Challenger Energy Group plc (LON:CEG), the Caribbean and Atlantic-margin focused oil and gas company, with oil production, appraisal, development and exploration assets across the region, has announced its Interim Results for the six months period to 30 June 2024.
CHIEF EXECUTIVE OFFICER’S REPORT
Dear fellow Shareholders,
I am pleased to report to you on your Company’s activities during the first half of 2024.
Highlights during this period were that we entered into a transformational farmout to Chevron for our AREA OFF-1 block in Uruguay, our AREA OFF-3 block in Uruguay was formally awarded allowing value-adding technical work to commence, we made good progress with our business in Trinidad and Tobago, and we welcomed a strategic investment in our Company by specialist energy investment firm Charlestown Energy LLC, which included the appointment of Robert Bose to our Board. Further details on these highlights are provided below.
Uruguay – “doing what we said we would do”
Challenger Energy secured the AREA OFF-1 licence, offshore Uruguay, in May 2020. This was in the midst of the Covid-19 pandemic, when Uruguay was not yet on the global industry’s radar, and so at that time we were the sole licence holder in Uruguay. Since then, offshore Uruguay has emerged as a global exploration “hotspot”, following on from sizeable discoveries made by two supermajors (TotalEnergies and Shell) from exploration wells drilled in the conjugate margin offshore Namibia (and subsequently multiple additional discoveries there by GALP Energia). By the end of 2023 all Uruguayan offshore blocks had been licenced, with Challenger Energy holding two of the seven available blocks, and the other five blocks having been awarded to majors / NOC, including Shell and APA Corporation.
In parallel with the industry’s “discovery” of Uruguay, through the course of 2023 Challenger Energy undertook a technical work program for AREA OFF-1, the result of which was the identification of three primary prospects in the licence area. In aggregate, we delineated a robust prospect inventory of approximately 2 billion barrels (Pmean) and up to 5 billion barrels (P10), thus establishing that AREA OFF-1 is a world-class asset.
Based on this technical work, in 2023 we had also commenced a formal, adviser-led farmout process, with the objective of securing an industry “heavyweight” as partner for AREA OFF-1, who could provide the further expertise and capital needed to rapidly take the block forward to 3D seismic acquisition and, ultimately, exploration well drilling. The fruits of this process materialised during the period under review, when in March 2024 we announced a farmout agreement with Chevron. Under the terms of that agreement, Chevron will assume a 60% operating interest in AREA OFF-1, will pay the Company US$12.5 million cash as an entry fee, will carry 100% of the costs of an agreed accelerated 3D seismic acquisition on the block (up to a total net cash value to the Company of US$15 million), and thereafter, if the decision is made to proceed to drilling of an initial exploration well, will carry 50% of the Company’s share of costs associated with that well (up to a total net cash value to the Company of US$20 million).
Post period end, on 19 September 2024, the farm-out was approved by the board of directors of ANCAP (the Uruguayan regulatory agency with oversight of offshore licences). Following this approval, and in accordance with Uruguayan legal requirements, the process has progressed to its final stage, which consists of the farmout being notified to the Uruguayan Ministry of Industry, Energy and Mining, and at the same time the requisite Consortium Agreement between the Company and Chevron being submitted to the Uruguayan Ministry of Economy and Finance for registration. Once a 20-day notification period has elapsed and the Consortium Agreement is registered, we can move to finalising the farmout, which we now expect will be in the next 4-8 weeks. Chevron will then immediately assume operatorship of AREA OFF-1, and we are already working closely with our new partner in anticipation of the transition, as well as assisting Chevron as they plan for upcoming activity on AREA OFF-1. We share a common goal with Chevron, which is to see a 3D seismic campaign commence in the next available shoot window (H1 2025), because it is this activity, and subsequent well drilling, which we believe will ultimately realise the considerable upside value we see in this asset.
Shareholders will also recall that during 2023 we made an application for another offshore exploration block in Uruguay, AREA OFF-3, then the country’s last available offshore acreage. In June 2023 we were awarded the block, on attractive terms. As with AREA OFF-1, the “size of the prize” that AREA OFF-3 offers is substantial: based on initial assessment, an estimated resource potential of up to 2 billion barrels and up to 5 trillion cubic feet gas (c. 1 billion barrels equivalent), from multiple exploration plays. But, unlike AREA OFF-1, the AREA OFF-3 block has not only existing 2D seismic coverage, but 3D seismic coverage as well, an advantage that will allow for an accelerated work program focused on 3D seismic reprocessing.
During the period under review, the AREA OFF-3 licence was formally signed (March 2024), and we immediately began the process of preparing for a technical work program, which has now commenced. Our strategy for AREA OFF-3 is to follow the same formula that produced a successful outcome for AREA OFF-1: first, undertake high quality technical work to establish the prospectivity of the block (we expect to conclude this over the coming 9 months), and second, with the benefit of that technical work, seek to bring in a partner via a farmout process (we expect to be able to commence a formal process around mid-2025).
In summary, therefore, insofar as our business in Uruguay is concerned, the first half of 2024 was truly transformational. We cemented our position as one of the largest acreage holders in Uruguay, with two high-quality assets. More importantly, we showed that we do what we promise to do – technically, through excellent work, commercially, in being able to reach a market-leading farmout for the AREA OFF-1 block, and strategically, in developing an enviable position that no other junior player was able to develop, in what has become a global exploration focus area.
Trinidad and Tobago – “focusing on the nuts and bolts”
In August 2020, Challenger Energy completed the acquisition of Columbus Energy Resources Plc, which gave us a portfolio of assets in Trinidad and Tobago and Suriname, including onshore oil fields in active production.
Our initial view in assuming ownership of these assets was that we would be able to generate organic growth in production from the existing fields. However, despite efforts ranging from application of efficient mature oilfield management practices and field improvements to enhanced oil recovery (EOR) initiatives, production growth as we had hoped for did not materialise, given the age and condition of the fields.
Therefore, during 2023, we switched our operational approach in Trinidad and Tobago – instead of seeking production growth, our focus became to achieve consistent and stable production and drive cost savings, with a simple objective: achieve at least cash-flow breakeven performance from those assets considered “core” (consisting of the Goudron and Inniss-Trinity fields in south-east Trinidad and the Icacos field in south-west Trinidad), whilst at the same time divesting or exiting from all those assets considered “non-core” (consisting of various other assets in central and south-west Trinidad, and an appraisal block in Suriname).
Through the first half of 2024 we executed on this revised approach. Specifically, during the period:
(i) we finalised all aspects of our exits from the non-core South Erin and Cory Moruga fields in Trinidad and the project in Suriname, and we began work on an arrangement to fully exit from the Bonasse licence (a non-producing field since the unsuccessful Saffron-2 well, but nonetheless with continuing liabilities, lease expenses and potential exposures, and with no corresponding upside; the specifics of this arrangement took shape post-period end and it was finalised in August 2024), and
(ii) we continued to focus on achieving baseline production and improving financial performance from the remaining “core” fields, with good results. 1H 2024 production from the Goudron, Inniss-Trinity and Icacos fields was stable (we averaged approximately 283 barrels of oil per day), revenue remained consistent versus the comparable period, and we were able to achieve meaningful reductions in the cost base of our Trinidadian operations. This meant that, in general terms, we saw a marked improvement in financial metrics – depending on monthly field activity levels the business was largely self-sustaining on a cash basis, thus meeting our core objective (in an accounting sense however, certain non-cash charges are included in the income statement).
Our HSE&S performance during the period under review remained as strong as ever, and we were once again awarded a two-year STOW-TT (“Safe to Work in Trinidad & Tobago”) certification. STOW certification is a specific Trinidadian certification for oil field operators that provides a standardised, independent system for certifying operators and contractors with respect to Health, Safety and Environmental delivery.
Thus overall, insofar as our Trinidad and Tobago business was concerned, the first half of 2024 could be described as a period of continuing improvement and progress.
Corporate
In April 2024 we entered into an agreement for an investment in the Company by Charlestown Energy Partners LLC. Charlestown agreed to invest £1.5 million, initially in the form of a loan, with that loan converting into shares in the Company on a pre-agreed basis (and at a premium price), once the Company completed (i) a share consolidation, and (ii) the AREA OFF-1 farmout to Chevron. The investment from Charlestown was finalised in May 2024, providing the Company with finance in the medium term until full completion of the AREA OFF-1 farmout to Chevron. The first of the requisite conditions – a share consolidation – was subsequently undertaken in August 2024. As noted, we expect the Chevron farmout will be fully completed in the next 4-8 weeks, at which time all conditions for conversion of the Charlestown investment into a shareholding will have been met. Charlestown’s loan will then be extinguished, and Charlestown will be issued with shares that will result in Charlestown holding an approximately 8.7% interest in the Company, thus becoming one of the Company’s largest shareholders.
Charlestown is a specialist energy investor that is associated with Charlestown Capital Advisors, a family office located in New York that was founded in 2005, and has been making investments globally in E&P since 2016. Of particular relevance to our Company, Charlestown is the cornerstone shareholder in Sintana Energy Inc (“Sintana”), a TSX-listed exploration company since 2019. Sintana maintains an indirect interest in a portfolio of exploration licenses in Namibia including in the emerging Orange Basin, where several multi-billion-barrel discoveries have been made by Shell, TotalEnergies and Galp Energia. Given that we see potential parallel between what has happened in Namibia in recent years and what may happen in Uruguay in the coming years, we were very pleased to have been able to attract an investor such as Charlestown to Challenger Energy.
Consistent with the long-term, strategic nature of Charlestown’s investment in the Company, Mr. Robert Bose was also invited to join the Company’s Board, with that appointment taking effect in May 2024. Robert has been the Managing Member of Charlestown since 2016, having joined Charlestown Capital Advisors as a principal in 2014. Prior, he spent 17 years in the Global Investment Banking Group at the Bank of Nova Scotia, most recently as Managing Director and Head of the Power & Utilities Group, with a specifical focus on the energy and power sectors. Robert is currently also serving as Chief Executive Officer of Sintana, which as noted represents a significant holding in Charlestown’s current portfolio. Robert’s addition to our Board is highly complementary, as it will give us the benefit of his experience, industry insights highly relevant to Challenger Energy’s position in Uruguay, and network.
Financial Review, Cash Position and Funding
The unaudited interim financial statements for the half year ended 30 June 2024 present details on the financial performance of the Company for the period. By way of added commentary, I would note that the nature of the Company’s primary business – high impact hydrocarbon exploration activities – means that a key financial indicator we focus on, and which is not always readily discernible from the financial statements, is net cash spend (or “overhead run-rate” or “burn” as it is sometimes also referred to).
In this regard, the Company’s net cash spend, after adjusting for various items such as licence expenses in Uruguay and purchase of property plant and equipment in Trinidad & Tobago, was in the order of $180,000 per month. This represents the basic costs of staying in business as a junior AIM-listed company – corporate expenses, salaries, listing costs, annual audit fees, etc. We believe that this level of “burn” compares favourably with similar AIM-listed entities, is consistent with the level of net cash spend in prior periods, and meets the Company’s stated objective of keeping its “burn” under $200,000 per month.
At balance sheet date the Company had approximately $1.8m of unrestricted cash (and approximately $0.8m of cash on restricted deposit in support of work program guarantees for various licences). During the period we sought to defer expenditure and minimise cash outflows as far as possible in anticipation of completion of the AREA OFF-1 farmout. As noted, once the farmout of AREA OFF-1 is completed, Challenger Energy will receive a cash $12.5 million payment, along with Chevron being required to carry our share of certain future work programme costs. Therefore, subject to completion of the AREA OFF-1 farmout, the Company expects it will have the cash needed to fund all planned activities for the foreseeable future, without the need for additional capital.
Strategic Direction
In our most recent Annual Report, I said I believed that the outlook for our Company over the coming period is as strong as it has ever been. My belief in this regard has not changed, and indeed, as each day passes, I become increasingly excited about what might be achieved from our early entry into Uruguay. What was initially no more than “option value” has now crystalised into an opportunity for substantial value-creation.
Thus, in the next 12 months, we expect that we will see Chevron rapidly take the AREA OFF-1 project forward, first with 3D seismic acquisition that could see new data for AREA OFF-1 available as soon as the middle of 2025, leading shortly after that to a decision on exploration well drilling. At the same time, our technical work program for AREA OFF-3 is underway, primarily involving reprocessing of legacy 2D and 3D seismic, but also including a number of other work streams similar to those we found leveraging for the AREA OFF-1 farmout strategy. As noted, we will be looking to replicate our AREA OFF-1 farmout success for AREA OFF-3, with a process that we expect will commence by mid-2025, and with the goal being to secure a partner for AREA OFF-3 during 2025/early 2026, and exploration well drilling thereafter.
Meanwhile, in Trinidad and Tobago the focus is to continue the good work of the last year in terms of maintaining current production, driving improved financial performance, and disposing of or exiting from any remaining non-core assets. At the same time, with the benefit of the improving operating position we have been able to achieve, we can also begin to consider the right way forward for the Trinidadian business over the longer-term: growing it into one that is profitable and cash-flow generative and/or reducing our exposure and potentially monetising our position.
Overall, the first half of 2024 has been truly transformational for our Company, during which time we solidified much of the hard work over the past several years, produced an outstanding result on our AREA OFF-1 farmout ambitions, and clearly laid the foundations on which we hope considerable shareholder value will be built over the coming years. As a significant shareholder myself I am fully aligned with all shareholders, and can assure you, my fellow owners of the Company, that everyone on the Challenger Energy team is laser-focused on delivering our objectives.
Eytan Uliel
Chief Executive Officer, Challenger Energy
30 September 2024
