Mid Cap Oil & Gas Roundup May 2013

The last fortnight has seen many of the mid-cap oil and gas E&P companies listed on the LSE provide interim updates to the market.

In theory, these companies offer investors an attractive middle ground between the high-octane, all-or-nothing risk of the small cap AIM oilers and the steady-as-she-goes dividend machines like BP and Shell.

In reality, this can often be true — mid-cap firms can deliver material gains more easily than supermajors, and can also make attractive takeover targets, because they offer material production, solid proven reserves and decent infrastructure to major players. At the same time, they are relatively affordable for major buyers, often more so than a major exploration campaign.

At present, many of these firms look attractively valued to me, so let’s take a look at some of the highlights from last week’s updates.

Heritage Oil

Heritage Oil (LON:HOIL) sank after its recent results, but its share price has started to recover, and I think the sell-off was overdone.

Last week’s interim management statement suggests I might have been right. Heritage reported that the industrial action and technical issues which had caused production to fall in the first quarter had largely been resolved, and that production is currently over 20,000 bopd per month.

The firm said that production was expected to rise above 35,000 bopd in the next few weeks and that 2013 gross production from OML 30, its Nigerian licence area, is expected to average 35,000 bopd. Heritage’s interest in the licence is 45%, so this should equate to around 15,000 bopd for the FTSE 250 firm, which should generate strong cash flow.

Heritage’s cash position also remains strong, at $184m, excluding the $400m+ restricted cash that is set aside for its Ugandan legal dispute. I was also pleased to note that the firm is refinancing its $500m bridge loan (used to pay for the acquisition of OML 30) with a more affordable reserve-based loan.

Afren

Afren (LON:AFR) keeps on delivering, and the company’s share price keeps on standing still!

Last quarter saw Afren’s working interest production rise to 47,064 boepd, a 14% increase from the same period last year, when the firm’s working interest production was 41,308 boepd.

A fall in the average realised oil price from $116 to $107 per barrel meant that post-tax profits for the quarter fell from $53m to $39m, but operating cash flow remained strong, dropping just 4% from $300m to $288m.

Although Afren’s Okoro and Ebok assets in Nigeria are decent enough in themselves, I think that the firm’s Barda Rash and Ain Sifni fields in Kurdistan offer transformational potential, if, and when, the Kurdistan explorers are able to start exporting oil on a commercial scale.

Afren is currently selling some of its Kurdish oil into the local market, providing useful cash flow, but this understates the potential value of these assets, as is the case with other Kurdish companies, like Genel Energy and of course Gulf Keystone Petroleum.

JKX Oil & Gas

After performing strongly for the last few months, JKX Oil & Gas (LON:JKX) share price has weakened since its interim update last week. I’m not sure I completely understand why.

Although production slipped in Q1, it doubled in April, suggesting that the Russia and Ukraine-based firm will continue to deliver to promise this year. Overall production was 6,884 boepd in Q1 (7,330 boepd Q1 2012), but it rose to 11,713 boepd in April 2013, and further improvements are planned for later this year.

The only weakness is that the production gains have come in Russia, where regulated gas prices are low — they averaged just $2.60/Mcf in 2012, and were reduced by 3% in the first quarter of this year.

Prices are much better in Ukraine, but production has been flat there so far this year, except for an increase in LPG production just after the end of the quarter, when a planned upgrade to JKX’s LPG plant was completed.

Gas and liquids production in Ukraine should improve later this year, as the company continues with its programme of new wells and a multi-stage frac on the Rudenkovskoye R-103 well.

Salamander Energy

Salamander Energy (LON:SMDR) is another of my favourite mid-cap oil and gas E&P companies, operating on and offshore in Thailand and Indonesia.

In its latest update, Salamander reported average group production of 14,100 boepd for the year to April 30th, and confirmed its annual forecast of 12,500 – 15,500 boepd. This compares to average annual production of 10,800 boepd last year, following the sale of some non-core assets towards the end of 2011.

Salamander has a busy drilling programme this year, made up of development and exploration wells. The firm said that the performance of eight new development wells completed and hooked up to its Bualuang Bravo platform was ‘ahead of expectations’ and that it was reviewing the reserve upside.

On the exploration front, its three-well North Kutei programme is looking good. Its first well, South Kecapi, was a decent discovery which flowed at 6,000 bopd under testing, while its second well, North Kendang, discovered high pressure wet gas before being suspended for safety reasons and later re-entry. The third well, Bedug-1, is currently being drilled.

Finally, the development of Salamander’s Kerendan gas field, onshore Indonesia, is also going well, with the development wells flowing gas at twice rate required for the initial Gas Sales Agreement and further prospects targeted.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.