United Oil & Gas (LSE:UOG) fell 2.6pc to 3.7p on Monday morning after announcing that it has signed an option agreement to farm-in to a Bénin-based asset. If it decides to exercise the option, it could take a 20pc stake in a production sharing agreement over the project, which is called Block B.
Block B covers over 4,590km2 to the west of Bénin’s capital Cotonou continuing to the Togo border. The site is a frontier area, with no wells drilled to date. However, it is surrounded by prolific hydrocarbon-producing regions, alongside what United calls ‘excellent positive indications of a working petroleum system’.
As it stands, data at Block B is limited to a single seismic line and an airborne survey. This has suggested the presence of numerous large structures – including one called Allada – with the potential to hold more than 200MMbbls.
United has agreed to fund passive seismic and field studies up to a value of $175,000. This is expected to complete in April and inform the company’s decision on whether to progress the farm-in further.
If United does choose to exercise its option, it will take a 20pc stake in the asset. In exchange for this, it will be responsible for funding 30pc of non-drilling and 20pc of drilling costs in a phase one work programme. The company would also pay its farm-in partner $260,000, which is equal to a quarter of its past costs on the licence. It would then pay the remaining $780,000 in three equal six-monthly instalments.
United’s chief executive Brian Larkin said the asset could have ‘huge potential high-impact upside’ and be ‘transformational’ for the business.
‘When this early stage, high-impact opportunity in Benin came to our attention, we immediately considered ourselves fortunate to be able to take a position instantly bulking up and adding further diversification to our high-impact portfolio offerings,’ he said. ‘This excellent opportunity has been added to our portfolio at a very small initial commitment and is one which we look forward to continuing to update investors upon as we work with our new partners to further derisk and eventually market this exciting new play.’
The deal is also likely to have provided an unexpected confidence boost to investors in Nostra Terra Oil & Gas (LSE:NTOG). United’s potential farm-in partner is a private company called Elephant Oil. Elephant’s managing director is Matt Lofgran, who is also chief executive of Nostra.
On Monday’s deal, Lofgran said: ‘Block B In Bénin holds a great deal of potential and we’re excited to be moving forward with the Passive Seismic program. We believe this will further delineate the opportunity. We’re excited to be working with United on this project.’
As it stands, Nostra’s shareholders are eagerly anticipating news of a potential farm-out deal at the organisation’s Mesquite asset in the Permian Basin. Mesquite covers 2,184 acres and contains tight formations. These are typically oil bearing and of low permeability, making them ideal targets for horizontal drilling. The structures have delivered in other areas of the Permian, with comparable horizontal drilling producing at rates of 200-300bopd.
The first iteration of Nostra’s field development plan for Mesquite, which was carried out by Trey Resources, was released in January. It gave the asset a $21.6m NPV10 valuation and a 34pc internal rate of return (IRR) at $53/bbl oil once fully developed. Meanwhile, the area has an estimated NPV10 of $28.6m and an IRR of 46pc at $60/bbl oil. Both NPV10s dwarf Nostra’s post-admission market cap of £5m.
Lofgran’s ability to secure a farm-out agreement on such favourable terms through Elephant is no doubt a positive sign for Nostra’s shareholders, who will now be hoping he can replicate this success at Mesquite.
The company says it has already received four unsolicited approaches about Mesquite from industry partners and opened a data room containing an analysis of the asset in January. This reflects how hot an oil province the Permian Basin is and shows how much interest there is in opening up new horizontal plays.
Its hand in negotiations was strengthened even further earlier this month when well-known small cap-focused asset manager Miton Group had taken a 10.1pc stake in its share capital. Following Monday’s update, Nostra’s shares were trading up 2.5pc to 2.7p.
Author: Daniel Flynn
Disclosure: The author does not own shares in any of the companies mentioned above