DALP commences planned $9.4m energy-driven SXDT buyback

Spectre.ai is pleased to announce a partnership with and purchase of tokens in oil recovery project Solar Oil (SOP), which will see an energy-based-buyback-facility established for SXDT on Spectre Exchange and a yield-swap mechanism allowing SXDT token holders to swap between SXDT and SOPX, Solar Oil’s redemption token that is generated via daily oil production.

The backdrop

Despite the growth in green energy, oil is still considered to be the lifeblood of many industries. It is the world’s most important commodity, despite the turbulent economic times the industry faced in 2020. The U.S. Energy Information Administration (EIA) projects that by 2031 oil prices (which are currently sitting at around $60 a barrel) may grow to $102.56 per barrel. The National Energy Board (NEB) also predicts significant growth in the next ten years, estimating that crude oil may fetch a per-barrel price of $75 in 2031.

Source: KNOEMA, NEB, EIA, World Bank, IMF.

However, predictions are not certainties, and there are some factors that could influence these estimates. One of these factors is the development of renewable energy sources that could play an important role in replacing electricity. Other factors include OPEC’s dominion on supplies and other geopolitical factors, as highlighted by McKinsey in a recent strategy piece on future oil prices. Despite that, it is hard to see a future in which oil is completely replaced by renewable energy because of how essential oil continues to be to the transportation and manufacturing industries. As these industries keep growing and developing, the demand for a reliable energy source like oil is unlikely to decline any time soon.

It therefore remains important that oil companies keep up a steady supply. However, the oil mining process can be extremely expensive due to outdated forms of technology still being widely utilised. This is a major issue because the high costs involved in the process have resulted in more than 100,000 low-volume oil wells in the United States being either abandoned, or utterly under-utilised. This is a problem that is found in many other countries as well. Logic dictates that it therefore makes most sense to drain these wells instead. A project known as The Solar Oil Project (SOP) have made it their mission to find a solution for this complex situation.

SOP make use of modern technology to effectively address the problem of under-utilised or abandoned oil wells. They use a more eco-friendly way to extract oil from these wells by making use of solar powered equipment and more cost efficient design. Not only is his extraction method more cost effective, but it is also more environmentally friendly. The oil that is produced is then tokenized and can be redeemed or compounded (or both) over a 10–20 year period.

At the time of writing SOP have already made significant inroads into oil fields acquisitions and established exclusive manufacturing relationships with the patent holders on the new eco-friendly pumping technologies.

Investment by DALP and ‘fin’ curves

A total token purchase by the DALP of $0.2m has created a direct bridge between oil production revenues generated across a range of abandoned oil fields (est. at a pre-tax $9.4m over 240 months) and the market-buying of SXDT tokens, thereby further strengthening the already successful asymmetric hedges the group has put into place recently, which provide increasing de-risking and diversification for token holders.

The group has modelled three scenarios one of which we believe will play out over the coming 240 months, using the SOP calculator that takes into account average WTI oil prices, capacity in barrels per day produced and re-investment (compound) factor. A downtime/force majeure factor is already embedded in the calculations but geopolitical uncertainty and price risk is not. We have decided to compound 70% of incoming production revenues over a 120 month period, which means total cash inflows will occur over 240 months. The following fin-shaped curves detail how oil revenues and thus the SXDT buyback will play out with 240 months divided into what we call two ‘epochs’.

The first epoch is 120 months, where 70% of inflows are compounded or re-invested into fresh depleted oil well capacity and the final epoch, also lasting 120 months, is when 100% of inflows are redeemed. In the base case, where we model WTI at $60/barrel (the price at the time of writing), c. $1.3m or c. $10.7k/month of oil is redeemed and SXDT procured. In epoch 2, c. $8.1m or c. $67.3k/month of oil is redeemed and SXDT procured. At the start of the investment horizon, cash flows monthly will be relatively small (c. $2,000 projected for month 1) and ramp up as the project scales, we expect. All figures are pre-tax.

WTI price assumption of $60 over forecast horizon.

The buyback may be substantially higher if oil prices do progress higher but equally it may be lower should oil prices drop as the below fin-curves show.

WTI price assumption of $75 over forecast horizon.

In detail, if oil drops and stays at $30 over the forecast horizon, the total projected SXDT buyback drops from a $9.3m figure to just $990k. Geopolitical, execution and regulatory risk exist as well, alongside environmental factors such as major hurricanes which can result in major production/supply-side shocks that may be permanent.

Hatchworks investment associate Zen Zijlstra commented “The DALP took the decision to plugin to the digital monetary energy network a few months ago by building strategic balances of key digital assets which have since soared. The next logical step is to plugin to a decentralised energy network and given the risks vs rewards, our position in SOP helps not only reduce inflationary risks to the group stemming from ongoing monetary debasing but at the same time, allows the group to hedge token holders to some degree from underlying core business model risk in the long run by tying SXDT performance to an uncorrelated asset class (oil)…”

Ian Buck, the group’s IR director stated “First and foremost, this move adds a rising chunk of liquidity for SXDT to Spectre Exchange. Additionally, the partnership will likely see a yield-swap mechanism created such that users can redeem their SOPX tokens into SXDTs on Solar Oil Project’s upcoming commodity exchange, for those looking to diversify from energy exposure into financial trading and gaming.” This feature may eventually be available on Spectre Exchange too, for clients to purchase SOAX tokens in order to get oil exposure.

He went on to comment “global inflation risks have never been more real and oil is one form of inflation protection and if one can do so in an environmentally more sustainable manner while also creating jobs locally, its a slam dunk from our point of view…”. Solar Oil Project’s head of communications Morgan Theisen commented “We are pleased to team up with Spectre to provide them access to our oil recovery ambitions over time and allow our own token holders and theirs to yield swap at will, between industries”.

Depending on the performance of this SXDT bridge, the group may consider further investments in the future, but instead geared towards SXUT and with a lower compounding factor resulting in a more accelerated program.

Procurement amounts and other details will be listed, as always, under the investor relations section on Spectre Exchange at the end of every month. A webinar between both management teams is expected in early May. For more information the investor relations team can be reached under ir@spectre.ai.

Team Hatchworks

Risk warning: Investments made by the wider group or any specific companies related to the group are made after careful consideration of risks and opportunities. Most investments, such as that made into SOP, are not for retail investors and it is strictly advised to seek the financial advise of a qualified investment advisor before investing in any risky asset. All products and services at Spectre.ai are closed to U.S citizens.

Heading up the group’s R&D activities for Hatchworks.