Deltic Energy Boosted by North Sea Gas Discovery as it Eyes International Expansion

Deltic Energy, the AIM-listed oil and gas explorer, received a major boost to its plans for international expansion with a significant new gas discovery in the UK North Sea. Coming on the heels of the UK government’s latest budget, which further tightened the fiscal regime for North Sea operators, the discovery highlights both the remaining potential and challenges of Deltic’s home market as it looks to leverage its exploration expertise abroad.

A Timely Discovery in Challenging Waters

The morning after Chancellor Rachel Reeves announced an increase to the Energy Profits Levy and removal of some capital investment reliefs, Deltic revealed a successful outcome from its Selene exploration well. The discovery unearthed recoverable gas resources estimated between 95 and 176 billion cubic feet (BCF), with a mid-case of 131 BCF.

While at the lower end of pre-drill estimates, Deltic CEO Andrew Nunn put the result in context, noting it is still likely “the second or third largest discovery, with Pensacola being the largest, in the UK Southern North Sea since Tolmount was discovered in 2011.” Importantly, the reservoir quality encountered was significantly better than predicted, which should lead to improved production rates.

The timing of this discovery is particularly significant given the increasingly challenging fiscal and regulatory environment for North Sea operators. As Nunn stated, “The budget last week did not do the industry any favours and it has reinforced the UK’s reputation as an unattractive destination for new investment into the UK’s homegrown oil and gas industry.”

Building on Past Success

The Selene discovery follows Deltic’s involvement in the Pensacola discovery announced in February 2023, which found nearly 100 million barrels of oil equivalent in the emerging Zechstein play. However, Deltic was forced to withdraw from Pensacola earlier this year due to funding challenges, highlighting the difficulties faced by small-cap explorers in the current UK market.

Monetization Options and Development Potential

Unlike Pensacola, the Selene discovery benefits from being in the well-understood Leman Sandstone reservoir, which has a 60-year production history in the Southern North Sea. This familiarity, combined with nearby infrastructure, means Selene could potentially reach a final investment decision without further appraisal drilling.

Deltic now has several options for extracting value from its 25% stake in Selene. These include:

1. Full or partial monetization in the short term
2. Further farm-down of its equity stake
3. Participating through the development phase and monetizing via production

In the meantime, Deltic will work with project partners Shell (until Viaro takes control in H1 2025) and Dana Petroleum to progress Selene towards a final investment decision.

Pivoting to International Opportunities

While Selene represents a significant success, Deltic’s management recognizes the need to diversify beyond the challenging UK market. As Nunn explained, “Our key investors recognize the technical achievements of the Deltic team but they want those proven hydrocarbon finding skills to be deployed in other jurisdictions where investors can be more confident in seeing a return on their investment.”

The company plans to leverage its global experience and 100% exploration success rate to secure opportunities in areas with the right balance of subsurface potential and supportive political and fiscal regimes. Initially, Deltic will focus on smaller opportunities that can provide near-term access to cash flow while incubating longer-term, high-impact exploration projects.

Investor Perspective and Valuation

Despite its recent successes, Deltic’s market valuation remains depressed at around £5.8 million, or 6p per share. This is roughly one-fifth of the value ascribed by Canaccord analyst Charlie Sharp, highlighting the disconnect between the company’s technical achievements and investor sentiment towards UK-focused oil and gas explorers.

The successful monetization of Selene could provide a significant catalyst for rerating Deltic’s shares. Additionally, news of international deal-making and project acquisitions will likely be closely watched by investors as the company pivots to a more global focus.

Outlook and Catalysts

In the near term, much of Deltic’s investor communication will focus on progressing Selene towards a final investment decision and potential value extraction. However, the real excitement lies in the company’s international expansion plans.

Investors will be eagerly awaiting news of deals that showcase Deltic’s ability to secure attractive opportunities abroad and demonstrate the value of its proven exploration expertise in more favorable jurisdictions. If successful, this pivot could transform Deltic from a North Sea-focused minnow to a dynamic international explorer with a diversified portfolio of assets.

As the energy transition continues and geopolitical factors impact global oil and gas markets, Deltic’s technical prowess and nimble approach could position it well to capitalize on overlooked or undervalued opportunities. For investors willing to look beyond the current valuation, Deltic Energy represents an intriguing high-risk, high-reward play in the small-cap oil and gas exploration space.