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Nostra Terra unleashes blockbuster economic report on its Mesquite asset in the Permian Basin (NTOG)

There was big news for Nostra Terra Oil & Gas (LSE:NTOG) this morning as the company released a blockbuster engineered economics report for its Mesquite asset in the Permian Basin. So far, the market hasn’t reacted to the news, with the shares up only 4%. However, if the numbers Nostra has reported stand up to scrutiny and the company is able to secure a farm-in partner, this could represent a sea change for the business with a market cap of only £4million.

Trey Resources, who produced the report for Nostra, estimates there are 2.4m barrels of recoverable oil on the 1,384 acres Mesquite field which is located in the US oil hotbed Permian Basin. This gives Nostra’s 100% owned Mesquite asset a Net Present Value (NPV10) of $21.6m at current prices equating to a value per acre of $15,625 – considerably higher than the original price paid by Nostra on acquisition.

Matt Lofgran, CEO of Nostra said: “We’re very excited to have such strong confirmation of the potential of the Mesquite Asset. The work that Trey has done on our behalf has been thorough and detailed”.

Trey has extensive experience in horizontal drilling across the Permian Basin, and assuming the deployment of this drilling technique, estimates initial flow rates per well could be around 265 barrels of oil per day (bopd). Over a 20-year life, each well is expected to offer an Estimated Ultimate Recovery (EUR) of 300k barrels of oil, with Trey suggesting production of 100k barrels from each well in the first three years. The report gives a NPV10 of $2.5m per well with an Internal Rate of Return of 34% at current prices – The NAV10 bumps up to $3.3m with an IRR of 46% at $60 oil. These figures are calculated on the assumption that each well will cost $2.9m to drill and complete.

Matt Lofgran commented: “The Report we received from Trey has helped us build a compelling investment case for Mesquite. We are especially encouraged by the NPV estimates and potential IRRs. The base case is built on conservative numbers and demonstrates a clear path to substantial value for a Company of our size”

With the Field Development Plan (FDP) now complete, Nostra is ready to discuss the possibility of a farm-in with potential partners. The company’s activities have already attracted considerable interest. Nostra highlighted it had received four unsolicited approaches from potential partners in an update to investors on 17  January. The announcement also detailed Nostra had secured the option to add a 75% working interest over a further 800 acres to its existing Mesquite asset. This would create a larger, continuous stretch of land, all of which is deemed suitable for horizontal drilling.

Matt Lofgran adds: “As the first operator in the area to pursue horizontal drilling on these leases, Nostra Terra has a crucial first mover advantage in this prolific oil field. This is reflected in the level of unsolicited interest the Company has already received from potential industry partners concerning Mesquite.”

Over the last two and a half years we have worked extremely hard to reposition Nostra Terra. Our focus was initially on building a foundation of producing assets that make money in a lower oil price environment. As we have said all along, we did this so that we could then introduce much bigger projects to the Company.

The Mesquite Asset is a perfect example of what we hoped to bring to Nostra Terra, where a single well has the ability to triple our current production, without the associated exploration risk. Now that we have the Field Development Plan based on initial assessment we will open discussions with potential partners, with a view to realizing considerable value at Mesquite.”

With Nostra Terra already on course to deliver record revenue for 2018 and having announced a comprehensive hedging strategy, the company has a firm foundation for exciting growth. With Lofgran sounding so bullish and dropping some tantalizing hints about farm-in potential for Mesquite, this business could be primed for an explosive 2019.

Author: Stuart Langelaan

Disclosure: The author owns shares in the company mentioned above

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