent at an average of 1,114 bbl /d, which is up from 1,094 bbl /d in Q4 of last year. COPL has held the production of its joint interest partner Cuda Energy to offset ongoing operating arrears liabilities. In aggregate, total net average oil production was 1,591 bbl /d. Production is anticipated to ramp up substantially after Q3.

“The optimisation and associated increase in oil production will occur later in 2022 with activities getting started in earnest after the completion of the Cuda acquisition,” Millholland added.

Petroleum sales, net of royalties increased to $7.1 million from $5.8 million in Q421. Cuda’s petroleum sales, net of royalties was $2.7 million in Q122 and $2.3 million in Q421 for an aggregate amount to COPL’s account of $9.8 million for Q122 an increase from $8.1 million in Q4 2021.

Improved operating cash flow profile

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The company has improved its overall operating cash flow profile, making it more highly cash generative than previously. The completion of the Cuda assets acquisition will make Canadian Overseas Petroleum a more attractive proposition for investors overall. Cost of capital is going to come down as it re-finances the credit facility it was carrying on its books through its COPL America credit facility. COPL received a waiver from its lender on the covenant defaults due on 31 December 2021, subject to certain conditions and fees. Therefore it is no longer in technical default on the credit facility. Indebtedness has been re-classified as a non-current liability as at 31 March of this year.

Investors will want to pay attention to the ongoing work to optimise the oil production at the Shannon Unit. COPL has currently eliminated the butane component of the enriched gas injection scheme it was using and is now injecting pure methane at overall reduced volumes into the reservoir. In the fourth quarter of 2022, butane enriched gas will be injected into certain injection wells as the COPL expands the miscible flood with additional production and injection wells.

Other injection wells will continue to receive a pure methane injection stream. The reduction of butane from the injection stream will have a significant operating cash benefit going forward, as it eliminates then reduces asignificant cost component of the miscible injection program.

Further analyst reports on COPL are expected in the very near future.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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