Nostra Terra Oil and Gas (LSE:NTOG) this morning delivered a late Christmas present for investors. The company confirmed it has received approval for a new $5million Senior Lending Facility at an interest rate of 4.75%. This represents yet another remarkable achievement for Nostra in its hard-fought turnaround story, having secured a hedging facility with BP Energy Company last September. With the company already on track to have generated record revenues in 2017 and its plans for an extensive drill campaign in 2018, little old Nostra is punching well above its weight. By the end of 2018, today’s £5million valuation at 4.15p could look like an absolute steal.
Punching well above its weight
As of publishing, the market reaction to Nostra’s news has been somewhat muted. The stock is up a little over 3%. This is surprising, given the ringing endorsement the company has received for its strategy from Washington Federal Bank. We’re not talking about some desperation funder here. This is a major institution, with $15billion in assets under management.
A lender like this simply does not lend money unless it is confident it is going to get repaid. We already know from December’s 38% Reserves Upgrade at Pine Mills that the bank had been conducting thorough due diligence. It required that Nostra complete the updated report as part of its assessment of the company’s business model. That Washington Federal then proceeded to grant the new facility with an interest rate of only 4.75% must mean it was impressed by what it saw.
This is no small matter.
I cannot think of another oil and gas play anywhere that is Nostra’s size, which has been able to secure a lending facility on such favourable terms.
Globally there must be other examples that exist somewhere and if you are able to find one, please be sure to send me a Tweet because that is a company I would want to buy into.
And there’s more.
Although there has been chatter on Social Media that Nostra’s new Senior Lending Facility is “at the lower end of expectations”, this misses a number of key points.
First, the current facility and $1.2million borrowing base has been calculated solely on Nostra’s production at Pine Mills, using an oil price $36.50 per barrel. WTI currently trades at $61.50 and the facility size does not include any of Nostra’s Permian production.
This is significant because Nostra’s strategy in the near term is to increase production at its 24-drill ready locations in the Permian Basin. November’s successful Twin Well is due to commence commercial flow testing very shortly and the company also announced its plans to start permitting for its second Permian well in the very near future. Now that the Senior Lending Facility is secured, it seems reasonable to expect that this will all go ahead as planned.
The next point certain of the Twitterati seem oblivious to is that the size of Senior Lending Facility will be “reassessed at least twice yearly”. If Nostra increases its 1P Reserves and increases stabilised oil production then the company’s directors expect the amount available to it will grow. This situation has the potential to be further improved if the company then uses its hedging facility with BP Energy Company.
Overall, although the headline “$5million” might not have been what certain people in the market wanted to see, the detail of the RNS is extremely encouraging.
The third key point is summed up in the following quote, “the Facility is not restricted to geographical region. Nostra Terra can deploy funds from the Facility for operational purposes and acquisitions in its current areas of operation, in the USA and Egypt, or in other areas should the opportunity arise.”
This opens up the door for incredible possibilities for a company of Nostra Terra’s size. CEO Matt Lofgran has proven himself to be a great deal maker. While running on fumes, he has successfully managed to navigate the worst oil bear market in living memory, restoring realisable value to the business. Now that it has this facility from Washington Federal behind it, it wouldn’t be at all surprising to see Nostra embark on an acquisition spree that adds meaningfully to the company’s 1P Reserves, while boosting profitable production.
Nostra demolishes its critics
Make no mistake, today’s announcement from Nostra is a significant step in the right direction for the business, promising plenty of news flow for 2018. During this period the company is expected to become profitable at the Plc level. The company already has bankable assets to develop, including the 24 drill-ready targets in the Permian, and has referred in the past its “robust deal pipeline”.
Until recently, many in the market had simply not believed this. A consensus developed that Pine Mills was figuratively “just another promote” and the Permian oil production a joke.
Well today those ill-founded criticisms look very foolish. Pine Mills has underpinned the $5million facility from Washington Federal, and its 4.75% interest rate, and all of a sudden those Held By Production (“HBP”) leases in the Permian Basin are looking one hell of a lot more appealing.
Nostra’s ability to begin drilling at such short notice in the Permian illustrates precisely the effectiveness of its strategy in acquiring the HBP leases. HBP means that existing production, even if just two barrels a day, enforces the lease so it will not expire. This allows Nostra to drill at its own pace, while securing more acreage across at low cost.
Now that Nostra has secured the means to fund development of these leases through more drilling, this was the final piece in the jigsaw. The upside from here should be clear.
The author of this piece owns shares in the company covered in this article