Cadogan Petroleum Plc: operational update

Oil and gas production in 2017 increased by 34% over the corresponding period last year. The average daily production rate through the year was 167 boe/d (155 boe/d net to Cadogan) and the year-end exit rate was 190 boe/d (176 net to Cadogan).

The increase in production levels is due to successful work-overs and the implementation of production optimisation programs. Combined, these operations increased oil production from the Monastyretska field by 78% and kept gas production constant, despite the high level of depletion from the two producing fields.

The increase in oil production from the Monastyretska field was achieved by re-entering old suspended wells, rather than drilling new ones. This approach delivered the targeted increase in oil production, while minimising cash outflow and as such only marginally impacted the Company’s cash position.

Operating costs have remained under tight control and combined with the increased production volumes have taken the Company’s E&P operations above break-even. The management and staff are also proud to have achieved another year of LTI free operations, as well as a further reduction of CO2 emissions to the atmosphere (per produced boe) during the year.

The Ukrainian government approved a reduction in the sub-soil use tax (royalties) from 45% to 29% for oil wells, from 29% to 12% for new gas wells shallower than 5000 m and from 14% to 6% for new gas wells deeper than 5000 m. While the reduction in royalties for oil wells has had a direct positive impact on net revenues, the reduction for gas wells has increased the value of the Company’s Borynya licences and is expected to make its farm-out more attractive.

The company’s gas trading business had a good year in 2017. This was driven by the combination of a new team, which delivered on expectations, and a number of opportunistic sales, which generated a healthy margin.

The focus of Cadogan’s E&P Services business during the year was on catering for the company’s internal needs, including site restorations and well abandonment in the East of Ukraine and work-overs in the West. While these operations did not generate additional external revenue streams, they contributed to keeping costs low by retaining the contractors’ margin within the company.

The acquisition of ExploeEnergy in Italy was finalised during the year and the company has engaged with the local authorities to expedite the award of the licences. The search for further investment opportunities, as part of the company’s strategy to reload its asset portfolio outside Ukraine, has also continued. The company has strict criteria for any additional assets it acquires, based on a combination of price, risk and potential synergies to ensure the cash resources are used effectively in building shareholder value. The Board and management remain committed to these criteria, with a focus on delivering long-term value over short-term gain.

As part of the search, an extensive net has been cast across both industry and the financial communities of the main European financial centres, which has helped retain a healthy pipeline of opportunities. Over the last year, more than twenty opportunities were scrutinised, but none met the criteria needed to create value for shareholders and as such justified an investment.

2018 Outlook

Net production to Cadogan is expected to exceed 200 boe/d as the company continues to implement production enhancement activities. These are aimed at continuing to support profitability and cash generation from the company’s existing Ukrainian assets and preserve the Company’s cash position for further investment.

Two wells are planned within the next 12 - 18 months, both of which will support the retention of the Company’s licences. These include a shallow well on the Borynya licence, to test the potential of satellite prospects around an old depleted oil field, and an appraisal well on the Monastyretska’s oil field.

The appraisal well on the Monastyretska field will be drilled upon completing an integrated reservoir study, which will be used to update the licence value, after the two successful re-entries of the past year, as well as to assist in identifying the optimal development scheme. The scheme will be included in the application to convert the licence from an exploration to a production licence.

The Cheremkhivsko-Strupkivska licence expires in May and the operator, WGI, has filed an application to extend it for 10 years. The licence, located in Western Ukraine, contains a marginal gas field in which the company has a 54.2% participating interest and which last year contributed 15 boe/d to the company’s net production.

The Company intends to continue to operate its gas trading business, with trading volumes expected to increase over 2017 notwithstanding the challenges of a market which is still evolving in a manner which is sometimes unpredictable. As E&P activity in Ukraine picks up, Cadogan also intends to actively explore opportunities to spin-off its E&P services subsidiary.

The management team is currently reviewing several potential opportunities for further investment outside Ukraine. The team intends to continue to actively pursue these and other opportunities that arise to utilise the preserved cash.

Read the article online at: https://www.oilfieldtechnology.com/special-reports/26012018/cadogan-petroleum-plc-operational-update/