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Nostra Terra Oil and Gas – the key well is coming (NTOG)

It takes time to build a proper oil & gas company. AIM investors typically have little patience for this, preferring instead to burn money on the sex and violence offered by blue-sky fantasies. Nearly all of these plays end in bitter tears, with long term holders nursing massive losses and wondering how it was the multi-billion barrel oil field they were promised turned out to be yet more barren wasteland in the middle of nowhere. One company, however, promises to buck this trend by pursuing a much more profitable strategy; Nostra Terra Oil & Gas (Plc).

Nostra’s strategy is wildly different from all of its peers on AIM.

The company has focussed on building revenue.

Yes, that’s right. Nostra is trying to build a business based on cash flow generation. A crazy concept on AIM, I agree.

Over the last 3 years Nostra has delivered on its plan. According to last week’s results, the company’s revenue in 2018 was up 56pc to $2.27m. To put this into context that is more than double the revenue of Sound Energy (LSE:SOU) (£0), UK Oil & Gas (LSE:UKOG) (£225,000), Pantheon Resources (LSE:PANR) and 88 Energy (LSE:88E) combined. Valued together and those companies have a pooled market cap of £296m. At 1.8p, Nostra’s market cap is a mere £4m.

It’s ludicrous.

Of course supporters of the blue-sky fantasies will say I’m not comparing like with like. The larger companies apparently all offer so much more potential than Nostra, with their telephone book numbers.

But do they?

All of those businesses are heavily capital intensive, burning through tens of millions of pounds each year. Even if (and this is a huge “IF”) their wells are successful, they still have to go through extensive testing and in most cases require significant further investment to build supporting infrastructure to enable continuous production.

None of this applies to Nostra’s assets in the Permian Basin.

As the company demonstrated in 2018 with the Twin and G6 wells, if a new well is successful in Texas it can be brought into immediate continuous production. The infrastructure already exists to support this.

Why this is so significant for Nostra is because the company appears to be one successfully horizontal well away from being genuinely profitable at the Plc level. Now, just imagine that. A small-cap, AIM-listed oil and gas company, which actually generates a profit!

To illustrate this point let’s return to the latest Annual Report. In 2018 Nostra made a gross profit of $942,000 (excluding exploration, impairment, depreciation, depletion and amortisation), which equates broadly to an operating cash loss for the year of $369,000. The company really is not far off becoming a profitable business.

Below is a chart from Nostra’s recent presentation, which illustrates the cash flow generation potential for each 1-mile horizontal well at the company’s Mesquite asset in the Permian Basin.

Source: Nostra Terra Oil & Gas Plc

As you can see, each well is estimated to generate about $1.5m in free cash flow in the first year at $55/bbl WTI.

Now, if we halve this assumption and apply it to the half mile lateral that Nostra plans to drill in the near future at the standalone 160-acre Mesquite lease it identified in April, it is clear how transformational a successful drill here would be for the company.

Not only would Nostra expect to generate additional free cash flow (up to $750,000), which could see it become profitable at the Plc level, but also a hit here would go a long way to derisking the wider Mesquite play. 

This would have significant implications for a business with a £4m market cap.

Nostra has previously reported that the first 1,384acres it secured at Mesquite have a $21.6m NPV10 valuation at $55/bbl oil. In addition to this, Nostra Terra has identified sizeable expansion potential in the surrounding area covering a further 30,000 acres of leaseholds, which it believes it has first mover advantage in securing.

The company has opened a data room for potential farm in partners, but has also indicated its primary goal is to maximise its first mover advantage at Mesquite. In short, it wants to secure as much of the surrounding acreage as it can, before bringing a partner in.

To this end Nostra raised £1.15m at the end of February to strengthen its balance sheet and give it enough runway to develop further its drilling hypothesis at Mesquite. It is worth noting that the formation Nostra is targeting at Mesquite has not yet been drilled horizontally in the surrounding area, although the geology is analogous to other prolific producing areas in the Permian where horizontal wells have delivered such huge production gains.

In other words horizontal drilling at Mesquite should work. It is now up to Nostra to prove it.

Taking all this together and this is why the company’s summer drilling plan is so important. The 160-acre lease, which Nostra has identified, is standalone. This means the company could bring in potential partners on this lease and this lease alone. Nostra would not have to give up any of its existing stake in its other Mesquite acreage, nor would it give up the any future share of future leasing in the surrounding area.

However, any success with the planned well would strengthen the company’s hand a great deal in any future negotiations.

On Monday, Nostra announced it has “agreed terms with all mineral owners and expects to receive executed agreements in the coming weeks.”

As soon as those executed agreements arrive, the company will be able to swing into action with its plans for drilling. It’s require patience to get to this point but that key well is coming.

Valuethemarkets.com and Dynamic Investor Relations Ltd are not responsible for the content or accuracy of this article.  News and research are not recommendations to deal, and investments may fall in value so that you could lose some or all of your investment. Past performance is not an indicator of future performance.

  • Ben Turney currently holds a position or positions in the stock(s) and/or financial instrument(s) mentioned in the piece.
  • Ben Turney has not been paid to produce this piece by the company or companies mentioned above.
  • Dynamic Investor Relations Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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