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Canadian cashflows tempt i3

North Sea developer eyes cut-price production to bolster its balance sheet

The Western Canadian oil patch has hardly been among the global good news stories during the current oil price crash. But the UK’s i3 Energy, previously focused solely on the UK continental shelf (UKCS), is looking to it to secure cashflow and production on attractive terms to boost its position.

The firm, which is aiming to develop the Liberator and Serenity discoveries on the UKCS, announced on Tuesday that it was taking up an option to buy Canadian producer Toscana Energy. It secured the option in March when it acquired the firm’s C$28mn ($20.7mn) senior and junior debt facilities, on which Toscana had defaulted for just C$3.4mn.

Building a base

The Toscana deal itself is small. The firm produced only 1,065bl/d oe in 2019 from 13 licences—albeit assets that i3 notes are low-decline, long-life conventional fields and produce at an average break-even price of just below C$30.50/bl oe (slightly under $22.40/bl oe). i3 will dilute its current shareholding by just 4pc in stumping up the equivalent of C$3.85mn to complete an all-shares deal.

More importantly for an exploration firm previously without production or revenues, the assets generated C$5.5mn (US$4mm) in field netback—revenue less royalties and opex—and come with $89mn in accumulated tax pools. And i3 intends to use Toscana as a platform for further growth in Canada, having signed to non-binding letter of intent to seal another, much larger deal.

"The acquisition of the proposed assets would be the first follow-on transaction in our business plan and would be transformational for i3" Shafiq, i3

The firm will pay just under $60mn to acquire—from an as yet unnamed seller—250+ wells across what it describes as “multiple low-decline, long-life, light oil and gas fields”. The assets produced over 10,000bl/d oe in 2019 and generated more than $34mn in field netbacks.

The Toscana deal was always intended to “provide a platform to execute on a strategy for the rapid growth of a Canadian onshore production portfolio via M&A”, says i3’s CEO Majid Shafiq. “The acquisition of the proposed assets would be the first follow-on transaction in our business plan and would be transformational for i3, adding material, low cost per barrel, low decline production with significant organic growth optionality.”

UK renegotiation

The prospect of material Canadian production and cashflows should assist i3’s UK position. The firm was unable to meet an end of April deadline in its loan notes to enter into a reserve-based lending (RBL) facility or find an alternative means of funding to achieve first oil from the Liberator field.

But the majority noteholders have agreed to waive this condition as long as, by end of September, i3 has secured firm commitment for a minimum of £15mm of unsecured or fully subordinated financing, agreed a farm-out and/or funding term sheet to fund the drilling of at least one appraisal well on its Serenity discovery during 2020 or 2021, or executed an acquisition agreement for at least 2,500bl/d oe of production net to i3.

In addition, the firm is obligated to raise production to or above 5,000bl/d oe by the end of April 2021. The Toscana deal will be a step on the road to achieving those production targets, while the proposed follow-on acquisition would take i3 beyond where it needs to be.

In March, i3 said it had begun a farm-out process for its UKCS assets. “These efforts remain ongoing and engagement continues with potential farm-inees,” it updated on Tuesday. 

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