Path Investments (LSE:PATH) has reported that the German gas field it is planning to make a two-stage maiden investment into could contain reserves of nearly 85Bcf (billion cubic feet) of gas. Path has entered into a conditional farm-in agreement to purchase a 50pc participating interest in the 64.6km2 Alfeld-Elze II licence, which includes the Alfeld-Elze/Hildesheimer Wald gas deposit. This is welcome news for shareholders, who have been waiting nearly a year for Path to deliver a deal.
A competent person’s report carried out on the licence found that its two existing wells – H-WD Z2 and A-EZ Z4 – contain 20Bcf of gas. These wells make up Phase One of Path’s investment programme.
Phase Two of Path’s investment programme, which may require the drilling of up to three horizontal wells, has an ascribed 2C Contingent Resource of 64Bcf.
Path, which raised £1.4m through listing on the Standard List of the London Stock Exchange in March 2017, announced in December that it planned to enter into a joint operating with 5P Energy, the licence’s current owner.
To fund the proposed deal, which will see the two firms directly split ownership of the licence, Path suspended trading in its shares last December with a view to re-listing on AIM in Q1 2018 and undertaking a fundraising.
The terms of the deal for phase one will see Path pay €5m on completion of the transaction to cover some of 5P’s previous drilling costs for H-WD Z2.
It will then make a further €2m payment when A-EZ Z4 reaches commercial production.
For Phase Two, Path will pay €10m towards 100pc of the costs of the drilling, logging, testing and completing one or more horizontal wells.
It may have to pay up to a further €7.25m in the future if certain revenue and gas milestones are met within the first five years of operations after completion.
If the deal completes, Path expects the investment phase of the deal to last until 2021 at a gross capex cost of up to €25m. It then hopes to enter a long-term stable cashflow phase from 2022-2035.
The outlook for the licence and deposit looks promising. The area previously produced around 66Bcf of nitrogen-rich gas from nine wells between 1972 and 1995, before it was abandoned following water breakthrough. Four of these wells produced more than 10Bcf of gas.
The field was brought back into production in 2015 by 5P Energy through the workover and re-entry of H-WD Z2, which has produced in excess of 2.6Bcf.
A-EZ Z4 has been identified as another well workover candidate and, subject to testing, demobilisation and commissioning, is due to start production around mid-2018.
If it completes, the transaction will mark the first step in Path’s strategy to buy stakes in assets owned by oil and gas companies which have been squeezed by a sharp decline in commodity prices over recent years. In particular, Path is targeting assets, which possess a lower risk profile than exploration or development assets. It will be interesting to see what price the company raises money at. Given the size of the deal on the table there is every chance this could be at a decent premium to March’s listing price.