Challenger Energy, an Atlantic margin focused oil and gas company, is pleased to announce its audited Annual Results for the year ended 31 December 2023.
The 2023 Annual Report and Financial Statements will be posted to shareholders by 30 June 2023 along with the notice of the Company's Annual General Meeting to be held on 29 July 2024 at 11.00 a.m. British Summer Time at The Engine House, Alexandra Road, Castletown, Isle of Man IM9 1TG.
Chairman's Letter to the Shareholders
Dear Shareholders,
It is my pleasure to report to you as Chairman of your Company.
In my last report I commented on our strategic objectives for 2023: achieving value for our Uruguay AREA OFF-1 licence, and resetting our business in Trinidad and Tobago. I am pleased to be reporting that as of this Annual Report, both strands of our objectives have been achieved.
In Trinidad and Tobago, disposals of non-core assets have successfully completed, and the reset of 'efficiency and profit' around our core assets of Goudron and Inniss-Trinity continues. It is a credit to our team in Trinidad and Tobago that we continue to have safe and sustained operations in country, and I take this opportunity of thanking that team on behalf of shareholders and the Board of Directors. In 2023, we also exited our acreage position in Suriname, ensuring that all operational focus is on Trinidad and Tobago.
In Uruguay, we had a very clear objective of creating value for our shareholders by the farm-out of AREA OFF-1. We announced a successful farm-out to Chevron earlier this year, which came as a result of a well-run process. As reported, the transaction is yet to close, but we do expect to have completed all regulatory matters in the course of the coming months.
In Uruguay, we also secured the award of AREA OFF-3, and as was the case with AREA OFF-1, with a prudent work programme.
Overall, Uruguay acreage is still benefitting from the almost constant stream of good news coming from the African side of the Atlantic conjugate margin. We look forward to working closely and supportively with Chevron over the coming months and years to make AREA OFF-1 a highly successful venture. We are equally excited about our plans to enhance value at AREA OFF-3. Eytan, in his CEO report, expands on the detail behind the work undertaken and planned on both our Uruguayan licences.
In April 2024, we reported on the strategic investment by Charlestown Energy Partners in the Company, and I look forward to working with Robert Bose on the Board.
Finally, and as always, I thank the staff of Challenger Energy for their efforts last year, the Board for their guidance and insight and, of course, our shareholders for their continued support.
Chief Executive Officer's Report to the
Shareholders
Dear fellow Shareholders,
This is my fourth report to you, the owners of the Company, in my capacity as Chief Executive Officer.
The last 18 months has been a period of excellent progress for Challenger Energy. During this period, we did what we said we would do and we delivered most of what we promised we would deliver. The highlight event being the farm-out of our AREA OFF-1 block in Uruguay to Chevron, a transaction which is transformational for our Company in that it will lead to an exciting program of value-adding activity over the coming 18 months, as well as ensuring that we are fully-funded for the foreseeable future. Therefore, as we look to the second half of 2024 and beyond, I believe that our Company is in the best position it has been in for many years. Details are provided in my commentary below.
Strategic Context
In last year's Annual Report, I reported on several key developments in Challenger Energy's business during the 2022 period.
In summary, these were (i) the Company and its business had been successfully "reset", both operationally and financially;
(ii) significant exploration discoveries had been made in the Namibian conjugate margin, analogous to the Company's licenced
acreage in Uruguay; and (iii) endeavours to increase production from our Trinidad assets had proved difficult.
As a result of these factors the Company responded during 2023 with a shift in strategy to place primary emphasis on our Uruguayan assets, and to deemphasise growth in Trinidad in favour of achieving cashflow breakeven from the core Trinidadian assets while divesting any assets non-core to this objective.
Uruguay
In a relatively short space of time, our interests in Uruguay have become the centrepiece of our business. It is the place where we expect to be able to realise the greatest incremental value over the coming years, and it is thus the place where we are now focusing much of our efforts.
Shareholders will recall that in 2020 we were awarded the licence for the AREA OFF-1 block, offshore Uruguay. At the time we saw Uruguay as being an underexplored frontier basin location with reasonable potential, although at that time Uruguay was not on the global sector radar, so when we were awarded the AREA OFF-1 licence Challenger Energy became Uruguay's sole licence holder. However, in geological terms Uruguay, we believe, is the "mirror" of Namibia's Orange Basin, and thus when very large new discoveries were made by supermajors in the Orange Basin in 2022, Uruguay become a global exploration "hotspot". In less than two years Uruguay's offshore went from being completely unlicenced to being 100% licenced, with every offshore block (other than Challenger Energy's) licenced to majors / NOC. Moreover, new entrants committed to significant work programs to secure their licences, in contrast to the modest work program we bid to secure AREA OFF-1.
In this context we decided to strategically prioritise Uruguay. We laid out a plan of action, and over the last 18 months we successfully executed on that plan, as follows:
(i) We accelerated our technical work program on AREA OFF-1, thereby rapidly enhancing the value of the asset. Our work program was thorough and focused, including reprocessing of legacy 2D seismic data, advanced amplitude variation with offset (AVO) analysis, seabed geochemical and satellite seep studies and full reinterpretation and remapping of all data, leading to lead and then prospect definition and an initial volumetric assessment. The result was delineation and high grading of three primary prospects, in aggregate representing an inventory of approximately 2 billion barrels (Pmean) and up to 5 billion barrels in an upside case (P10). This served to establish AREA OFF-1 as a high-quality asset of global scale and materiality. Focused technical work continued throughout 2023, in support of maximising the potential for securing a farm-out. This also meant that by the end of 2023 our minimum work program commitment for the first four-year period of the AREA OFF-1 licence - initially meant to be completed by August 2026 - had been completed, more than two years ahead of schedule.
(ii) To fully leverage the value of our acquired knowledge and understanding, the excellent working relationship established with the Uruguayan authorities and regulators, and the attractive conditions in that country for hydrocarbon industry activity, we decided to bid for a second licence. We were successful in this endeavour, and in June 2023 Challenger Energy was designated as the party to whom the AREA OFF-3 licence - the last available offshore acreage in Uruguay - would be awarded, on attractive terms. This award was subsequently finalised in March 2024, with the initial four-year exploration period for AREA OFF-3 commencing in June 2024. As a result of this award, our Company has emerged as the 3rd largest net acreage holder in Uruguay, and the only junior E&P company with any position in the Uruguay offshore, holding two world class assets and a growing prospect inventory in what has fast become a highly desirable exploration "postcode".
(iii) On the basis of our excellent technical results, in mid-2023 we launched a formal, adviser-led farm-out process for AREA OFF-1. The objective was to secure an industry heavyweight as a partner for the project, who could provide the further expertise and capital needed to rapidly take AREA OFF-1 forward to 3D seismic acquisition and ultimately exploration well drilling. Our target was to secure a farm-out by the end of 2023, and whilst ultimately the process took a few months longer than planned, in March 2024 we entered into a farm-out 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, 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). As at the date of this Annual Report, Chevron's entry into the project awaits approval from the Uruguayan regulatory authorities, a normal industry formality for any farm-out and one which we expect will be concluded in the coming months, well within the time needed to allow for Chevron's proposed 3D seismic acquisition to commence at the end of 2024/early 2025. We anticipate thereafter that we will see Chevron undertake significant activity on AREA OFF-1, and it is this activity which we believe will ultimately realise the considerable value we see in this asset.
In summary, the recap for 2023 insofar as our business in Uruguay is concerned is that we completed a high-quality and value-accretive technical work program for AREA OFF-1, we materially expanded our Uruguayan asset base through adding the AREA OFF-3 licence to the portfolio, and we secured a market-leading farm-out for AREA OFF-1.
However, before moving on to considering the rest of our business, I think it is worth making a brief, specific comment on the value and impact of this last item - the farm-out agreement with Chevron. As already noted, entry into this agreement was undoubtedly the highlight of the last 18 months for Challenger Energy, and represented the culmination of a huge amount of technical and commercial work, by many people over more than a year. It is thus an outcome we are extremely proud of, and is important for two reasons.
Firstly, the farm-out metrics achieved in this transaction are in our view, excellent. All CEOs will have you know that their Company is undervalued, but in this case, if properly analysed, the embedded value to our Company in the AREA OFF-1 farm-out arrangement is many multiples of our current share price - something I believe the equity market is yet to appreciate.
Secondly, over and above the mere numbers, the AREA OFF-1 farm-out is genuinely transformational for Challenger Energy's future, in that (i) our strategy and technical work has been validated by one of the world's leading energy companies - the resulting intangible benefit in terms of our industry "credentials" is immeasurable, (ii) going forward, operation of the AREA OFF-1 project will be in the hands of an operator and partner who has made a clear commitment to accelerating 3D seismic acquisition (and hopefully thereafter, exploration well drilling), and (iii) we will retain a material stake of 40% in the AREA OFF-1 licence, which will give us enormous flexibility when it comes time to consider how we participate in any future success case.
Trinidad and Tobago
By the end of 2022 we had come to the conclusion that achieving a material increase in production from our Trinidadian onshore asset portfolio was not commercially viable, due to the age of the fields and the technical characteristics of the relevant reservoirs. We thus shifted our objective from production growth to achieving financial breakeven from core assets, and streamlining our operations by divesting any assets considered non-core to this objective.
Thus, in early 2023, we sold the small and geographically removed South Erin asset, and in late 2023 we completed the sale of the non-producing Cory Moruga appraisal asset. In both cases the sales not only realised cash, but also relieved the group of significant liabilities, work program commitments, and administrative burden and cost associated with management of those assets.
At the same time, we concentrated our operational efforts on our two primary producing assets - the Goudron and Inniss-Trinity fields in south-east Trinidad. There, the focus was very clear: maintain constant production, eliminate excess cost, realise operating efficiencies from our people and equipment, and achieve cashflow breakeven.
In terms of results, 2023 production from these two fields was generally constant (on a like-for-like basis almost identical to 2022 production), and total operating expenses and G&A were reduced considerably (33%) as compared to 2022. However, realised oil prices across 2023 were lower than across 2022, so many of the operational gains we made were offset by lower revenue, such that whilst we were successful in operating on a cashflow breakeven basis, we did record a (relatively small) net operating loss (as compared to a small positive operating cash surplus in 2022). This financial performance also necessitated us reconsidering the carrying value of the Trinidadian licences on our balance sheet, and at the end of 2023 we decided to write down both the goodwill and asset values associated with these licences.
Through 2023 we also spent a substantial amount of time and effort on trying to develop options to expand our Trinidad business into a more sizeable and profitable production operation, either through organic growth or through adding new acreage to our portfolio. However, despite our best efforts, we did not make any progress of note on this important task.
In summary therefore, insofar as our business in Trinidad is concerned, I can report that 2023 was a mixed year. We largely met our core objectives of achieving cashflow breakeven operations and selling non-core assets. But, we did not turn a profit, and we did not "crack the code" as to how, in the longer term, we can transform the Trinidad business into a profitable production base of greater scale. We will continue our efforts to make progress on this front in the coming year.
Other Assets
In relation to the Company's licences in The Bahamas, throughout the course of 2023 we continued to pursue a renewal of the licences into a third exploration period. In parallel we continued to explore various alternative strategies seeking to monetise those assets. The process has been frustratingly slow, but we expect to make better progress in the coming 12 months.
During 2023 we also undertook a detailed "economic basement to surface" technical review of the Weg Naar Zee project in Suriname, and concluded that the project did not offer the prospect of long-term commerciality (especially as compared to the better return potential we saw available from other assets in our portfolio). We thus made the decision to exit from the Suriname project, a process which was fully completed by the end of 2023.
Financial Performance
For the 2023 period under review, we recorded a loss of $13.4 million, although this includes the impact of various non-cash items, including non-cash losses arising from accounting impairments associated with the Trinidadian assets of approximately $12.9 million. Therefore, a more relevant metric to evaluate our financial performance during the period would, in my view, be a consideration of our "burn" - that is, cash used in running/sustaining our business across the period. In that respect, as noted, our Trinidadian operations operated on a largely self-sustaining basis through 2023 (thus requiring no cash support from the group), and the general and administration cost for the rest of our business was reduced to under US$200,000 per month (this being a reduction of 37% as compared to 2022). Based on benchmarking, we believe that this level of "burn" which represents the basic costs needed to stay in business as an AIM-listed vehicle, compares favourably with most of our peers. That said, we are always considering ways in which we can reduce our cost base further.
Capital Allocation and Funding
For a junior E&P company, effective capital allocation is one of management's most important tasks. This is because within any given portfolio of assets, there will almost always be more opportunities and activities in need of funding than there are funds available. With this in mind, prudently managing our available capital has always been a key priority, with the overriding goal being to strike a balance between advancing our business quickly and in the most advantageous way, but at the same time making the most out of every dollar spent, and avoiding to the greatest extent possible the need to seek additional funding by way of dilutive equity raisings.
Pleasingly, over the last 18 months we have largely been able to achieve this goal. Specifically, Challenger Energy's last equity capital raising was in March 2022 as part of a broader corporate restructure / recapitalisation. At that time, we raised an amount that was then estimated to be sufficient to sustain 12 months of future operations, but we have "stretched" the funds raised such that we have operated without needing to undertake an equity placing for more than two years now. We have done this by:
(i) keeping overheads lean and efficient: as mentioned, through the course of 2023 our corporate overhead was low, both in an absolute sense and as compared to 2022;
(ii) ensuring any incremental expenditure is very focused in its application: in 2023, we only allocated discretionary capital to value-adding technical work in Uruguay, and, as noted, operations in Trinidad and Tobago were largely self-funding through the period, thus requiring almost no financial support from the Group; and
(iii) successfully selling non-core assets: the sales of the South Erin and Cory Moruga assets supplemented available working capital, and whilst a delay in regulatory approval for the sale of the Cory Moruga asset necessitated a bridge funding facility being put in place in mid-2023, we were eventually able to deliver on that transaction, which in addition to releasing capital back to the business also allowed for the bridge funding facility to be fully repaid and cancelled.
Subsequently, in May 2024 we secured a meaningful equity investment - at a premium price - from specialist E&P investor Charlestown Energy, and as previously noted, on closing of the farm-out for the AREA OFF-1 licence in Uruguay we will receive US$12.5 million in cash. Against this we have no debt, our cost base is low, the minimum work program on AREA OFF-1 in Uruguay has been completed and our share of 3D seismic costs will be carried by Chevron, the work program for AREA OFF-3 is modest, and we have no unfunded forward work program commitments. This means that once the AREA OFF-1 farm-out completes we will have cash reserves more than adequate to ensure ongoing operations on a "fully-funded" basis for the foreseeable future. This puts our Company in the best financial position it has been in for many years.
ESG
As I noted in last year's Annual Report, the broad category of activities generally referred to nowadays as Environment, Social and Governance, or ESG, are central to everything we do. It is a core value in our business to ensure that achieving our commercial objectives never comes at the expense of harm to people or the environment, and that our "social licence to operate" is maintained intact at all time. We want to be known as a responsible, reliable operator and a partner / employer of choice.
In 2023, our excellent track record in this all-important area was maintained. Across all of our operations there were no incidents of note - whether personal injury, property damage or environmental. We maintained productive and positive relationships with all relevant Governments and regulatory bodies, we continued our policy of investing considerably in Company-wide training programs and ESG awareness activities, and we made a number of targeted social and welfare contributions in the communities where we operate. A tangible expression of our record of achievement in this area was the considerable body of work undertaken in support of renewing our Safe-to-Work (STOW) accreditation in Trinidad, a regulatory certification granted to only a few operators in that country. After almost a full year of preparation and audits this renewal was granted in April 2024, a testament to the strong culture of workplace health and safety awareness, commitment, accountability and performance that we have fostered and maintained.
In summary, the Company's excellent ESG performance record continued in 2023, and everyone at Challenger Energy is 100% aligned to ensure that this continues into the future.
Outlook
I believe that the outlook for our Company over the coming period is as strong as it has ever been.
In the next 12 months we will be looking to see a result from efforts to realise value from our assets in Trinidad, and, as noted, we hope to reach a resolution in relation to our licences in The Bahamas in the same timeframe. But, undoubtedly, the key area of focus and value creation for Challenger Energy going forward will be Uruguay.
There, we expect the AREA OFF-1 farm-out to be finalised in the coming months, following which we expect that Chevron will begin to rapidly take the project forward. 3D seismic acquisition may happen as soon as the end of 2024, meaning that we could see new data for AREA OFF-1 as soon as the middle of 2025, leading to a decision on exploration well drilling thereafter.
Meanwhile, we will shortly kick off our technical work program for AREA OFF-3, which will see reprocessing of legacy 2D and 3D seismic, as well as a number of other work streams similar to those we found leveraging for the AREA OFF-1 farm-out strategy. We will be looking to replicate our AREA OFF-1 farm-out success for AREA OFF-3, this time with a process we expect will commence in early-to-mid 2025, with a goal to secure a new partner during 2025/early 2026, and exploration well drilling thereafter. And, all of this activity in Uruguay will occur against a backdrop of heightened industry interest, and substantial offshore exploration work being undertaken by others in Uruguay, northern Argentina, and southern Brazil - so it will be a busy and exciting time.
In concluding my review of 2023, I would like to take this opportunity to thank all of our team. We may be a small company, but we have highly-skilled, committed, and fiercely loyal employees, whose hard work and dedication deserves recognition. I also wish to express my deep appreciation for the support we receive from our Board, stakeholders, regulators, suppliers, contractors and shareholders.
2023 was a period of great progress for Challenger Energy. Now, with the benefit of the excellent foundations put in place over the past few years, our task is to realise the value we see in our assets. All of us who work at Challenger Energy are very much looking forward to doing just that.