Union Jack Oil PLC (AIM:UJO) has unveiled plans to expand, through a venture in the United States, with a deal to acquire a package of royalties over-producing wells in the Permian basin in Texas.
Alongside the royalties, the company is also entering into a drilling collaboration with Reach Oil & Gas Inc., in which the partners will seek ‘a number of value accretive, exploration, drilling, development and potential production ventures’, in Oklahoma.
The aim is to “acquire material interests in projects with near-term planned drilling, a high chance of success and capable of adding significant cash flow, complementing Union Jack's existing profitable, production and development interests onshore UK,” the company said in a statement.
Due diligence work has taken place and proposals have been approved by Union Jack’s technical team, and now the new partners are finalising terms for a joint venture to enable a programme of at least two wells in Oklahoma – with the first drilling slated for early 2024.
Union Jack executive chair David Bramhill highlighted that the new American drilling opportunities, once finalised, will be funded from current cash balances without recourse to capital markets.
"The investment climate for international investment outside of the UK, especially within the United States, has improved significantly, driven primarily by streamlined asset ownership and the evolution of enabling technologies,” Bramhill said in a statement.
“These factors have been instrumental in Union Jack's decision to expand its activities in the United States.
"The acquisition of the Royalties provides immediate cash-flow, is without CAPEX exposure and has the scope to grow exponentially, as new wells are drilled and completed within the prolific Permian Basin.
“The longevity of the royalties is assured as the economic life of the wells is in excess of 26 years.”
Royalties package
Union Jack is buying the royalties for around £677,235 ($854,070) and the deal sees the company pick up the economic interest in a range of assets.
These include:
- 25 wells in the Cronus unit, comprising Chevron and Exxon operated production
- 15 wells in the Powell Ranch unit, operated by ConoccoPhilips
- 10 wells in the Palm Springs unit, operated by Occidental Petroleum
Union Jack did not provide specific forecasts regarding financial yield, in dollar terms, other than to describe the investment as “value accretive” while noting that the royalties are estimated to have an economic life of more than 26 years, and currently give an Internal Rate of Return in excess of 20%.
Union Jack will retain a British core
Bramhill, meanwhile, commented that Union Jack’s British assets will remain “core” to the business.
"Union Jack's existing onshore UK conventional production, development and exploration activities will remain our core focus for the foreseeable future,” he said.
“This distinct strategy has transformed the company into a self-sustainable, dividend paying, profit making entity.”
"The evolution of Union Jack, particularly in recent years, in my opinion, has been transformational. Almost every year growth in assets or revenues has been delivered to shareholders.
“Management has consistently focused on value creation, such as at our flagship, Wressle development, where our interest has increased from just 8.33% to a predominant 40%, due to our acquisitive approach when value can be seen.”
The Union Jack boss noted that the UK onshore success, driven by the Wressle field, had led to £3 million of shareholder returns over a 15 month period – with dividends and share buybacks – and the company intends to continue making share buybacks and paying dividends “as and when appropriate”.