Is Block Energy poised for a re-rate after slow entry to AIM? We speak to CEO Haywood (BLOE)

With $39.3m worth of 2P net oil reserves, plans to increase production to more than 900bopd within 18 months and with over 600 BCF of gas to develop, Block Energy (LSE:BLOE) looks interesting at 3.4p. Thanks to some historic holders selling, the Georgia-focused business has suffered since listing last month, leading its market cap to fall from £10.3m to £8.7m. With Block still in its early days of trading on AIM, we spoke to CEO Paul Haywood to discuss the potential he thinks investors are currently missing out on.

Existing production 

Block’s two most advanced assets are the Norio and Satskhenisi licences.  Like the rest of Block’s portfolio, the sites are found in Georgia’s prolific Kura basin near its largest historical oil field, which is currently producing around 70,000bopd. They are estimated to contain a combined 1.1MMbbls of 2P net oil reserves and 32MMbbls of 2C net contingent oil resources.

Despite historically producing 2.1MMbbls of crude oil, Norio and Satskhenisi are currently producing just c.15bopd. However, this month saw Block launch a fully-funded £1.2m work programme to boost output to 900bopd within 18 months.

At Norio, Block will complete some workovers, reperforations and drill a sidetrack using a technique called radial drilling to reactivate existing wells. Radial drilling involves cutting small holes at regular intervals in a well’s casing before penetrating new reservoirs horizontally using jetting technology. Haywood told us it is the best way to maximise production after years of inactivity:

‘These wells were initially drilled in the 1950s when the operators went in and created a lot of damage around the wellbores. Following years of disuse, the wells now have a producing zone clogged with cement that risks destroying production potential. Radial drilling takes us beyond the skin damage and into new reservoirs from where we can hopefully produce. There are 52 wells drilled across two fields, and we have gone down into 15 to select ten to develop. If the radial drilling goes well, then we think we will have another 30 potential candidates.’

With Block breaking even at 110bopd production, Haywood plans to recycle cashflows from the first phase of the work programme to fund the continued development of Norio and Satskhenisi. Phase Two, as the future work is known, is expected to take place in the next 24 months and will see the company drill new horizontal wells and sidetracks to increase production to 2,000bopd.

The current cost of production at the fields coming in at c.US$25 per barrel and Block expects netbacks to come in at an impressive $30-35 per barrel. Using these figures, it believes that even if it operates at half the 900bopd initial production target, annual revenue potential would be c.$6m- a high proportion of current enterprise value.

Jewel in the crown

Block also owns a 25pc stake in a licence called West Rustavi, where it has an option to earn-in up to 75pc. Multiple gas discoveries are already present at the site which contains 0.9MMbbls of 2P gross oil reserves, 38MMbbls 2C gross contingent oil resources, and 608Bcf 2C gross contingent gas resource. Based on $5/Mcf gas and $50/bbl oil, it also has a healthy netback of c.$3+/mcf gas and c.$30/bbl oil.

Georgia currently purchases its gas for c.US$5.5 /Mcf, giving West Rustavi an estimated unrisked project value to the Company of $600m at a conservative 50pc recovery rate, leading Haywood to already describe it as Block’s ‘jewel in the crown’. To exploit this, the firm has a clear plan for getting West Rustavi online, the first part of which will be a fully-funded, £3.9m work programme, beginning this month.

The programme, which will take place throughout the rest of 2018 and the first half of 2019, will see Block re-enter and reactivate three to four wells in exchange for earning into a 50pc working interest. It will then conduct a gas test and possibly 3D seismic leading to drilling two sidetrack wells targeting 650bops to earn-in to a 75pc working interest. Beyond this, it plans to test and flow gas at previous discoveries, targeting gross 2C resources of 608BCF and 3C resources of 1TCF, before bringing the site online in around two years.

Major interest

Georgia is comparatively under-explored due to a historic reliance of Russia for its commodities. However, as a historical international oil and gas transit hub, it has plenty of infrastructure in place. Previously, the country’s domestic oil and gas industry has suffered from a weak services sector, but this all changed last year when Schlumberger acquired a 100pc working interest in three Georgian licences. The business, which also operates the block, is the world’s largest oilfield service provider with a market cap of around $95bn. Haywood says Schlumberger’s interest validated Georgia’s political and business climate and confirmed market potential for commercial gas production. He believes all this will support Block’s market appeal going forward:

Schlumberger does not typically own and operate its licences. In fact, the Georgian entry as we understand it marks the first time it has ever taken 100pc ownership of any one licence. We see its entry into the country as a big win both for Georgia’s domestic oil and gas industry and our prospects.’ 

Rather handily, Schlumberger is targeting the same high impact gas play as Block on an adjacent licence around 15kms away from West Rustavi. With the high-profile company using its massive financial resource to advance quickly into the testing phase, Haywood feels that any updates can help to de-risk Block’s assets and potentially attract new investment by proxy:

‘Ultimately, we can sit back and learn from Schlumberger’s operations while drilling. They are currently assessing a gas prospect, and if that is successful, then it is handy for us. It will give us even more confidence to go after what we think is there. I do not think the market has quite grasped this yet, but we are working on getting the message out.’

Supporting Block on this journey in Georgia, and indeed its longer-term goal of expanding beyond the country, is a management team with significant regional and Georgian-specific experience. Haywood has spent over eight years in the Georgian oil and gas sector while technical director Roger McMechan and exec director Niall Tomlinson have spent multiple years working on projects in the country.

Thanks to its de-risked assets and existing production, Block has also managed to secure a significant amount of institutional backing for a firm of its size. Indeed, top investors include Amati Global Investors (14.5pc) and Gervais Williams-headed Miton Asset Management (8.7pc)

Another top investor is Georgia Oil and Gas, an established operator and drilling service provider in the country that is party to multiple production sharing agreements. Fortunately, this has allowed Block to land an attractive production sharing contract with the government for Norio and Satskhenisis that Haywood described as ‘one of the best I have seen in the world’. It allows Block to recover 100pc of operating costs and retain 50pc of remaining production as cost oil with residual profit oil then split 50/50 with the state during cost recovery.

Early days

With most of Block’s current £8.7m market cap covered by the £5m it raised when listing last month, the market is currently ascribing very little value to the business’s portfolio. This comes despite the firm expecting to reach breakeven imminently as it targets 900bopd within 18 months, with its sights set on scaling up to 2,000bopd through further development work across its portfolio. This resonates even further when you consider that West Rustavi has an estimated value of c.$600m, with a clear route to production and the potential to be significantly de-risked by nearby Schlumberger’s ongoing operations.

While Block is no doubt in its early stages, and success is by no means guaranteed, investors should not overlook its management experience in the relatively niche, growing oil and gas region of Georgia. Indeed, the company has already caught the eye of significant institutional investors- something that many junior oil and gas plays would not be able to boast at this stage. With plenty of news flow on the horizon from both Block and Schlumberger, it may be worth having a punt on the expectation of a re-rate.

Author: Daniel Flynn

Disclosure: The author does not hold positions in any of the stocks mentioned above

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