Acquisition of Prospect in Wyoming

RNS Number : 7005Q

Nostra Terra Oil & Gas Company PLC

03 September 2014

 



Nostra Terra Oil and Gas Company plc

("Nostra Terra" or the "Company")

Acquisition of operated interest in White Buffalo Prospect

Nostra Terra (AIM:NTOG), the oil and gas exploration and production company with a growing portfolio of assets in the USA, is pleased to announce the acquisition of a 100% working interest in 6,100 net mineral acres in the White Buffalo Prospect from Ward Petroleum Corporation ("Ward") (the "Acquisition").  The Prospect is located in the Big Horn Basin of Wyoming and comprises several targets including the proven Phosphoria Formation.

Acquisition Highlights

·     Nostra Terra now owns, controls and operates a 100% Working Interest in 6,100 net acres

·     Up to 20 potential locations for horizontal wells with 4,500 foot laterals, are possible with total recoverable potential of up to 13MMbo

·     PV10 for a horizontal well (4,500 ft lateral) in the Phosphoria Formation is estimated at US$5.9 million (best case) to US$11.8 million (high case)

·     Potential mean project value of US$118 million up to US$236 million in total based on 20 horizontal wells

·     Acquisition consideration of approximately US$1.2 million which includes the acreage, geological and geophysical work and associated legal and other costs

·     The Acquisition has been funded by existing cash reserves and an existing debt facility

·     Leasing of the Acquisition acreage is completed, with additional potential for expansion

·     The Phosphoria Formation has a history of prolific production and there is additional potential from the Frontier and Muddy Formations

·     SM Energy Co. has spudded its first horizontal Phosphoria well and Devon Energy Corp. has permitted two wells in the immediate vicinity

Rationale for the transaction

Nostra Terra has for some time sought to acquire a sizable prospect in basins with an established history of oil production but that has not yet been fully exploited by modern horizontal drilling techniques.  By engaging in exploration, the Company benefits from much lower lease acquisition costs whilst gaining exposure to relatively low risk prospective resources and near term production potential.  As demonstrated at the Company's Chisholm Trail acreage, the value and cost of lease bonuses increases significantly with the commencement of horizontal production in the area, especially in emergent Resource Plays.

The directors believe that White Buffalo fulfills this key criteria and the Acquisition significantly increases the potential scope of Nostra Terra's operations.  The 6,100-acre leasehold establishes a sizable block within a non-contiguous area of over 12,000 acres.  Importantly, with this project, Nostra Terra has become the operator of significant assets and will have much greater control of its own destiny.

By comparison, the Company's existing Chisholm Trail Prospect in Oklahoma comprises approximately 1,500 non-contiguous acres, roughly 300 mineral acres net to Nostra's 20% interest. These assets are under the control of various operators.  

White Buffalo, therefore, provides a potential resource roughly 20 times the size of the successful Chisholm Trail Prospect, providing Nostra Terra with considerable flexibility to bring in partners, if desired, and maintain significant upside potential.

Acquisition details

The purchase consideration for the prospect is US$1.2 million.  In return, the Company has acquired a potential resource play that is drill-ready with assignments to over 450 individual leases.  The average lease still has with more than 4.5 years remaining in primary term, followed with options to extend.  Included in the purchase consideration are the costs incurred by Ward for lease brokerage, legal costs, title work, filings, geologic and geophysical interpretation and other overheads incurred over the period required to generate the concept, lease the core area and deliver the final package to Nostra Terra.  The effect of the Acquisition on the Company's current net debt position is an increase of approximately £600,000. Additional cash reserves have been allocated to fund further acquisitions.

Significant operators entering the region

Well-respected industry peers such as Devon Energy Corp (NYSE:DVN) and SM Energy Co. (NYSE:SM) have each acquired significant leasehold positions and will be testing and evaluating their own horizontal wells in the Phosphoria formation in the near future.

Independent evaluation of assets

Based on technical analysis using analogous nearby wells, the potential Original Oil in Place (OOIP) within the newly acquired 6,100 acres has been estimated to be 74.5 MMbo, or 7.8 MMbo per section (640 acres), by Haas Petroleum Engineering Services, Inc. ("HPESI").  The net Prospective Resources, future net income ("FNI") and PV10 on a high, best and low case basis for each of a long lateral horizontal development (10,000ft lateral), standard horizontal development (4,500ft lateral) and vertical development have been estimated by HPESI as follows:

		Net Resources BO	FNI (US$)	PV10 (US$)
10,000 ft lateral	High case	963,750	49,345,420	24,481,910
	Best case	630,960	28,114,100	12,816,340
	Low case	377,380	11,935,800	3,928,080
4,500 ft lateral	High case	484,210	24,271,680	11,814,840
	Best case	317,130	13,612,360	5,912,530
	Low case	190,100	5,508,200	1,456,820
Vertical	High case	146,620	5,357,390	2,545,110
	Best case	120,210	3,839,130	1,701,880
	Low case	85,950	1,934,430	631,930

Source: Haas Petroleum Engineering Services Inc. assessment of net Prospective Resources. Type decline curves were extracted from approximately 200 wells using decline curve analysis. Prospective resources do take into account constraints on profitability, such as royalties, operating expenses and future commodity prices.

As many as 75 conventional vertical wells could be drilled on the current acreage and the most likely economic recovery is projected to be 9 million barrels (PV10 US$127 million) by this at method. 

The application of horizontal drilling and hydraulic fracturing is known to improve ultimate recovery and estimates indicate that by drilling 20 horizontal (4,500ft lateral) wells approximately 6.3 million barrels of oil (PV10 US$118 million) could be recovered from the leasehold area. Of the wells examined in the study, of the few vertical wells that were lightly fracced, 20% higher EURs were projected than for wells with the typical acid treatment. The high case for 4,500 ft wells is 9.6million barrels (PV10 US$236 million).

Regional geology and prospectivity

The White Buffalo Prospect is close to two significant fields producing from the Phosphoria Formation, the Manderson Field (discovered in 1951) and the Cottonwood Creek Field (discovered in 1953).  Each is a structural/stratigraphic trap producing from multiple horizons.  Cottonwood Creek alone has produced 60 MMbo and 67 BCf from the Phosphoria Formation, the largest stratigraphic oil accumulation in the Big Horn Basin. In addition, the Muddy and Frontier Formations, above the Phosphoria, have also been productive in the area. Horizontal drilling and new multi-stage frac technology appear to be well suited for the efficient recovery of hydrocarbons from this dense, stratified, compartmentalize dolomite.  The White Buffalo Prospect area is approximately 90 square miles that appear to be geologically prospective.

The Phosphoria Formation is both source rock and reservoir.  It is the source for the Permian Tensleep, the Permian Minnelusa and to the Leo and the Weber Sandstone in Colorado.  Historical production was dependent on vertical wellbores intersecting natural fractures to produce economic volumes of hydrocarbons.  Just as in the Barnett Shale of Texas, wells drilling through the Phosphoria Formation almost always encountered shows of oil and cores generally were low porosity and permeability.  Many drill stem tests only recovered small volumes of drilling mud and slight shows of oil and gas.

The Big Horn Basin has produced 2.86 billion barrels of oil and 2.2 trillion cubic feet of gas since the first discoveries over 100 years ago, according to the United States Department Interior, 2010.  The United States Geological Survey (2008) estimates that as much as 110 MMbo remain to be recovered from the Phosphoria Formation alone in the Big Horn Basin by "Conventional" means, which is usually taken to mean vertical wells.  There are no estimates of basin-wide recovery through "Unconventional" means, which is usually taken to mean horizontally drilled and fracced wells.  In the prospect area, one horizontal well was completed by Union Pacific in the 1990s in an effort to encounter multiple fractures.  Cumulative production to date from the well is 100Mbl.  However, the additional costs of the directional work at the time did not justify further such wells.  As of today, only one horizontal well with plans for multi-stage stimulation has been permitted targeting the Phosphoria Formation, which was spudded by SM Energy on 15 August 2014 and is currently drilling.

Matt Lofgran, Chief Executive Officer of Nostra Terra, commented:

"Our production portfolio across Oklahoma, Texas and Colorado continues to grow and generate cash, however our focus has always been to acquire a significantly sized prospect which we control and which provides substantial potential upside, not just in economics but a large number of drilling locations.  Two large, respected oil companies in the USA, Devon Energy and SM Energy, have recently become active in the area, further validating the Acquisition.

The resources we're targeting currently range from US$118 million to US$236 million on PV10 based on horizontal drilling and fraccing of 4,500 ft lateral section.  This should demonstrate to current and prospective shareholders the significant potential increase in scale for the Company."

Alden McCall, Chief Operating Officer of Nostra Terra,added:

"The Phosphoria was first completed as a prolific producer in this multi-zone basin as early as 1922.  Many wells have been drilled throughout the years and, eventually, some of those fields implemented water floods.  Due to compartmentalization, recovery from the waterfloods was far less than had been projected in simulations.  The identification of a "failed waterflood", or of a "bleeding core", or significantly less than projected recovery, is each, individually considered an indicator of a reservoir that could benefit from horizontal drilling and completion.  When they are all found in the same general area, such as in the Phosphoria of the White Buffalo Prospect, things really get interesting."

The technical information within this announcement has been reviewed by Alden McCall, the Company's Chief Operating Officer, a Certified Petroleum Geologist and a member of the American Association of Petroleum Geologists and the Society of Petroleum Engineers.

Glossary

"Bcf" means billion cubic feet (of gas)

"BO" means barrels of oil

"Bopd" means barrels oil per day

"Frac" means the process of hydraulic fracturing, a modern completion technique

"Mbo" each mean thousand barrels of oil

"MMbo" each mean million barrels of oil

"PV10" means the pre-tax, net present value of acquisition cost and estimated future revenues to be generated from the production of hydrocarbons, discounted at the annual discount rate of 10 per cent.

For further information, visit www.ntog.co.uk or contact:

Nostra Terra Oil and Gas Company plc

Matt Lofgran, CEO

[e-mail]                                                       Telephone: [phone]

Northland Capital Partners Ltd

(Nominated Adviser) 

Matthew Johnson / Lauren Kettle                                       Telephone: [phone]

Hume Capital Securities plc

(Broker)                             

Jon Belliss / Abigail Wayne                                                   Telephone: [phone]

Lothbury Financial Services Limited

Gary Middleton / Michael Padley                                       Telephone: [phone] 

Notes

SM Energy Co, (formerly St. Mary Land and Exploration Company), was founded in 1908 and is listed on the New York Stock Exchange with a market capitalisation of $6Bn.  SM Energy's oil and gas plays are focused in four core areas of North America, The South Texas & Gulf Coast, Mid-Continent, Rocky Mountain and Permian basin regions.  In Q214 SM Energy produced 13.4MMboe and had reserves of 428MMboe.

Devon Energy Corp, headquartered in Oklahoma, is a fortune 500 company with a market capitalisation of $31Bn and is included in the S&P Index.  Devon has recently sold its non-core US assets for $2.3Bn to focus on the North American oil boom.  For Q214 the company reported total average daily production of 667Mboe.

 

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