North Sea oil firm set to make huge profit amid slump in market
NORTH Sea-focused Ithaca Energy has announced plans to slash investment in new assets following the oil price plunge but said it could make $450 million cash profit this year even if Brent crude sells for $1 per barrel.
Ithaca provided a further sign that the turmoil in the oil market is set to take a heavy toll on the North Sea when it said it expects to reduce capital investment by 50 per cent this year, to $120m.
The company also plans to make big savings on the costs of running assets in response to the disastrous change in market conditions triggered by the impact of the coronavirus and the start of a piece war between Saudi Arabia and Russia.
The cuts will impact on jobs at the firm which employs around 500 people offshore and in Aberdeen.
Brent traded at $32.95 per barrel yesterday afternoon compared with $52/bbl at the start of March.
Ithaca said it was making preparations to cope in the face of a potentially “lower for longer” commodity price outlook.
However, the Israeli-owned company said it should be able to generate $450m cash from its operations net of costs this year even if Brent drops to $1/bbl for the balance of the year.
The confidence partly reflects the fact Ithaca put itself in a good position by arranging to sell more than 20 million barrels of oil in coming months at an average price of at least $62/bbl.
The company used hedging deals to help it trade profitably during the oil price plunge that started in 2014.
But sector watchers will take heart from the fact that Ithaca has shown that North Sea firms can produce oil cheaply enough to allow them to remain profitable at very low commodity prices.
Ithaca’s production costs averaged $17/bbl last year.
Chief executive Les Thomas said the company had reaped the rewards for expanding significantly in the North Sea last year.
It bought a $2bn North Sea portfolio from US giant Chevron. The deal was one in a series that involved US firms offloading North Sea assets to free up funds to invest in the shale fields of their home country.
Mr Thomas said the Chevron deal established Ithaca Energy as a major UK North Sea operator with an exciting future. “The acquisition provided us with a high-quality, low cost set of assets and an enlarged platform from which to grow and unlock the full potential of the business,” said Mr Thomas.
Ithaca is owned by Delek, which acquired the business in a £1bn deal in 2017, under a plan to become a significant international player.
Ithaca said it achieved underlying earnings of around $960m last year.
The preparation of the firm’s audited results has been delayed following the request by the Financial Conduct Authority last month for firms to wait before filing numbers given the level of uncertainty caused by the spread of the coronavirus.
Ithaca said: “2020 operating expenditure has been cut and is forecast to reduce unit costs from $17/ boe to approximately $15/boe.”
The company said it is reducing staffing on offshore facilities for safety reasons and reviewing all aspects of operations, without quantifying the expected impact on jobs.
Onshore workers have been invited to take part in a Voluntary Leavers programme.
Ithaca employs 280 people onshore. The prospect of spending cuts by firms that operate oil and gas fields will cause deep concern in the North Sea.
The supply chain was hit hard by the fallout from the slump in the crude price from 2014 to 2016.
Major exporters curbed output to support the market but the agreement fell part last month when Saudi Arabia and Russia differed about how to respond to the impact of the coronavirus on demand.
President Trump tweeted last week that he expected the countries to agree within days to cut production.
It is thought the two countries want US producers to be covered by any agreement. They are expected to meet tomorrow.