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Northcote Energy (AIM:NCT), an onshore US oil and gas exploration and production company, has announced interim results for the six month period ended June 30 2013.
Highlights:
· Rapidly advancing strategy of building an extensive low-risk onshore oil and gas production company
· Quadrupled production since January 2013 to 100boepd
· Increased net acreage by 500% to 2,895 net mineral acres since listing
· Current P1 reserves with an NPV of US$61.9m based on approximately half of acreage held– upgrade expected in the coming months
· Development programme in place to rapidly increase production and reserves
· Targeting in excess of 250 boepd by mid 2014
Partnership agreement to provide non dilutive capital on an attractive risk basis to participate in field development
· Evaluating additional opportunities to consolidate our position in Oklahoma and to expand into other prospective US onshore locations
Northcote Energy Managing Director Randall Connally said, “In our first 6 months since listing we have made dramatic progress in increasing our net acres, reserves and production. Our current focus is in the state of Oklahoma where we have built an excellent platform for further rapid growth in the right address. With already increased production and a steep development curve projected, we expect a re-rating of our stock which is currently trading at a 66% discount to P1 reserves for only half of our portfolio. With reserve upgrades targeted in the second half and with a production target of in excess of 250 boepd next year, we expect to build on the rapid progress made to date and generate considerable value for shareholders.”
CHAIRMAN’S STATEMENT (in full):
Since our Admission to AIM in January 2013 we have quadrupled our daily production, in the process hitting our 100 BOEPD 12 month target five months ahead of schedule, increased our net leasehold position by 500% to over 3,000 net mineral acres, and almost doubled our proven reserves to US$61.9million. Achieving all this during our first six months as a listed entity demonstrates our ability to rapidly and significantly increase net production, reserves and acreage in the Mississippi Lime formation, our focus area in Oklahoma, as we look to build Northcote into a leading producer of oil and gas in the region.
The Board believes that this growth has been impressive and is especially pleased that the Company’s net attributable reserves have increased from 0.94million barrels of oil equivalent (“BOE”) at IPO to 1.699million BOE. This does not include any reserves from our interests in the new projects, such as Oklahoma Energy and Mathis. We expect to announce additional reserves and P1 PV10 later this year after reserve reports have been prepared for these additional projects. This will significantly add to our reserves per share and demonstrates the potential within our current asset portfolio. This significant growth results from the successful implementation of operational initiatives such as hydraulic fracture stimulation programmes, new wells and workover campaigns, and the acquisition of additional assets which consolidate and leverage our position in Osage County, where we believe our management team provides a significant competitive advantage to the Company.
We are focused on the Mississippi Lime formation, a proven and producing hydrocarbon formation, due to both the highly attractive economics it offers and the excellent access to infrastructure, making it an ideal environment for rapid expansion. At between US$2.5million and US$4.0million, drilling costs are relatively low in the Mississippi Lime and third party commentators believe it has one of the lowest breakeven oil prices among onshore US plays. In recent years, US independents such as Chesapeake Energy, Devon Energy Corp. and SandRidge Energy have successfully built a strong presence in the Mississippi Lime. Northcote also actively seeks to take advantage of the multiple pay zones that exist in its focus area and as such is actively developing other objectives including the Layton and Bartlesville sands.
Our core portfolio currently consists of the Horizon Project (51% working interest (“WI”)), the contiguous Mathis Project (100% WI), and the OKE Project (100% WI), where our 100% acquisition conferred Northcote with operator status in the region. We also have smaller working interests in the Bird Creek Project, Osage County (3.125% WI), the De Agua Project, Woods County (0.125% WI) and the South Weslaco Gas Unit, Hidalgo County, Texas (up to 25% WI). With this in mind, we have set a new production target of reaching 250 BOEPD by the end of July 2014 to be met through an aggressive work programme on existing properties that will consist of continuation of the fracture stimulation programme, new drilling and exploitation of existing well bores.
We have a highly experienced team on the ground, led by our CEO Randy Connally, who was involved in the successful formation of Eagle Energy Company of Oklahoma (“Eagle”). In less than 3 years Eagle was transformed from a small, gas focused E&P company to a significant player, which was acquired by Midstates Petroleum for US$650 million in October 2012. The Board plans to utilise Randy’s experience to build Northcote in the mid term.
Horizon Project, Osage County (51% WI)
The Horizon Project currently produces from 10 wells with one further well pending completion. The project has excellent infrastructure for continued low cost development in the area. The significant and on-going progress we have made at this asset reflects our multi-faceted approach to increasing our exposure to the proven substantial reserves.
Since listing we have increased our WI in Horizon from 28% to 51% through the exercise of options at minimal cost to the Company, which automatically enhanced our P1 PV10 and proven reserves considerably.
We initiated our operational campaign through a workover programme at Horizon which centred on four wells not scheduled for fracture stimulation in the near term. This involved increasing water disposal capacity through a pipeline project, re-acidizing, pumping down fluid levels and in some cases installing larger submersible pumps. This low cost work had a positive impact on overall production. The pipeline project in particular has provided significant production gains and we continue to see additional production gains as the water is pumped down.
We elected to participate in the deepening of the Burkhart#1 well, which was originally drilled to and produced from the Mississippi Chat formation, and it has successfully reached its target depth of 4,226 feet. This well will be completed in the Mississippi Lime formation and plans are currently being discussed with our working interest partners in the well.
Initially we plan to complete our hydraulic fracturing campaign at Horizon. We have completed fracks at Big Hill #1 and Big Hill #2, which were deemed our worst two performing wells when we acquired our interest in the project. We chose to frack these two wells first to gain an understanding of the variables associated with fracking in this area; optimization of a frac depends on a number of variables associated with the well, but also the characteristics of the formation in a particular region. Big Hill #1 returned positive results from the frack which contributed towards hitting our 100 BOEPD target. We reported an open flow rate of up to 1,210 Mcf/day of natural gas (215.5 boepd gross, 88.4 net to Northcote). These numbers are highly encouraging and have demonstrated that the fracture stimulation has enabled the well bore to open up unexploited reservoir.
We experienced significant technical issues with the frack at Big Hill #2. Remedial action has been taken and the well is back on test and is currently producing approximately 120 thousand cubic feet per day of natural gas. However, management believes that given the issues associated with the well, specifically split casing and a damaged submersible pump that were discovered immediately after the frac, there is a significant likelihood that the frac did not adequately stimulate the well and the reservoir remains, in effect, unfracked. The performance of this well will be closely scrutinised but, at this stage, it seems likely that it will be a candidate for further stimulation at a future date.
We have also advanced our share of the funds to secure the frack of the next two wells, both of which are fully funded. The third frack is anticipated to commence in early October subject to completion of certain work, which is underway, on the surface location as required by regulatory authorities, with the fourth frack following shortly thereafter. We plan to frack 4 wells total in 2013, and will continue our programme across all the wells in our portfolio in 2014.
Mathis Project (100% WI)
In June 2013 we completed the acquisition of a 100% working interest in leases covering an additional 960 acres (`Mathis’) contiguous to the our Horizon Project for a relatively small payment of US$325,000.
The Mathis Acquisition comprises 1,280 gross acres, inclusive of 320 gross acres previously acquired via farm-in. This acquisition adds 960 acres contiguous to two of the Company’s existing wells acquired as part of the Horizon Project in Osage County, Oklahoma. The approximate 320 acres held by the Steele and Steinberger producing wells were held by Northcote in the Mississippian only, but with this acquisition Northcote acquires rights to drill to all formations on those leases. The acquisition is therefore highly strategic, allowing us to consolidate our regional position and also further leverage our existing field infrastructure at Horizon going forward.
Twenty Two vertical well bores exist on the property and its production directly offsets the Steele and Steinberger, which are two of the best performing wells on the Horizon Project. 3-D seismic exists covering a portion of the leasehold and the Company has already identified two potential horizontal well locations with two additional locations possible, subject to further geologic analysis. Significantly, all of the leases are part of a “unit” and as such, production on any part of the unit holds the entire lease by production.
Oklahoma Energy Project (“OKE”) (100% owned)
We completed the acquisition of a 100% working interest in the 1,040 acre OKE Project in April 2013 for a total sum of US$700,000, of which US$250,000 was settled in equity and a further US$200,000 earn-out to be paid from production.
On completion of the acquisition of OKE, Northcote gained operator status and capacity to operate projects in Osage County, Oklahoma. This project has huge potential and we have already commenced work to unlock this potential. The first stage of our work programme has been completed and was highly successful increasing production by 150% since acquisition to 37 BOPD.
The second stage of the workover programme is now underway and targeting an increase in gross production at OKE to 50 bopd by the end of 2013. In conjunction, we are evaluating additional Mississippian opportunities on the acreage to significantly enhance production and reserves with at least one well scheduled to be drilled within the next twelve months. Importantly, the project has the required infrastructure in place to support increased production.
These initiatives to increase production will be highly beneficial to Northcote as we aim to accelerate the pay-out of the 41.5% BlueRock term royalty inherited on acquisition. BlueRock’s royalty will expire when it has received US$1.23 million and an internal rate of return on that amount of 15% from its share of the Project’s revenues. On expiry of BlueRock’s royalty, our net revenue interest will increase to 80% and leave us well positioned to develop all zones within our tenure.
Bird Creek Prospect, Osage County: (average 3.125% working interest)
We acquired a 3.125% working interest in the Bird Creek Prospect shortly after listing. We have already elected to participate in the drilling of two wells, one of which, the Bray #1, has been drilled to target depth of 1,820 feet and encountered good oil shows across 10 feet of pay from 1,704 to 1,714 feet. While the results from the well, together with well data from nearby wells suggested we were on the outer edge of a structure, the porosity was less than desired. We next participated in drilling the Keese #1 well which is complete and a second Keese well (third overall), the Keese #2, is currently being completed. On completion of the second well, work will begin to install the necessary production facilities in order to permit production from the wells, at which point production data will be announced. The Bray #1 will be completed as a salt water disposal well.
DeAgua Project, Woods County: (average 0.348 % working interest)
This smaller working interest in the DeAgua Project enables us to participate in wells alongside Chesapeake and Midstates, two of the leading operators in the Mississippi Lime.The pace of drilling on this project has been a disappointment as the operator has been focused on other acreage in their portfolio. However, one well, the Cook 1H-12, in which Northcote has an approximate 1.0% working interest, is being completed and results will be announced in due course.
Partnerships
In July 2013 we were pleased to announce the formation of our first partnership vehicle, Northcote Drilling Partners LLP (‘the Partnership’). This enables U.S. investors to participate with Northcote in the development of oil and gas assets located onshore US, initially in Oklahoma. Full details of the partnership can be found in the announcement dated 4 July 2013, but in essence, the Partnership will de-risk Northcote’s development programme by providing it with a non-dilutive source of capital that offers direct upside participation in additional assets, whilst also providing opportunities to optimize our portfolio by sharing the costs associated with higher risk, but also high reward. Importantly, our subsidiary, Northcote Energy Development, is managing general partner of the Partnership and receives a participation in the revenues generated by the partnership for this role.
Financial Review
Gross production at Horizon during the period averaged over 100 BOEPD, significantly less than the full potential of the project. During the period under review, production was affected by the work programme across the project, which resulted in production at a number of the wells at our Big Hill and Little Drum units being temporarily suspended whilst work was completed. We look forward to reporting substantially increased revenues in our year end accounts, as the full year effects of our work programme are shown through increased production.
During the period the Group reported a loss of $2,183,000 of which $1,273,000 (2012: $Nil) related to a one-off goodwill impairment related to the reverse acquisition completed in January 2013. In addition the loss includes IPO costs of $366,000 and non-cash share based payments of $64,000 (2012: $Nil).
During the period, Northcote raised a total of $5.2million via placing. The funds raised, both on admission and post admission, are being used to accelerate our work programmes across both our original and expanded portfolio of projects. As part of the placings we were delighted to welcome Cape Bouvard Equities Pty Ltd, one of Australia’s largest private investment companies, to our shareholder register.
Outlook
We have significantly grown Northcote during the first six months of the year, our first as a public entity. We now have a strong core portfolio with excellent upside potential, operator status in Osage County and an exciting and de-risked development campaign to considerably bolster our production to 250 BOEPD and build on our already sizeable reserves by the end of July 2014. In tandem with this, our experience and network in Osage County will help us secure further value accretive opportunities to consolidate our position, a proven strategy which will substantially enhance Northcote’s value, and build the Company into a leading oil and gas company in the State of Oklahoma.
We have set, and are confident of meeting, the following operating targets:
5,000 net acres by 31 December 2013; and
250 boepd production by 31 July2014.
I would like to take this opportunity to thank our Board, management and advisers for their hard work during this exciting period, which has seen us achieve the first of our annual production targets, 5 months early, and we look forward to the next 12 months as we continue to deliver our growth plans by the execution of our ongoing work programme.
