A planned funding and proposals for a new work programme at a prospective oil field in the Nevada desert has brought US Oil and Gas Plc back into focus for the company’s large retail investor base.
On the face of it, the company - which is at the moment unlisted - has appeared to be in hibernation. But behind the scenes, chief executive Brian McDonnell has been working through what describes as a very busy period.
The Eblana well, drilled in 2013, discovered oil in a previously untested area, though engineering challenges - the sort inherent in ‘wildcat’ drilling – caused frustration as the well couldn’t be fully tested and flow rates couldn’t be precisely quantified.
That oil flowed to surface was a silver-lining that many investors overlooked.
With USOP’s apparent period of inactivity coming to an end, however, McDonnell strikes an enthusiastic tone as he talked Proactive Investors through plans that, if successful, promise to add some materiality to Hot Creeks Valley’s much speculated upon potential.
The plan, subject to funding, is to re-enter Eblana with an adapted well design to properly test the zones that flowed before and to go deeper to hit other higher potential zones.
If successful, the promise is of a possible commercial flow and the raising of USOP’s 19 million barrels of Contingent Resources to Proved Reserves, enormously enhancing the company’s asset base.
New times, and a very different US oil market
USOP’s apparent slumber coincided with the company’s search for an industry partner to intensify its exploration effort in Hot Creek Valley by bringing in substantial resources.
The aim was to fund several further wells and hopefully bring the project to commerciality. But no matter how promising, a Nevada discovery was a difficult sell in 2013-2014 at the height of the shale boom.
As McDonnell explains it, pitching higher risk frontier or ‘discovery’ plays to shale-focussed US oil execs was difficult no matter how great the potential - as projects in the vast Eagle Ford or Bakken presented lower-hanging fruit.
“Shale offered a low-risk option in convenient, well-understood regions,” he said. “Now, after the price crash, the boot is on the other foot. Shale looks the riskier option, and pioneer plays with potentially large conventional resources and low-cost uplift look a less risky proposition.”
McDonnell believes the oil at Hot Creek Valley has the potential to be economically viable, and could be significantly cheaper to extract than the currently squeezed shale plays, with the cost to the refinery possibly as low as US$5 per barrel as compared to US$40 or more for shale.
When the dust finally settles in the US oil market, McDonnell believes those left standing will look towards conventional projects rather than shale for new opportunities.
“Shale will continue to look vulnerable to the oil price in a way that conventional oil assets like ours will not. Conventional oil will be the first to capitalise on an oil price recovery when that comes,” McDonnell said.
Crucially, distress in the oil field services industry has caused project costs to plummet, which further tips the risk profile in USOP’s favour. USOP estimate the cost of drilling a well at as little as US$1.2mln, which suddenly puts the reins of control back in the company’s hands.
It means that for the time being at least, the Hot Creek Valley property can be advanced without a partner. So, in the meantime, the plan is very much to pursue operations in the field.
A re-entry to the previously drilled Eblana well is planned
On March 22, USOP confirmed its intention to re-enter the Eblana-1 well. The company said the existing well, originally drilled in 2013, will be plugged back to 3,220 feet and new casing will be run.
New drilling will then see the well deepened to a target depth of up to 13,000 feet. Additionally, USOP told investors that it may also carry out sidetrack drilling, depending on the results of a planned vertical seismic profiling (VSP) survey.
Subsequently, on March 31, USOP told investors that it had now secured all permits needed for its proposed re-entry to the previously drilled Eblana well. And it now intends to conditionally hire a drilling contractor.
Possible new shareholders and a possible new listing
To implement those plans, USOP is raising money. The funding plans that could see USOP raise as much as £3.8mln of new capital will take place in two parts.
The company is currently in discussion with institutional investors in relation to a possible share placing to raise up to £810,000. And separately, it has launched an open offer which will give existing shareholders the opportunity to raise as much as £2.9mln.
The deadline for the open offer was extended by 14 days at the request of brokerages, and as a result the deadline is now April 15.
McDonnell is hopeful that the group’s large retail investor base, a near 4,000 strong group, will support the project.
There is, he says, a huge amount of interest in the company and its prospects in the new oil price environment.
But, for everything to be considered fully ‘back on track’ many of its backers will feel USOP will have to be again on a recognised stock exchange. McDonnell agrees, though he emphasises that the priority has to be securing the financial future of the company and pushing ahead with operations at Hot Creek Valley.
In the meantime, a number of appointments including board members and advisors, and other changes in the background, have been put in place in preparation for a planned listing.
”The most important thing over the last months has been to come up with a viable operational plan regardless of the oil price and industry sentiment.
“We have tremendous expertise at our disposal and world-class understanding of the geology of the region, in particular the volcanics that have caused so many problems for explorers in the past.
“Oil exploration is never without risk, and in the end the drill bit will decide. But we believe we have done everything possible to minimise that risk and maximise our chances of success.”