Saturday, September 23rd 2023

Small Cap Oil Review!

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Which firms could stand to benefit if energy prices continue to rise?

Oil prices topped $73/bbl on Tuesday after being driven higher by political turmoil in Venezuela and Saudi Arabia’s announcement that a deal between producers of the black stuff to curb output could be extended to the end of the year. The positive momentum topped off a bullish month for oil and gas, which have been bolstered by strong demand alongside tightened US sanctions on Iran and Venezuela and OPEC output cuts. Here, we take a look at some London-listed junior stocks that could be set to benefit from a continued increase in energy prices.

Union Jack Oil

Union Jack has had a difficult start to the year, taking a notable battering in March when its 22pc-owned Biscathorpe prospect failed to deliver. The well was targeting a mean prospective resource of around 14MMbbls oil with a 40pc chance of success. However, this was not to be, with preliminary analysis at the well indicating that its primary objective – the Basal Westphalian Sandstone – was poorly developed.

Despite this hit, Union Jack’s prospects could soon be set to reverse. Earlier this week, the company announced that a date has been set for an appeal against the refusal of planning consent on its 27.5pc held Wressle oil field in North Lincolnshire. The asset’s operator and 30pc owner Egdon Resources (LSE:EDR) said an inquiry will start on 5 November this year.

The Wressle oil field was discovered in 2014 by the Wressle-1 well, where a total of 710boepd were recovered from three separate reservoirs during testing. In September 2016, a Competent Person’s Report estimated that Wressle contains reserves and contingent and prospective oil and gas resources of 2.15MMbbls.

Meanwhile, last week also saw Union Jack announce that drilling had begun on its 16.7pc-owned West Newton-2 conventional appraisal well. The well is targeting a gas prospect that has been assigned best estimate contingent resources of 189Bcf of gas equivalent of 31.5MMboe gross.

The gross NPV(10) for West Newton’s gas discovery alone is $247m, with a 52.5pc return on revenue. This does not include upside from an underlying oil exploration target called Cadeby Reef that has been assigned Best Estimate Prospective Resources of 79.1 million boe (gross). With this in mind, could a combination of strong oil prices and success at Wressle and West Newton prompt a significant re-rate for Union Jack?

Block Energy

The last month has seen Georgia-focused resources business Block Energy rocket from 3.95p to an astonishing 14.75p. The driver here was the news at the beginning of April that initial production rates from well 16a on Block’s West Rustavi field had come in at an average of 1,100bopd, far exceeding the firm’s 325bopd targeted production rate. According to Block, this test rate indicates a better initial performance than any well drilled in Georgia over the last 50 years.

Following this initial announcement, the firm subsequently confirmed that these impressive rates had been sustained at 16a, providing further evidence that the well was not just a flash in the pan. The company is now working on a ‘detailed operational market update’ covering its planned oil and gas development. This will include the scheduled spud date for the sidetracking of West Rustavi’s well 38, a neighbour and analogue to well 16aZ.  It will also cover plans for the appraisal of the field’s existing gas discoveries, the acquisition of a 3D seismic survey and, a revision of the CPR consequent to the performance of 16aZ.

Clearly, the fact that Block has already risen by so much will be at the forefront of many investors’ minds. However, with the company boasting strong institutional backing and clear future plans, could its current bull-run be maintained (presumably at a more sustainable pace)? It will be worth keeping an eye on the organisation’s imminent market update to find out.

Prospex Oil & Gas

Last week saw Prospex announce a substantial upgrade to the resource estimate for its part-owned Podere Gallina exploration permit in the Po Valley region of Italy. The Selva gas field, located within Podere Gallina, has been assigned gross contingent resources of 14.1bcf, up from zero. This followed the evaluation of the historical gas-producing North Flank and South Flank reservoirs, which have a chance of success of 60pc and 70pc respectively.

Following the evaluation of four large prospects, Prospex also announced a 74pc increase in Podere Gallina’s aggregate gross prospective resource from 52.7bcf to 91.5bcf. The company is also preparing to drill a second well later this year at its Suceava Concession in North East Romania. This will target a lookalike structure to the Bainet discovery that was drilled successfully in 2017 and is now on production.

With Italy looking promising and Romania providing a potential Summer catalyst, could Prospex be worth buying at 0.17p a share (as at writing)? Non-executive chairman Bill Smith certainly thinks so. In last week’s update, he said: ‘This is an exciting period for the Company and I look to forward to providing further updates on our progress, as we look to deliver multiple value trigger events for our shareholders.’

Nostra Terra Oil & Gas

Nostra Terra enjoyed a moderate 10pc bounce on Monday after announcing that it is in advanced discussions around a new 160-acre lease in the Mesquite target area within the Permian Basin. From here, the company plans to apply for a permit to drill its first horizontal well as soon as discussions with the lease’s current mineral owner complete. It then plans to secure a rig and prepare the pad before drilling and completion operations. Subject to the execution of the lease agreement, these activities are expected to take place in the coming weeks and months.

Perhaps the most significant part of the update was that the lease on which Nostra intends to drill is standalone from it existing 2,184 (1,984 net) acreage in the Mesquite target area. A field development plan carried out by Trey Resources in January gave the business’s first 1,384 net Mesquite acres 400,000bbls of recoverable oil and an NPV(10) of $28.6m at US$60 oil.

In Monday’s update, the company said that, because its new lease is standalone, it expects to be able to bring in partners while maintaining a 100pc interest in its existing Mesquite asset. On top of this, it said the well would allow it to prove up and increase its overall proven and probable oil reserves at Mesquite.  Speaking to TMS, Nostra’s chief executive Matt Lofgran added:

‘The new lease is part of the Mesquite target area and shares its characteristics, but we have structured our approach in a way that this is standalone and not contiguous with our existing acreage. This gives us the ability to promote out and bring in partners on just this lease and still retain 100pc of the Mesquite asset. Meanwhile, drilling a well at the new licence will continue to prove up our existing acreage and the overall Mesquite target area,’ he said.

‘Moving forward, we will have other leases in Mesquite, and some will be contiguous, and some will not be. We have got just under 2,000 acres in an area that is bigger than 30,000 acres. If we are going to continue to expand our footprint in the area, then, given our size right now, we will have to bring in a partner. We figured the approach we demonstrated with the new lease is the smartest and most strategically beneficial way of bringing in another party as it allows us to hang on to the large asset.’

With horizontal wells in comparable Permian Basin structures delivered oil at rates at 200-300bopd, the prospect of Nostra continuing to build up its stake in the 30,000 acre Mesquite target area is very exciting. Especially given that the company’s market presently sits at just £4.6m. The business has already captured the attention of industry stalwart Miton Group and has enjoyed interest from numerous third parties in its Mesquite acreage. Could it be worth getting in now before drilling begins?

Reabold Resources

Despite remaining fairly buoyant, Reabold has edged down so far this year in the face of disappointments at the Colter and Wick wells, where it has exposure through its holding in Corallian Energy. However, the last week has seen the business announce steps forward across the rest of its portfolio that offer the opportunity for a change of fortune.

Firstly, like Union Jack, the firm has exposure to the West Newton appraisal well, where drilling operations have now begun. Secondly, the firm revealed on Monday that testing is underway at the Burnett 2B well on its Monroe Swell field in California. This was the second of the two wells drilled at Monroe Swell and was announced as a discovery on 1 April 2019. Reabold has an agreement with Sunset Exploration to pay the full drilling and completion costs of two wells within its Monroe Swell licence areas in order to earn a 50pc working interest. With Reabold also enjoying exposure to an imminent exploration campaign in Romania, a string of successes could see shares soon look like good value at their current 0.65p.

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The author was remunerated but doesn’t hold shares in the companies