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Northcote Energy: Mississippi Lime offers quick route to cash-generative oil production

AIM debutant Northcote Energy comes to the market with a very clear and quick route to cash-generative oil production. In fact, chairman Ross Warner reckons the company, which is targeting the emerging Mississippi Lime formation in Oklahoma, could be covering its overheads in as little as six weeks.

AIM debutant Northcote Energy (LON:NCT) comes to the market with a very clear and quick route to cash-generative oil production.

In fact, chairman Ross Warner reckons the company, which is targeting the emerging Mississippi Lime formation in Oklahoma, could be covering its overheads in as little as six weeks.

A high-impact six-well fracking programme of already producing holes could be utterly transformational.

It means Northcote today and the business 12 months down the line will be two utterly different propositions if all goes to plan, said Warner.

“Our frack programme is a low risk proposition. The best place to find oil is in a hole that already produces oil,” he added.

How we get from today – a business producing 25 barrels a day – to something far more substantial will rely a great deal on the expertise and experience of managing director Randy Connally.

The Texan was a strategic adviser to and investor in the Eagle Energy Company, which blazed a trail in the Mississippi Lime.

Interestingly, its US$650mln sale to Midstates Petroleum last year was the first significant piece of M&A in this particular play.

Those au fait with US oil and gas will be more than familiar with Oklahoma’s historic links with the oil industry, although the most productive formations have been the Layton and deeper lying Arbuckle.

It is only in the last three to four years that Mississippi Lime has really emerged as a low cost alternative amenable to modern horizontal drilling and fracking.

And it compares very favourably to other shale plays, in that wells tend to require modest investment (in the order of US$2.5-$4mln) and are far less complex to complete than some other onshore targets in say the Bakken.

A US$40 a barrel break-even cost means the payback on a well runs into months rather than years.

Northcote has two projects on the western and eastern flanks of the Mississippian play that straddles the Oklahoma, Kansas border.

The Horizon project in Osage County is the key near-term value catalyst. The company has a 28% working interest in 10 wells covering 1,680 gross acres and the opportunity to take this to 46% for US$1.4mln (with $600,000 to be paid in shares).

Crucially, there are some 25,000 feet of unfracked wellbore to play with. It also has a minor royalty interest in another well.

The objective in the next year is to frack up to six of the existing wells and drill a further two in Osage County.

Net of listing costs (the flotation was done via a reverse takeover), the group has around £1mln, which it reckons – along with cash flow from the early wells – is enough to achieve its aims this year.

Ultimately it is hoped that the fracking will lead to stabilised production of 100 barrels a day net to Northcote from the current 25.

This may be achieved sooner rather than later, although the group is being very conservative about the potential of the fracking.

The competent person's report suggests that fracking may increase initial production by anywhere between two and thirty times.

There are some wells in the Lime play that have come on at around 1,200 barrels. However, Northcote is being far more conservative in its assumptions.

Having already been drilled and producing, the downside appears to be fairly much mitigated – which would explain the chairman’s earlier comments.

“These wells are producing and we do not expect any problems in fracking them,” he said.

He added: “Assuming the fracks perform in line with our expectations, the 2012 work programme is fully funded.”

In Woods County, the group is a very, very minority stakeholder in the De Agua project.

Its average working interest is 0.35%, which gives it exposure to two producing wells and a further 12 well drilling programme this year. The operators are Chesapeake and Midstates.

And there may be the potential to take its interest significantly higher in future.

In the meantime Northcote has the benefit of news flow from a pretty aggressive drilling programme and the data it generates.

Outside the two projects, there may be scope for acquisition, although Warner is remaining tight-lipped on plans at this point in time.

And you can see why with such a busy year ahead. Fracking of the first well is expected to get under way in mid-February with results later that month or early March. And then it is pedal to the metal after that.

Northcote’s competent person's report, prepared by Moyes & Co, points to the group’s huge potential.

It comes up with a present value of US$33.8mln based on current reserves and at 10% discount rate.

“We are not here to take significant geological risk,” Warner said.

“We are developing proven reserves which is all about sweating our assets.”

Ian Lyall
Ian Lyall
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