By Dr Michael Green
Following the placing of £850,000 (gross) at Mayan Energy on Monday this week (in which we participated), it looks as though investors are about to see an acceleration of the progress in the new Mayan Energy story.
After 18 months of sorting out the mess that was Mayan, Managing Director Eddie Gonzalez now believes that he has all the pieces in place to deliver on the public production targets of circa 500 bopd in the near term and which will transform the company into one making real money. The company is rapidly growing its oil and gas production base in Texas and the latest news concerns the acquisition of 12 additional well bores which represent more low cost highly productive and cash flow generative assets.
The acquisition involves a total of 12 wells – 3 horizontal and 2 vertical Austin Chalk wells in Wilson and Gonzalez counties plus 7 additional vertical wells at the Stockdale Field in Wilson County which are all being acquired for a total consideration of US$605,000 (of which just under half is in new Mayan shares). The potential of the Austin Chalk formation is well known within the industry, with many companies drilling for oil and gas here for decades. Indeed this area is known as one of the most prolific oil producing regions in the South West U.S.
The 5 Austin Wells (60% WI and 50.25% NRI) consist of three horizontal wells and two vertical wells which are seen to have attractive near term workover and exploitation profiles. The two horizontal wells were previously drilled in the late 1980s – 1990 into and were very good producers, especially from such long lateral sections. These wells have not produced for twenty odd years and so it is hoped that they have pressurised back up.
In addition, there are the three vertical wells where the Austin Chalk was the target. These wells were drilled through the Austin Chalk and deeper down, encountering two more formations: the Eagle Ford and the Buda. This offers three very good chances of production. There is no surprise then that the Austin Chalk will be given the company’s immediate attention. The plan is to use the coiled tubing rig to clean out, work over and acidise the Austin Chalk zone in each of the horizontal laterals with an estimated potential production of 60-80 bopd per well. High impact results are expected reasonably fast as each work over and acidisation procedure is only expected to take a matter of two days per well.
Coiled tubing rig refers to a very long length of metal pipe which can be used to carry out operations much like wire-lining, but there is the additional benefit that chemicals can be pumped down the tubing with acidisation used to restore the natural permeability of the reservoir rock to stimulate production. These are both low-cost techniques that have served the company well at the Morris #1 well.
In addition, the 5 Austin Chalk wells provide longer-term potential of re-fracking the targeted zone that was identified using the Roke Quad Neutron log tool. Apparently, none of these wells has ever been re-entered or stimulated which does suggest upside potential from using low cost stimulation and production enhancement techniques and technologies. Mayan has a 300bopd (gross) target from this five well package, with further upside if the team is able to achieve the higher end of its expectations range on each well. Operating costs likely to be in the US$18-20 per barrel range, as there is the additional cost of trucking away produced water for disposal.
The 7 Stockdale Wells (60% working interest WI and 45% net revenue interest NRI) are seen as providing a number of opportunities to replicate the success that has been enjoyed at the Morris #1 well in the same field. Morris #1 well has been producing at a steady rate of 80bopd (gross), following a low-cost workover. We make the that the Stockdale Field is highly profitable due to low operational costs which for the Morris#1 well is under US$14 per barrel.
The immediate plan calls for the reworking over of the 7 Stockdale wells in the same way and using same techniques and technologies that were successfully applied at the Morris #1 well. This means that all these 7 vertical wells will be completed in both the upper and lower Anacacho zones plus the lower Escondido sand where the Morris #1 encountered natural gas. Produced water will be piped into the established salt water disposal well (SWD). With the SWD operations already in place, it does mean that the workover and tie-in of production from the new wells ought to happen quite quickly.
At this stage the company has entered into a conditional Sale and Purchase Agreement for these 12 well bores which is subject to due diligence and entering a Joint Operating Agreement. The board intends to update investors when the acquisition has been closed. The deal is being funded by a £850,000 placing at 0.6p per shares, with a warrant for every two shares subscribed which are exercisable at 0.9p. In addition, these funds will also cover the cost of new work-overs at Stockdale and Austin Chalk as well as working capital. At the same time Mayan, also issued US$175,000 in shares at a higher price of 0.7p a share in settlement to outstanding creditors.
There was positive news from the Forrest Hill Field (70% WI and 52.5% NRI), where workovers on 2-4 producing wells is expected to begin in July 2018, having successfully resolved access issues. The Forrest Hill Field is highly profitable as all-in operating costs look like they will be averaging less than US$15 per barrel whilst realising a US$2 a barrel premium on WTI. At the time, Managing Director Eddie Gonzalez pointed out that “…the potential addition of these 12 new wells plus ongoing work programmes at Forrest Hill and now at Zink Ranch we are well positioned to push daily production towards our target range of 300 to 500 net bopd.”
Certainly, this latest announcement was a timely reminder of just how profitable these wells can be, with enviable low lifting costs and WTI trading over US$68 per barrel which means that the all-important netbacks being generated are impressive. These latest acquisitions help to grow the production more rapidly to form a really sound foundation on which to build a larger oil and gas company than originally envisaged 12 months ago. As material holders of the stock we believe the strategy being pursued will result in a highly profitable SW U.S oil & gas producing company.
At the current market cap of just under £9m, should the 500 bopd be hit we estimate the company could be making circa £5m p.a. in 2019 from the existing assets alone aside from the equity interest in Petroteq where we see material upside (see here – http://www.alignresearch.co.uk/cpt-company/petroteq-energy-inc/) in its own right and the expected revenue from the sale of gas at the Stockdale field.
As we move through the summer and into autumn in 2018 the flagged “high impact” news should finally put the nay sayers to rest and in discussion with the management in recent days we do not expect to see further placings. Given the current market cap and see through 2019 (at current oil prices) PE of under 2 times we continue to hold our 2.1p first price target with our confidence in this being achieved increasing by the day.
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