Shares in IOG LON:IOG have been rallying recently: the stock has actually managed to recoup all its losses over the last 30 days. Behind the rally for the North Sea energy specialist is news that it has what it calls a ‘well control event’ isolated at its Blythe H2 well. Consequently, the first gas from Blythe H2 is expected to commence by the end of Q2.
Production from IOG’s Blythe H2 well will be initially ramped up to safely and the company says it expects to build up to 30-40 mmscf/d rate post ramp up. IOG’s Blythe H1 well is initially planned to be shut in once the H2 well is fully onstream to reduce water production into the pipeline, however the H1 well will remain available for production.
IOG is a UK developer and producer of indigenous offshore gas. It began producing gas in March 2022 via its offshore and onshore Saturn Banks production infrastructure. In addition to its production assets, IOG operates several UK Southern North Sea licences containing gas discoveries and prospects which, subject to future investment decisions, may be commercialised through the Saturn Banks infrastructure.
IOG has four gas clusters in the North Sea, with three positioned close to co-owned infrastructure. It has a combination of conventional and tight gas fields, balancing sub-surface risks.
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IOG: positive sentiment creeping back in?
The news has certainly created some momentum behind the shares. At time of writing they were close to 6.2p, that’s up from 4.55p on 11 May. This is a classic small cap North Sea oil play subject to all sorts of volatility. Blythe H2 has been of some concern for investors for a while, and many have sold out, especially back in January.IOG has been dogged with other issues as well. Back in January it had to report a low gas rate and formation water production issues at its Southwark A2 well during testing. At that time it was trying to stimulate six discrete reservoir zones on the field.
In October 2022 IOG had to cut its production guidance (the second time in three months) as it looked like it would recover less gas than hoped from its Blythe and Elgood wells. Up until then shares had been doing well, and IOG was seen by investors as a direct beneficiary of the higher oil prices experienced after the Russians invaded Ukraine.
There seems to be an awful lot of “expectations” not being met in the company’s reports to the market. IOG has been backed by Warren Buffet, but is still regarded as something of a North Sea minnow. The share price is very easily affected by operation disruptions. Although the recently rally has created some excitement, the shares are still a long way from where they were.
Rupert Newall, IOG’s current CEO, said earlier this month: “While Blythe H1 continues to produce steadily through our co-owned infrastructure, our team have worked closely with Petrofac and Shelf to handle the complex well control challenge on H2 safely and professionally. After coming onstream, H2 production is expected to reach an initial peak 30-40 mmscf/d, enhancing our cash flow. Meanwhile, we continue to carefully manage costs, optimise the portfolio and evaluate future investment options alongside our joint venture partner.”
Right now the stock is still looking heavily sold and is still being closely followed by investors who will jump in if they think the operational problems have been banished. IOG’s strategic objective is the delivery of gas at a cost-effective unit price to the UK market, which attained strategic priority following the start of the Ukraine war and sanctions on Russian gas exports.
Some of the impetus from this story has disappeared, at least short term, with the drop in energy prices. However, the energy security theme remains relevant.
