These are not easy times to be an oil company. Reserves are getting harder to find, costs are escalating and large parts of the oil and gas map are blighted by instability, violence and corruption. There’s one very notable exception: the fracking boom in the US. It is hard for investors to ignore the favourable economics of these onshore plays, where technological advances are continuing to improve well netbacks and recovery rates both from new shale plays and conventional reservoirs.
This is good news for those oil juniors that staked a claim before valuations got dizzy: companies like Empyrean Energy, for example, with its Sugarloaf project in the heart of the prolific Eagle Ford Shale. ASX-quoted Target Energy is another company that spied the potential in the US and has been working to prove up the work of its small but well-placed footprint.
The A$19.5 million market cap company is focused on the prolific Permian Basin, which can trace its producing history back to the 1920s and today still pumps three times more oil than Australia. The basin currently pumps 1.3 million bpd, and that tally is rising with analysts forecasting daily output of 1.6 million barrels by 2016.
Perth-based Target, which last week posted a 20 per cent increase in proven reserves to 0.74 million boe, with 2P reserves of 1 million boe and total reserves and resources of 2.15 million boe, hopes to play its own small part in this Permian Basin surge of oil. The company currently has interests ranging from 35 per cent to 50 per cent in 4,500 gross acres – the Fairway Project – in Howard and Glasscock counties, prime Texan oil and gas real estate.
The attractions here are multiple stacked hydrocarbon-bearing zones, a mix of conventional and shale plays including the includes the Spraberry/Wolfcamp shale, now identified as the world’s second largest oilfield, which increase oil volumes and reduce drilling risks.
Big boys like Occidental Petroleum, Apache and Pioneer Natural Resources are spending billions of dollars on their Permian Basin acreage, attracted by the hard-to-beat economics. Analysts at Credit Suisse say the Permian is the “prize” for oil shale drilling given the large amount of vertical pay that can be drilled horizontally and the fact it will support a higher density of wells per acre than any other shale play in the US”. According to Oxy, Permian oil production is its “most profitable business”.
Unlike these heavyweights of the oil industry, Target can’t afford the horizontal wells that deliver the high IP rates but is instead sticking with low cost vertical wells, which come in at less than US$2 million per hole. It currently has net production of just under 200 boepd from eight producing wells but with a ten well programme now underway expects to exit the year with output of 400-500 boepd. At this point the company expects to be generating cashflows of around US$500,000 a month, covering its G&A.
The company targets three zones per well, the conventional Fusselman carbonate, the Wolfberry Shale and the emerging Cline shale, and its footprint would support 110 well locations on 40 acre spacing. The Phase 1 plan is to complete wells in the Fusselman conventional carbonate zone, which delivers strong IP rates and good EURs over a producing life of five to six years. Phase 2 will involve fracking of the Wolfberry shale zones, which will deliver more than 20 years of production, while the longer term upside lies in the Cline Shale through the use of lateral drilling. There is also upside potential in down-spacing to 20 acres for the Wolfberry formation.
As always with these micro-cap plays, funding is a big risk. In February Target raised A$6 million through a secured, convertible note and then in May 2014 it sold a ten per cent working interest in the Fairway project to Texas-based Victory Energy Corp for A$6.5 million in cash, realising a premium of 72 per cent relative to the current implied market valuation.
This, plus the cash from production, should enable the company to fund its 2014 work programme. The company is also negotiating a reserve based lending (RBL) facility to provide additional liquidity going forward. Modelling by analysts at Ord Minnett suggest the company should be self-funding from CY15, based on an expected drilling programme of around15 Fairway project wells per year. The ultimate end game, of course, will be to sell-up to a larger company to capture returns for shareholders.
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