- After a tumultuous year, investors are banking on a rebound in the oil sector
- Like many in the industry, ShaMaran Petroleum faced their share of challenges in 2020 and was able to overcome them with careful planning and attention to detail
- The company is now well-positioned to capitalize on the emerging supercycle and upswing in the oil industry
As the world starts to recover from the COVID-19 pandemic, there are signs that commodities, like oil, are beginning a new supercycle as prices rise and consumer demand builds.
Buoyed by factors like the U.S. stimulus package and a Saudi commitment to cut production, oil futures have recently broken the USD$60 a barrel mark. That's good news for investors and a sharp contrast to this time last year when the pandemic lock-down saw prices and demand plunge.
Combine that with declining U.S. crude oil and fuel inventories, and forecasts like the recent one from Wood Mackenzie predicting the demand for oil will rise by 6.3 million bpd this year to 96.7 million bpd, and it's little wonder that many investors are banking on a rebound in the oil sector. Or that junior oil companies that weathered the dark storm of 2020 are gearing up to take advantage of a much brighter forecast for this year.
"It's a whole different story this year — the world has changed, and our story has changed for the best.”
— Dr. Adel Chaouch, President and CEO, ShaMaran Petroleum Corp.
ShaMaran Petroleum positioned to seize on supercycle
One company well-positioned to capitalize on an upswing in the oil sector is Vancouver-based ShaMaran Petroleum (TSXV/Nasdaq First North Growth Market: SNM). The company holds a 27.6 per cent working interest through its wholly owned subsidiary, General Exploration Partners, Inc., located in the Atrush Block of the Kurdistan region of northern Iraq.
Despite all the challenges thrown its way in 2020, the company has emerged stronger and is poised for growth.
"It's a whole different story this year — the world has changed, and our story has changed for the best," says Dr. Adel Chaouch, ShaMaran’s President and Chief Executive Officer.
"This year we can focus on ensuring organic growth and optimizing our operations for the benefit of our shareholders."
ShaMaran overcomes obstacles to emerge stronger in 2021
Pre-pandemic, ShaMaran was moving full speed ahead on its field development plan for the Atrush Block. Phase 1 was completed, with the first oil produced in July 2017. By December 2019 the company achieved a field production rate of 50,000 bopd.
But then the pandemic hit and ShaMaran faced challenges that grew as the year went on. In addition to the oil market crash, the company had high interest bonds outstanding and oil sales payments overdue from the Kurdistan Regional Government (KRG), the ruling body of the autonomous Kurdistan Region of Iraq.
Careful planning and attention to detail saw the company through these challenges. To address the bonds issue, ShaMaran negotiated with its bondholders to defer payment of the principal and gain more time to make these payments and spread them out over 12 months.
With the backing of its main shareholder, the company utilized a liquidity guarantee provided by a trust of the Lundin family to pay its interests obligations. Additionally, the company was successful in securing another agreement with the bondholders for a buy back at market value and cancellation of the higher interest rate debt.
"We worked very closely with the bondholders to resolve this issue and received tremendous support from the Lundin Group to cover the interest," says Chaouch.
"Because we have such a good relationship with the bondholders, they understood that we were acting in their best interests and that enabled us to move forward."
ShaMaran also held constructive engagements with the KRG regarding the recovery of the outstanding payments owed to the company as well as a new payment mechanism. Kurdistan was hard-hit by the pandemic and it took several months before the government recovered sufficiently to address the problem. At issue, were payments from November and December 2019 and January-February 2020 — all months when oil prices were high.
As a result of the renewed relationship, the KRG committed to a payment of $41.7 million owed to the company for $34 million of deliveries from November 2019 to February 2020 and an additional $7.7 million of Atrush exploration costs invoiced over the same period.
The company also reduced capital expenditures by 80 per cent, postponing facility expansion projects and development wells previously planned for 2020. Operating costs were reduced by 22 per cent and general and administrative costs by 28 per cent.
Careful management was the foundation for a better 2021
The reduced capital program in the field will impact the company's 2021 guidance, but ShaMaran prefers a careful, cautious approach while continuing to develop their reserves and production profile. By careful management, the company has not only replaced its production but increased its reserves.
Press Release: $SNM released its financial and operating results and related management’s discussion and analysis for...Posted by ShaMaran Petroleum Corp. on Wednesday, March 3, 2021
"I would say we're probably the only company that maintained production guidance throughout the year of 2020," says Chaouch.
The company's 2021 guidance forecasts daily production to range from 39,000 bopd to 44,000 bopd. Resumption of deferred drilling and completion spending in 2021 is also expected to generate quarter-on-quarter production growth.
Thawing from the 2020 freeze, the company's 2021 capital program includes drilling and completion of a production well with targeted offtake rates of over 4,000 bopd and initiation of a gas solution project which will significantly reduce emissions and operating costs from reliance on diesel use.
The Atrush operating expenditure is forecast to be USD$80million (USD$22 million net to ShaMaran) for 2021. Additionally, Atrush’s average lifting costs per barrel are estimated to range from USD$4.70 to USD$5.70.
ShaMaran positioned to handle ESG and EU Taxonomy
Having survived the initial COVID-19 tsunami, ShaMaran is sailing into the calmer waters of an emerging "New Normal." The pandemic has affected the way the company — and indeed, all companies — do business. In addition to adhering to health and safety protocols to protect workers in the field, the company is also relying more on distance technology and online platforms.
"We were early adopters of these practices and it has had the upside of making us more time-efficient while also reducing costs," Chaouch explains.
"The pandemic also made us focus on must-haves as opposed to nice-to-haves and take a disciplined approach. As a result, we're a more efficient company and that creates better value for our shareholders."
COVID-19 isn't the only complicating factor ShaMaran and other oil sector companies have had to cope with. The European Union's new environmental, social and governance (ESG) regulations and Taxonomy require investment fund managers to incentivize financing companies that meet the EU's environmental objectives, especially climate change mitigation and climate change adaptation. This will have an impact on oil sector companies raising capital in the EU.
While the ESG and EU’s Taxonomy pose challenges, Chaouch is confident that ShaMaran can meet them in the same manner as the company met the COVID-19 storm. He points to the company's commitment to environmental stewardship with energy and emissions reduction programs as well as community-based social initiatives that are in line with these ESG goals.
"Environmental stewardship is something we've embraced as part of our business and we're staying ahead of the curve," he notes.
ShaMaran has an industry-leading waste and water management program, including prompt remediation of all impacted locations and plans to eliminate flaring and emissions via a gas sweetening project.
The company also hires locally, with staff localisation levels of over 75 per cent. It also provides social initiatives, including education and agricultural initiatives, as well as literacy programs for women and youth.
ShaMaran set to succeed in the new supercycle
Looking ahead, Chaouch says ShaMaran will focus on bringing its substantial reserves into the market and look for opportunities to grow organically.
With a team that's well-versed in the often complex politics and economic shifts in the region, he's hoping there won't be any surprises like 2020 brought with the pandemic. And like everyone else in the oil sector, he has his eyes fixed on that emerging supercycle.
"We're on the brink of a new supercycle and we want to take advantage of that to build shareholder value," he explains.
"We're cautiously optimistic that we have the right plan that's flexible. If we see an acceleration or upward pressure on oil prices, we'll be able to respond to that quickly."
2020 highlights recap:
- 40 million barrels produced from Atrush to December 2020
- Year-on-year production increase 2020 vs 2019 (32.5K bopd)
- 2020 CAPEX reduction, strategic response to global challenges
- $US/boe lifting costs reduction - $7.33 to $5.08 2019 vs 2020
- Annual 2P reserves growth exceeded annual production since 2017
To learn more about ShaMaran, visit their website here.
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