With two pieces of critical news potentially on the horizon, we ask once again whether it is worth buying the dip at Nostra Terra Oil & Gas (LSE:NTOG), with shares currently looking cheap at 3.4p. Thanks to a lack of news flow, the last two weeks have seen the continuation of a gradual decline in the firm’s share price that began in May. But with Nostra’s past form suggesting flow test results from its G6 well could be imminent and a re-assessment of its senior lending facility now overdue, this may not be the case for much longer.
Firstly, Nostra is yet to publish anything else about its G6 well in the Permian Basin since reporting on 25 June that it had been completed and was being put into immediate production. In the update, it is interesting to note that chief executive Matt Lofgran said G6 would move forward similarly to its Twin Well, also at the Permian Basin.
At the Twin Well, which entered production in February, the company decided not to put out initial flow rates, which can often be misleading, and instead released more reliable, extended 30-day flow test results. Given that these results came out 20 days after Nostra announced that it was putting the Twin Well into production, it seems logical to expect an update on G6 production imminently given the timing of its last update. Obviously, there is no guarantee that it will stick to the same timeline, but if Lofgran sticks to his word, then we feel the Twin Well is a good indicator for its progress at G6.
The second piece of anticipated newsflow is a recalculation of Nostra’s well-received $5m senior lending facility with Washington Federal Bank. When the facility was established in January, Lofgran said its $1.2m borrowing base would be reassessed ‘at least twice yearly’. However, there is no publicly available information to suggest that this has yet happened.
As we are now well into July, it again seems logical to expect a recalculation sometime soon. What’s more, given that oil prices have risen and Nostra’s production has grown since the facility was established, there seems a good chance that the borrowing base will increase.
Beyond these two potential catalysts for a re-rate in Nostra’s share price, we continue to believe that the business looks undervalued given its strong investment case. Last month, the firm reported that its revenues increased by 300pc over 2017 to £1.1m, while production jumped 94pc to 30,703 barrels of oil equivalent (BOE), and proven reserves leapt 144pc to 646,280 BOE. It also reported a total loss over the year of c.£1m, a marked improvement on its £2.9m loss in 2016.
The results served as a concrete reminder of the turnaround progress Nostra has made under Lofgran across its Pine Mills and Permian Basin assets in Texas, which we have covered before on ValueTheMarkets.com.
Lofgran employs a Held-By-Production strategy, which means output at leases stops them from expiring, even if they are only generating a handful of barrels each day. This method has allowed Nostra to buy production acreage at a low cost and subsequently develop them when conditions are right and sufficient funding is in place. Last year, this strategy saw it successfully drill and bring into production its Twin Well and attract the attention of major player BP Energy, with whom it has secured a hedging facility.
Nostra’s turnaround has continued even more rapidly in 2018, with the business hitting record monthly revenues of $161,000 and record production of 126bopd at Pine Mills in February. In May, it also drilled two back-to-back wells in the Permian Basin targeting 25-40bopd production.
All this progress has seen the company become cash flow positive at the Plc level for several months in a row. In May, it reported that total revenues across its US assets from January to April 2018 hit more than $750,000, with the firm taking in a record $235,000 in April alone. Total gross production in April came in at 5,743bbls oil, split between 3,890bbls oil at Pine Mills and 1,853bbls in the Permian Basin.
Nostra now has a market cap of just £5m. With today’s oil price offering 3-to-1 returns and the company seeking further expansion, this is appearing increasingly undervalued. Having secured senior loan and BP hedging facilities, it is also in a position to steadily increase its operations without the need to come to the market for funding. If Lofgran delivers on his word – which he has done so far – then the firm should have plenty of good times ahead with more than 20 drill-ready locations.
Author: Daniel Flynn
The author does not own shares in the company mentioned in this article