Broker HansonWesthouse published a research report on Caza Oil & Gas (AIM: CAZA), reaffirming its valuation of the US focused oil and gas junior after it reported exploration successes and the new acreage in its Abo/Wolfcamp play in New Mexico.
Caza’s production in the third quarter increased 27% from the comparative period of 2008 to 116,016 Mcfe (thousand cubic feet of gas equivalent) from wells drilled before the start of the Endeavour programme.
The main features of the operational update included a further hydrocarbon discovery at the Moore Bailout 11 State #1 well, the second in the Endeavour programme, which has been put on production along with the first well in the programme, the Lucky Penny State #1. The drilling of the next well, Bada Bing 23 State #1 is ongoing with the rig set to be moved to drill the Moore Cowbell State #1 well upon the completion of Bada Bing.
All of these wells are located in the Abo/Wolfcamp formation in southeastern Mexico, where Caza has increased its footing by 135% since July by acquiring acreage around its existing prospect areas.
The wells are a part of the programme with Endeavour International (NYSE-AMEX: END, LSE: ENDV), which has the right to farm into Caza’s prospects by paying 100% of Caza’s first well on each prospect in exchange for 75% of Caza’s initial working interest, which currently amounts to 12.5% through to commercial production on each of the aforementioned four wells. The Endeavour agreement will enable up to nine wells to be drilled in 2009 and fits with Caza’s strategy to conserve capital, reduce single project exposure and increase the number of projects drilled in a given period.
HansonWesthouse said the well economics in the Abo/Wolfcamp play has improved through horizontal drilling and advances in stimulation procedures and added that the effects of the Endeavour agreement were reflected in the third quarter results, which were released at the same time with the operational update, showing a reduced loss of US$0.6 million compared to US$2.1 million in Q3 2008, which resulted from lower G&A (general and administrative) costs and the reimbursement of costs from joint venture partners. While exploration activity increased, cash balances declined by just US$0.1 million to US$11.1 million over the quarter.
The broker said that the new acreage increased valuation upside, while its valuation of 24.1 pence per share now looked firmer due to the recent exploration successes, which it said gave more confidence in Caza’s operational expertise. The ‘buy’ recommendation also was retained.
In addition to these prospects and initial wells, Caza’s agreed work programme and budget includes six additional prospects for potential drilling and testing in 2009, including Moore Cap #3, Las Animas, Bongo, Soledad Creek and Round Tank prospects. The 2009 programme is focused on prospects that have ample exposure to upside.
Shares in the company last traded at 11.25 pence.