Bahamas Petroleum Company, the oil and gas exploration company with significant prospective resources in licences in The Commonwealth of The Bahamas, is pleased to announce that, having postponed its Perseverance #1 drilling operation from H1 2020 due to the Covid-19 pandemic, it has entered into a definitive contract with Stena Drilling for provision of a drilling rig as soon as Q4 2020. Consequent on the terms of this contract, the Company is able to provide an updated and significantly reduced cost estimate for its first exploration well in The Bahamas, along with a general update on expected timing and progress toward drilling.
- Unconditional agreement with Stena Drilling for the provision of a state of the art, sixth generation drilling rig, including integrated supply of a Managed Pressure Drilling (MPD) unit.
- Firm window for commencement of drilling between 15 December 2020 and 1 February 2021, consistent with licence obligations as extended by the Covid-19 force majeure event.
- Reduced estimated total cost of Perseverance #1, down by approximately 15%, based on the contracted rig rate and rates for other contracted services and equipment, reflecting changes to the global operating environment.
- Perseverance #1 well targeting recoverable P50 oil resources 0.77 billion barrels, with an upside of 1.44 billion barrels. Reduced cost estimate creates scope for expanded formation evaluation work in the success case, without increasing previous estimated total capital requirement.
- Optimal funding strategy and timing, including farm-out process, being reassessed accordingly.
Simon Potter, Chief Executive Officer of Bahamas Petroleum Company, said:
"In March 2020, we were within weeks of commencing the drilling of our Perseverance #1 well when we were compelled to defer our planned drilling programme due to the impacts of the Covid-19 pandemic. Immediately we undertook a range of activities necessary to reschedule activity toward the end of 2020 and into the first quarter of 2021, consistent with our licence obligations (as extended for the declared force majeure event), by which time we expect the worst of the broad suite of impacts of the pandemic to be behind us. To this end we are pleased to announce that we have today entered into a rig contract with Stena Drilling, which provides a firm series of parameters on rig rate, provision of MPD, mobilisation and demobilisation costs, and defines a revised drilling window of 15 December 2020 to 1 February 2021.
This decision - to lock in a rig now, at an already favourable rig rate, rather than try and second guess what markets and availability will look like later in the year - speaks to our intent to ensure Perseverance #1 is drilled at the soonest opportunity, and provides the necessary certainty needed for operational planning. Acting decisively in this way is consistent with our single-minded focus on technical delivery. Importantly, the commercial parameters in the rig contract have allowed us to not only revise down significantly the anticipated well cost, but also clears the way to revisit our funding strategy with adequate time to ensure we have the funds available as and when we need them, on the best possible terms. I look forward to updating shareholders in the coming months as we continue making progress towards recommencing operations."
BPC has an obligation to drill an initial exploration well prior to the conclusion of the current exploration period of its four conjoined licences in the southern territorial waters of The Commonwealth of The Bahamas. That period was due to expire on 31 December 2020, but is extendable based upon declaration of force majeure occasioned by the Bahamian and global response to the Covid-19 virus pandemic, with the Company having submitted a force majeure notice to the Government of The Bahamas in early March 2020, in accordance with the terms of its licences. Based upon the licence terms and prevailing regulations (and allowing only for the duration of disruption to operations to-date) the Company expects that the current exploration period of its licences will extend until at least April 2021 (however, given the likely further continued Covid-19 related disruption the Company has sought clarification from the Government on an extension to at least June 2021).
At the same time, the Company's long-stated policy has been to avoid undertaking drilling activities during the peak of the Bahamian hurricane season, which traditionally ends in November of each year.
Accordingly, the Company has been working hard over the period of Covid-19 related shut-downs to reschedule its drilling plans, including all critical supply and service contracts, along with finance arrangements, towards a revised operational objective of drilling Perseverance #1 in the period December 2020 to April 2021.
Consistent with this revised operational objective, BPC, on 24 May 2020, entered into an agreement with Stena DrillMax Ice Limited ("Stena"), a wholly-owned subsidiary of Stena Drilling Limited, one of the world's foremost independent drilling contractors, for the provision of a sixth-generation drilling rig (the "Rig Contract"). The Rig Contract is fully termed, binding and unconditional, and provides the certainty of a firm time slot for the delivery of a drilling rig on location in the window of 15 December 2020 to 1 February 2021.
The Rig Contract is in accordance with standard industry documentation, and sets out all relevant commercial parameters and costs - a summary of the key terms and conditions of the Rig Contract is provided in Table 1 below. Establishing a definitive time window for drilling, and agreeing operating parameters with Stena, now allows the BPC drilling team to recommence planning for operations without unnecessary distraction or uncertainty.
The Rig Contract entered into with Stena replaces the previous contract for a drilling rig that the Company anticipated entering into with Seadrill Limited, and provides for improved terms (notably, an all-in rig cost, including managed pressure drilling system, lower than that previously anticipated). The rig to be provided by Stena is of an equivalent or higher specification to that which would have been provided by Seadrill, and thus the Company's existing drilling plan and Environmental Authorisation will, subject to some rig-specific updating, continue to be applicable for Perseverance #1 drilling operations. Over the coming months the Company will be working with The Government of The Bahamas to ensure an update and commensurate extension to the existing authorisation.
Revised Costs Estimate
The Company had previously provided guidance as to the estimated total cost of drilling operations for the Perseverance #1 well - most recently on 25 March 2020, when this estimated cost was confirmed to be in the range of $25 million to $30 million. At that time the Company also identified a number of contingency costs relating to pace of drilling (rate of penetration or "ROP"), the potential requirement for additional casing strings based upon real-time drilling outcomes, and/or additional logging activities. These contingencies (if required) were estimated to add up to a further $5 million, such that in the extreme case of all contingencies being required without any offsetting cost savings being achieved, the cost of Perseverance #1 might be up to $35 million in total.
The revised firm pricing and operating parameters encapsulated in the Rig Contract, as well as broader industry conditions exerting downward pressure on pricing, has provided an opportunity for the Company to revisit the cost of the Perseverance #1 well, with a revised estimated cost now in the range of US$21 million to US$25 million.
This revised estimate of US$21 million to US$25 million is not only materially lower than the previous cost estimate (of US$25 million to US$30 million), but represents a narrower range (in absolute terms) as compared to the previous cost estimate, given the now greater certainty on specific input costs (and notwithstanding that additional costs have been included in the estimate to accommodate implementation of a number of possible strategies for the mitigation of residual Covid-19 impacts - the extent to which these will be required as yet unknowable, given that the drilling window remains more than 6 months in the future).
At the same time, potential operational contingencies relating to real-time drilling results (as previously identified) are essentially unchanged, such that on a like-for-like basis, the total cost of Perseverance #1 is now estimated to be up to $30 million in total , representing an approximate reduction of 15% to the previous well cost estimate (of up to $35 million).
Over and above this revised estimate, the Company has also now scoped a further $3 million - $5 million of provisional cost elements relating to an expanded range of formation evaluation work, that the Company previously identified but that can now be undertaken at the Company's election in a success case, subject to capital availability (i.e. the identified cost savings mean, assuming accuracy, in a success case, that considerable additional work could be undertaken within the same $35 million capital "envelope" as had previously been estimated).
In summary, BPC now estimates the total cost of Perseverance #1 to be in the range of $21 million to $25 million, a material reduction from the most recent prior comparable estimate. In addition, the Company continues to assess there to be up to $5 million in potential operating contingency costs, and has scoped up to $5 million of provisional costs for additional formation evaluation work that the Company could elect to incur in a success case. However, the extent to which these contingent / provisional elements are utilised will not be known until closer to or during drilling operations, and decisions in relation to incurring these items will be based on capital availability at that time.
Funding and Funding Strategy Update
Prior to the Covid-19 pandemic shut down, the Company had commenced procurement of various long-lead or critical path equipment items required for drilling, such as casing and wellheads. Some of these items had been ordered and received but not yet paid for; others had already been paid for. All items received have been warehoused at minimal cost, and are available for redeployment at recommencement of drilling activities. The Company has also sought to work collaboratively with suppliers to reschedule payment obligations where items had not yet been paid for.
At the same time, prior to the Covid-19 shut down, the Company had already undertaken and paid for a considerable amount of preparatory work for drilling - largely reflected in "manhours" - most of which expenditure will not need to be repeated for recommencement of operations. Against this, the Covid-19 delay has added an additional 6 months of general working capital needs.
The Company has current cash holdings of approximately US$12 million. Taking into account ongoing working capital needs and costs associated with initiating the rig contract and readying for operations, at the time drilling is ready to commence in late 2020 / early 2021, it is anticipated the Company will have cash holdings of approximately $9 million. Thus, on the basis of this revised total well cost estimate of US$21 million to US$25 million (plus potential contingencies), the Company's current funding "gap" for Perseverance #1 is in the range of $12 million to $16 million (plus a further $5 million to $10 million depending on the extent to which potential contingency / provisional costs may be required / opted for).
In this context, shareholders are reminded that the potential funding sources established by the Company prior to the Covid-19 shut down continue on foot, and, if available and drawn (and when aggregated with the Company's existing cash holdings), would more than meet the Company's overall funding needs for Perseverance #1. In summary, these potential funding sources are:
- A Conditional Convertible Loan with Australian-based Bizzell Capital Partners Pty Ltd for a total investment of £10.25 million (approximately US$13 million). Once advanced, the Conditional Convertible Loan would be for a term of 3 years, with a coupon of 12% per annum, convertible at a price of 2.5 pence per share. Funding under the Conditional Convertible Loan remains subject to satisfaction of a number of conditions precedent, and, as announced on 25 March 2020, the parties to the Conditional Convertible Note Loan had agreed a variation such that the date for satisfaction or waiver of all conditions precedent and election to subscribe to the Convertible Notes was extended to no later than 15 October 2020 (and, to the extent that the subscriber elects to subscribe on an unconditional basis for at least £1.5 million of Convertible Notes prior to 15 October 2020, the date for the satisfaction or waiver of the conditions precedent to draw-down of the balance of the Convertible Notes will be extended to 15 November 2020), with accrual of interest not commencing until actual remittance of funds by the Subscriber to the Company, and therefore with no cost to the Company until that time; and
- A £16 million (approximately $21 million) facility with a Bahamas-based family office investor for a zero-coupon, second ranking convertible bond (the "Facility"), entered into on 20 February 2020 and expanded on 17 March 2020 (and as more particularly described in the Company's announcement of that date). As at 17 March 2020, the Company had drawn down an initial tranche of the Facility of £4.23 million (net of face value discount) , with the balance available to be drawn in four additional tranches. As announced on 25 March 2020, in view of the Bahamas and US Covid-19 situation, the parties to the Facility agreed to keep the Facility on foot, and to replace the draw down dates of April, May, June and July 2020 with revised draw down dates in November (£1.19 million available net of face value discount ) and each of December 2020 and January and February 2021 (£2.99 million available per tranche net of face value discount ) . The parties also agreed to further review the Facility terms and draw down schedule once the overall market impact of the coronavirus response is better understood.
In addition to the above noted facilities, given current market conditions and the revised drilling timing the Company is now actively seeking to revisit all potential funding sources for Perseverance #1, with a view to optimising the availability and cost of its funding. This includes continuing to pursue a farm-in, and farm-in discussions remain on foot with a number of parties. As noted above, consequent on signature of the Rig Contract, Stena Drilling has also been granted certain options to invest in BPC or the project.
Overall, given that drilling operations will not commence until at least 15 December 2020, the Company now has in excess of 6 months to refine, implement and complete its optimal funding strategy in a measured way. In doing so the Company's previously articulated funding principles will remain unchanged:
(i) to ensure that funding is available as and when required;
(ii) to seek to minimise shareholder dilution from such funding, such that the dilution required to secure the funding for the well would be less than or at least no more than the dilution that would result from a farm-in transaction; and
(iii) to create multiple funding sources with maximum flexibility and optionality.