Union Jack Oil PLC (AIM:UJO) has welcomed the conceptual development scheme for the West Newton field on PEDL 183 on Humberside released by operator Reabold Resources PLC (AIM:RBD) today.
The plan envisages a predominantly gas development project with eight recoverable volumes of 35mln barrels of oil equivalent with a sales gas component of 203bn cubic feet (Bcf).
Initial plans are for a five-well development drilling campaign, with the first gas anticipated in 2025 and plateau production rates of 44mln cubic feet per day of sales gas.
A further three wells would be drilled in 2028-2030, to maintain plateau production of sales gas.
Reabold has a 56% economic interest in the field, directly and through Rathlin Energy, which is the operator, while Union Jack Oil has a 16.7% holding.
Based on economic models following flow tests last year, West Newton has a gross pre-tax NPV(10%) value of US$448mln and a pre-tax IRR (rate of return) of 87%.
Any potential future gas discoveries within the Greater West Newton area were not included in the modelling.
Next steps are the completion of a Competent Person's Report (CPR), which is expected in the third quarter of this year with a first horizontal appraisal well planned for the first half of 2023.
David Bramhill, Union Jack’s executive chairman, said: "We are delighted by the results …. which has demonstrated West Newton's potential as an extremely valuable gas development opportunity.
"Located in an area that has access to both significant and relevant regional infrastructure and, with substantial additional exploration potential within the wider licence, the Conceptual Development Plan and a subsequent development decision at West Newton could deliver substantial volumes of low-carbon sales gas into the UK's energy market.”
Horizontal wells can optimise production, says broker
Union Jack Oil’s broker SP Angel added: "Following the results of the extended well testing programme at West Newton A-2 and B1-Z in 2021, third-party experts including RPS and CoreLab worked to understand the development potential at West Newton.
“The two key issues constraining hydrocarbon production during last year’s tests were local formation damage by water-based mud and the acid stimulation only interacting with a small section of the perforated intervals.
“Post-well analysis completed by CoreLab demonstrated actual fluid flow through many of the reservoir samples, which supports the view that drilling horizontal development wells would optimise the productivity from any new wells.”
SP Angel noted that Rathlin has said the development plan would cost US$140mln gross over 2023-2025 to drill the initial five horizontal wells.
Based on the NPV estimate, this amounts to US$75mln net to Union Jack for its 16.7% equity interest, added the broker, or the equivalent of c.50p/share on an unrisked basis just for this asset.
“While some may have expected a higher liquids component, we remind investors that the current c.200p UK NBP gas price is equivalent to a ~US$150/bbl Brent oil price.”
SP Angel has a buy rating and 182p target price for UJO and said it would be adjusting its valuation on West Newton after the news today.
In addition, it noted that UJO is seeking approval for a capital reduction at Thursday’s AGM, which would clear the way for a dividend or a buyback programme.