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Nostra Terra Oil & Gas opens Mesquite Data Room for Farm-In Discussions (NTOG)

Nostra Terra (LSE:NTOG) appears to be on the cusp of achieving something quite special on AIM. The US-focussed oil producer announced it has opened a data room containing the analysis of the Mesquite asset conducted by Trey Resources. In late November, Nostra reported it had already received four unsolicited approaches from potential industry partners regarding the development of Mesquite – well before the results of the Engineered Economics Report were available. Today’s news looks like another step forward in this company deliver substantial value for shareholders.

Trey’s report highlights the significant potential of the Mesquite asset, should the company pursue horizontal drilling. If successful each horizontal well could produce around 265 barrels of oil per day (bopd). Trey’s estimated $21.6m NPV10 valuation (the value to Nostra after any drilling costs) of Mesquite at current strip pricing dwarfs Nostra’s current £4m Market Cap.

Having built a steady foundation of production from conventional vertical wells, Nostra made moves last year to ramp up its operations, acquiring the Mesquite prospect in the Permian Basin in October. The company commissioned Trey Resources to create a Field Development Plan, bringing in its experience of drilling horizontal wells in the region. The economics appear compelling with an Internal Rate of Return (IRR) of 34% at current strip pricing, lifting to 46% at $60 oil. In anticipation of increasing activity in the area, Nostra set up a permanent operations office in Dallas just before Christmas.

Shrewd Deal Maker

Mesquite’s initial 1,384 net acreage cost Nostra a mere $150,000.  This is not the first time CEO Matt Lofgran has executed a shrewd, extremely value accretive deal for the company.

Lofgran told ValueTheMarkets: “Nostra got involved in the early days of what became the STACK play in Oklahoma. Similar to Mesquite, it was a prolific oilfield that was drilled for nearly a century from vertical wells. Geologists felt it had similar characteristics to other areas where tight rocks where later drilled horizontally to huge success. Nostra acquired the Chisholm Trail, where the partners in the asset were leasing around $300 per acre. As competition came in leases quickly started rising. We kept leasing, more selectively as it rose to $1,000 per acre. By the time we exited the play (after we drilled many of the wells in one of the formation) leases were trading over $20,000 per acre.”

Nostra is continuing to add assets in the Permian, which has become a hive of activity as operators increasingly utilize new technology to extract more oil from older, tried and tested fields.

As Lofgran points out: “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.”

Expanding its Permian footprint

Earlier in January, Nostra announced it had secured an option to add a 75% working interest over a further 800 acres to its existing Mesquite asset. If exercised, this would create a larger continuous stretch of land, all of which is deemed suitable for horizontal drilling.

What is interesting about this is that this option effectively puts Nostra in control of 1,984 net acres at Mesquite. Now that the company is actively looking for a farm-in partner, its hand seems to have been strengthened considerably.

What’s more and today’s announcement hints there could be more to come. We already knew that as part of its analysis Trey completed a 15square mile volumetric map of the area surrounding Mesquite. It is unknown how much of this area is available for leasing, but since Lofgran is so keen on the company’s first mover advantage, it seems a reasonable assumption that more land is up for grabs.

Whatever the case, the current acreage at Mesquite seems highly attractive and if Lofgran is able to secure a decent farm in, Nostra Terra could be poised for a sharp move higher.

We recently caught up with Nostra Terra CEO Matt Lofgran in a podcast interview to find out more about the benefits and processes of horizontal drilling. Click here to listen to the interview.

Author: Stuart Langelaan

Disclosure: The author owns shares in the company mentioned above

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