New horizons beckon for cashed up Nostra Terra
“…The company has moved into cashflow positive territory, giving it the financial scope to explore opportunities beyond its current base in Texas. This year’s Senior Facility renegotiation opened access to further financial firepower…”
Nostra Terra Oil and Gas (AIM:NTOG), an exploration and production company with a portfolio of assets in three different Texas basins, has weathered the crisis that hit many of its peers in the region when the pandemic took hold last year, and taken advantage of this year’s surge in oil and gas prices.
Focused on shallow, conventional reserves in Texas, the company is built on a foundation of low risk, producing assets with development upside. The company’s primary asset is a 100pc working interest in Pine Mills, a 2,400 acre producing oil field in eastern Texas, which has produced over 12 million barrels of oil since its discovery in 1950s. Since taking ownership Nostra Terra has focused on low-cost workovers and upgrades to increase production and overall uptime.
Last year the company farmed-out an undrilled 80-acre portion of the field to Cypress Minerals LLC in return for a 25pc carried working interest on the first well drilled. The farm-out secured a near doubling of gross production at Pine Mills, taking it to more than 100 bopd, and a second well is currently being planned. The company has a 50 to 75pc interest in a set of leases in western Texas, and last year took a 100pc interest in the producing Caballos Creek Oil Field to the south of the state. All produce from conventional reservoirs with long-life reserves.
Though Nostra Terra’s relatively conservative asset base did not leave it as exposed to last year’s downturn as many of its indebted neighbouring operators, particularly shale producers, the pandemic presented challenges, which the company addressed by cutting operating and overhead costs by nearly two-thirds. The company had taken the precaution the previous year of hedging more than half its production at much stronger oil prices than those that actually prevailed in 2020. It also took the opportunity to buy assets cast off by other companies at knock down prices. Nostra Terra also appointed a new Non-Executive Chairman, Dr Stephen Staley, a founder of Fastnet Oil & Gas, Independent Resources, Cove Energy, and Upland Resources Limited, whose experience of the Tunisian energy market, as will be discussed below, may be significant for Nostra Terra’s future. CEO Matt Lofgran, who has been with the company for more than 10 years, previously worked for Robson Energy, where he launched oil and gas, field services and coal divisions, and extended the company’s activities into Mexico.
Nostra Terra’s final results for the year ended 31 December 2020, published in June, reported revenues for the year of $1,010,929, down from $1,795,000 in 2019, reflecting the slump in oil prices and a decline in production from temporarily shutting in assets at the peak of the pandemic. But cost-cutting had secured a 60pc reduction in monthly overheads, and a 45pc reduction in overheads year-on-year. Two fundraisings during the period brought in a net £818,055 to fund asset acquisition programmes and provide working capital. And as the company entered 2021 the farmed-out well at Pine Mills promised to contribute significant new value.
Interim results published in September for the six-month period ended 30 June 2021 reflected the significant upturn in oil prices, West Texas Intermediate (WTI) rising during the period from a low of $47.20 to a high of $74.16. Nostra Terra was able to record an average sales price for the period of $63.28 per barrel, compared to $25.45 for the first half 2020. Together with a 25pc increase in total production to 15,211 barrels oil, up from 12,152 barrels, the price rise secured a 130pc increase in revenue to $963,000, up from $417,000. Gross profit from operations swung from a loss of $115,000 to a $250,000 profit, and the loss for the period fell from $437,000 to $269,000. The company expects to be cashflow positive for the full year 2021.
An independent reserves upgrade published last month was also charged by rising prices, estimating that an increase of 27pc to 1,994,240 gross barrels oil has the potential to yield just under $24m future net income (total proved), a 58pc increase from 2019 year end. The company also announced that the reserves upgrade, the strong performance by the Cypress well at Pine Mills, and improved cash-flow, had allowed it to negotiate an upgrade to its Senior Lending Facility, which has doubled from $5m to $10m. Its borrowing base is up to $2,350,000 from $1,550,000, available at a modest 4.40pc interest rate. The reserve estimates rose further a few weeks later to reflect the continued rise in prices, $68.5m future net income (total proved) forecast on the assumption of a $75 oil price. The company anticipates that continued higher prices will facilitate the granting of another large increase in the borrowing base from the bank.
Nostra Terra’s latest operations update confirmed that the farm-out well at Pine Mills was continuing to produce at strong levels, with no decline. The company reported a 44pc increase in production for the first half of the year to 121 net bopd, up from 84 net bopd in H1 2021, and a new offset well at Pine Mills is planned. During the third quarter well uptime improved yet again, increasing production by 19pc from the first half on this year and a 53 % increase in production over the last two weeks (128 net bopd compared to the average 84 net bopd in H1 2021)
The company is also planning a re-completion at its Permian Basin licence in a well that was never fully completed, but which offers the prospect of low-cost production. Nostra Terra’s improved cashflow is allowing it to plan new development wells in the field, which it anticipates operating with at least 90pc working interest, giving it substantial control over timing.
Surging oil prices
Energy prices are set to go higher yet, for some time to come. Last week US oil prices rose above $85 a barrel for the first time in seven years, reflecting expectations that crude supplies will not keep pace with fast-rising global demand. An influential forecast by Goldman Sachs suggested demand would soon hit its pre-pandemic peak of 100 million barrels a day. Soaring gas prices are generating greater demand for oil, adding a million barrels a day to global demand. Indeed analysts at JPMorgan Chase & Co believe WTI prices may be on their way to $100 a barrel as inventories fall at the US storage hub of Cushing, Oklahoma, where oil futures are priced.
The price surge is spurring a sharp revival in shale drilling in the southern US, where production is expected to return to pre-pandemic highs of nearly five million barrels per day within the next few weeks. This time activity is being driven by private operators rather than the larger publicly traded companies that fuelled previous booms. Chastened by a decade of poor returns many listed companies are paying back debt and passing profits back to shareholders rather than extending themselves on new wells, opening opportunities for unlisted companies that can draw on private equity or family money, and perhaps for smaller firms such as Nostra Terra that have not overextended themselves, with access to non-dilutive capital. The region’s operators are still vulnerable to counter-action by OPEC producers, which can turn on the taps and drive down prices if US producers flood the market. But for now global demand has mitigated competitive pressure between suppliers.
Conditions, then, would seem to favour operators like Nostra Terra that have positioned themselves to generate decent profits through inexpensive production. But the company needs to do something more to inject life into a share price that has drifted down to 0.44p from highs of more than 5p three years ago, reducing its market cap to just over £3m. The company views ‘the scope for sustained profitable growth, throughout many well-established hydrocarbon systems such as the Permian Basin, as virtually unlimited’, but its footprint there is still modest.
An intriguing update in April, however, signalled new possibilities. The company ‘has negotiated terms and is waiting final approval’ regarding a new opportunity in Tunisia, ‘a large block with existing discoveries, offering both exploration and appraisal activity and new entities have been organised in anticipation of such expansion.’ Acknowledging investor expectations for the company to set itself new ambitions, CEO Matt Lofgran said ‘We know investors like to see assets that have large potential upsides so that they can deliver substantial value. We said that we planned to add that aspect to the portfolio once we reached cashflow positive.’
And in an interview with TMS later that month Non-Executive Chairman Dr Stephen Staley cast a little more light on the prospect, saying it is ‘large in terms of area and it does have existing discoveries within it. In addition to those discoveries which we hope can be developed, there’s also what we like to think of as running room so there are a number of other prospects and leads of a substantial size that could be added to that portfolio of prospects to make this what we believe a very exciting area.’ Dr Staley, who developed a network in the country in the course of his experience prior to joining Nostra Terra, believes the Tunisian government is keen to establish itself as an oil producer, and that operations would be facilitated by the availability of a skilled workforce and a favourable business environment.
With oil prices on the upturn for the foreseeable future Nostra Terra is set to secure a decent return on its Permian Basin assets for some time to come. The company has moved into cashflow positive territory, giving it the financial scope to explore opportunities beyond its current base in Texas. This year’s Senior Facility renegotiation opened access to further financial firepower. Nostra Terra’s shareholders have waited for some time for the company’s stars to align, but having weathered the pandemic better than many of its peers, and with new assets on the horizon, perhaps now is the time to check out a small cap with a share price that may be set to rise.