Deltic Energy LON:DELT, is one of the junior O&G explorers flying the flag for the UK. The London-based, AIM-listed company is one of many juniors that have received a lift since early-2022 and the energy crisis precipitated by Russia’s invasion of Ukraine.
The Armchair Trader looked at one of its peers, Kosmos Energy [LON:KOS] NYSE:KOS yesterday. Kosmos has been around for 20 years, and the Dallas-based upstream oil and gas production company made a name for itself in 2007 when it discovered the vast Jubilee field off the shore of Ghana.
Jubilee was one of the most significant discoveries of the early noughties and turned Ghana into a significant player in the African oil sector. Jubilee is a vast deposit of near 1 billion barrels of oil and some 800 billion cubic feet of natural gas and produces over 100,000 barrels of oil a day currently.
Springboard moment
Kosmos used Jubilee to springboard to greater things and now operates in five African countries and the Gulf of Mexico, and has got strong working relationships with majors including BP LON:BP., Chevron NYSE:CVX, Hess NYSE:HES and Shell LON:SHEL. Up until the point of discovery, Kosmos was mainly a group of geologists with some private equity money floating around the coast of West Africa in a dinghy. Jubilee was a game changer for Kosmos.
And so to Deltic. Deltic is a lower down the development curve than Kosmos. If you had a junior junior, Deltic would be it. It’s a pre-schooler. It listed in May 2012 and was no Phileas Fogg, focussing on the North Sea and has a number of tenements in the Southern North Sea (the bit east of Kingston-upon-Hull and the Humber Estuary) including Pensacola, and the Central North Sea (east of Aberdeen) where it has the P2542 – Syros exploration block.
Resurrection
The North Sea was considered by some analysts to be on the wane – that was until the Russian-Ukraine war, and the lack of gas coming into Europe triggered a huge price spike in the cost of electricity and gas and saw governments scrambling to find new supplies. Globalisation broke down somewhat, as individual countries looked to find a way to make themselves energy efficient.
In the UK, following a spectacular economic own goal during the Truss premiership that added petrol to the flames of an already deteriorating economic outlook, the government opened up a new licensing round to allow oil and gas companies to explore for fossil fuels in the North Sea.
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The North Sea Transition Authority began a process to award more than 100 licences to companies hoping to extract oil and gas in the area in October 2022, something that had been put on hold since 2019/20 as the nation reviewed its ‘climate compatibility’ in the [then] rush to decarbonise energy production. When the taps were turned off in Russia, the government performed a swift volte-face and the North Sea started to get some lovin’ again. Almost 900 locations are being offered up for exploration.
Overlooked prospects
This was good for Deltic, as since inception the company had stoically persevered in trying to find the next big thing in the North Sea. For years, the Southern North Sea (SNS) was ignored. The last exploration well was drilled in 2019, but Deltic were SNS evangelists, and built the company on the exploitation of overlooked prospects.
The company brought in Shell and Capricorn Energy LON:CNE, to help it survey the vast area of rough sea where it held its exploration rights on the Selene, Pensacola and Plymouth prospects. Top of the list, and generating the most excitement at the Waterloo Road offices of Deltic, was Pensacola, which management reckoned had recoverable resources of over 300 billion cubic feet (bcf) of gas.
Four years ago today (8th February), Deltic secured a farm-in from Shell which transferred 70% of the working interest in the Pensacola prospect for 100% of the funding of a 3D seismic acquisition programme, completed that summer, as well as additional funding for technical surveying and well costs.
The focus on overlooked, underinvested prospects approach the Deltic was taking to the SNS was justified, as nearby exploration projects at Darach and Crosgan both successfully brought hydrocarbons to the surface in a test drill.
Confirmed gas strike
Last month Deltic announced that its own testing had hit gas at Pensacola and was moving onto further testing. Although the announcement was somewhat muted, Deltic’s share price jumped 52% when news landed. This was followed up today with another announcement, in a much more celebratory tone, that over 300bcf of gas had been confirmed at Pensacola – which could represent one of the largest natural gas discoveries in the SNS in over a decade.
Graham Swindells, Deltic’s chief executive said in a statement this morning: “Deltic’s first exploration well at Pensacola has resulted in a highly positive outcome and, at approximately 300bcf, would represent one of the largest natural gas discoveries in the Southern North Sea in over a decade.”
He continued: “This discovery is a major milestone in the development of our company as we continue to execute our exploration led strategy and progress our portfolio of high-quality drilling opportunities as we seek to create value for our shareholders.”
Future drilling
Although the gas price has come off a bit since last year, it is still very high, and this discovery at today’s price is very valuable. More importantly, Deltic has walked the talk and found resources in what in mining parlance would be ‘tailings’, the bits that the big boys passed up in search of lower hanging fruit. Further testing and drilling should be anticipated on Deltic’s other properties, and the hope would be that Pensacola wasn’t a lucky blindfolded throw at a dart board, but its other prospects can be equally as exciting.
Deltic opened trading at 3.7p today, and has offered a year-to-date return of 25.1%, a one-year return of 27.6% with its shares ranging between 1.93p and 4.36p over a 52-week period. Two years ago, the company was bubbling around 1.5p.
Today’s announcement is a stunning result for Deltic, and justifies their philosophy to go for the deposits that the majors had passed over. However, gas fields do take a while to build and as we’ve seen gas prices can be volatile, so it’s hard – given the current economic and political backdrop – to accurately predict profitability two, three years or longer into the future.
Last hurrah?
Also, the direction of the prevailing wind is away from the hydrocarbons industry to more sustainable energy solutions, and this current North Sea surge could be seen as a last hurrah for the industry.
Deltic also shares certain characteristics with Kosmos (which as we explained yesterday saw its share price appreciate 700% from March 2020), in that pre-war, during the Covid lockdown, juniors were heavily discounted, as the market questioned their long-term survivability and business models.
Deltic is wedded to the gas price, and what the market giveth, the market can taketh away. Recent upward moves might be a correction of the Covid discounting, which will stop at some point, and in some cases of over-correction, might start going the other way. If gas prices fall, the value of Pensacola and Deltic’s untapped assets will also fall away, and Deltic isn’t very diversified – it doesn’t even have the geographic diversification other juniors have.
Nevertheless, Deltic has cause to celebrate this morning. Pensacola could be Deltic’s Jubilee moment and might springboard it to bigger and better things.
