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Nostra Terra secures final approval for game-changing $5m lending facility NTOG

Nostra Terra Oil and Gas (LSE:NTOG) this morning announced final approval for its $5m Senior Lending Facility with Washington Federal Bank. The interest rate of the facility is just 4.75pc, which surely makes this one of the best financing packages available to any oil and gas company with a sub £30m market cap on AIM. The company has fought hard in recent years to turn its fortunes around and today’s announcement represents a huge step forward. With $1.2m available for immediate draw down, Nostra now has the potential to fund its growth without needing to come back to market to raise money via dilutive equity placings. Very few expected the company would get to this point, but the world is now Nostra’s oyster. With the business already ramping up activity across its Held By Production leases in the Permian Basin (not to mention sitting on potential value in its Egyptian Joint Venture), Nostra could be poised for explosive growth.

The commercial principle guiding Nostra’s new banking facility is pretty straightforward. Although the facility is not restricted geographically, meaning the company can use its funds anywhere, Nostra’s short-term plan is to increase production by drilling at its 24-drill ready locations across its Permian Basin assets. Assuming these drills are successful, increasing oil production and adding to the business’ 1P Proven oil reserves, this should result in Washington Federal upping the size of the facility and the borrowing base. The more successful Nostra is, the more funds it will have available to it. Simple.

Since the interest rate of the facility is a highly attractive 4.75%, Nostra’s expectation of a 2:1 Return on Investment at $40/barrel WTI makes for a compelling case for the company’s model. Having secured what could prove to be a funding virtuous circle, it seems reasonable to expect plenty of news flow could be on its way over the coming months.

Friends in high places

As an oil and gas firm with a market cap of just £5.7m, it is somewhat remarkable that Nostra has been able to secure a lending facility from an institution as large as Washington Federal. The bank is well established in the energy market and has around $15bn in assets under management.

With a ringing endorsement from BP seemingly not cutting the mustard alone, Washington Federal carried out its own thorough due diligence on Nostra prior to handing over the cash. Part of this assessment of Nostra’s business model required an updated reserves report, which saw the firm report a 38pc increase in proved reserves at its Pine Mills assets in December.

Washington must have been impressed with what it saw, as reflected in the 4.75pc interest rate. As we pointed out earlier this month, it is almost unheard of for an AIM oil and gas firm of Nostra’s size to have received terms as favourable as this.

Smaller resource firms are far more used to facilities with double-digit arrangement fees and low double-digit interest rates, which make funding growth an extremely expensive process.

Not so now for Nostra Terra.

Moving on up

The facility allows Nostra immediately to draw down $1.2m.

Not only is this a considerable figure against Nostra’s total size, but it also appears to make the firm one of those rare AIM oil and gas names to be able to fund the growth of its current assets without the need for a placing. For the time being, Nostra’s organic growth will not lead to the dilution of shareholder value.

The terms of the facility have been determined solely upon stabilised production at Nostra Terra’s Pine Mills assets, using a conservative oil sales price of $36.50 per barrel or less for the next six years. The size of the facility and its borrowing base will be reassessed at least twice a year, and Nostra expects that it will rise with any increases in the company’s 1P Proven oil reserves and use of its BP hedging facility.

Thanks to this Nostra is already in the process of ramping activity at its 24 drill-ready locations in the Permian Basin. As announced earlier this month, the firm is now securing permits for three new wells instead of one. November’s successful Twin Well is also due to commence commercial flow testing very shortly..

With WTI prices already far surpassing $36.50 per barrel at a current price of >$64, any progress on these Permian Basin developments could see the size of the facility increase significantly.

Nostra also still has outstanding, in the money warrants in issue, awarded out as part of a live market book-build carried out alongside Teathers last April. With the warrants exercising at 3p each, well below Nostra’s current share price, the firm can reasonably expect to receive approaching £750,00 by April’s expiry date.

This will strengthen the firm’s balance even further, enabling it to accelerate its plans.

Where next?

Like the BP Hedging Facility, Washington’s lending facility is not restricted to geographical region. As a result, the company can deploy funds for operational purposes across its entire backlog of bankable assets. Aside from Pine Mills, this includes its sites in the Permian Basin and Egypt. The firm can even look at making new acquisitions if it wants.

This lack of restriction becomes particularly attractive when one considers Nostra’s held-by-production (HBP) strategy. HBP means that existing production at leases means they won’t expire, even if this is of just two barrels a day.

Nostra has purchased a number of these leases across the Permian Basin in order to secure acreage at a low cost in anticipation for a more bullish oil price environment.

It can start drilling at these locations at very short notice. Now that it has the funds to do so, and may have significantly more funding in the near future, it will be interesting to see where the firm goes.

As Nostra’s chief executive Matt Lofgran put it last week: ‘Confirmation of the new Senior Lending Facility could prove to be a catalyst for exciting growth for Nostra Terra. We are an ambitious and nimble company. Our strategy over the last 18 months has been to take advantage of depressed oil prices, by securing assets that are both economic at lower oil prices and provide further development and exploration upside. As previously announced, we estimate our assets in the Permian Basin to have a 2:1 ROI at $40 oil. At higher oil prices we couldn’t be more excited to drill.”

Whatever happens, Nostra looks set to deliver plenty of news flow in 2018, a year where it also expects to become profitable at the Plc level. With Lofgran already proving himself a great deal maker by successfully navigating the company through the last oil bear market, there could be plenty of upside potential from the firm’s current 4.9p share price.

 

Disclosure

Author: Daniel Flynn

The author of this piece owns shares in the company mentioned.

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