Thursday, September 28th 2023

Nostra Terra Oil and Gas PLC

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Its all about future revenue for Nostra Terra Oil and Gas


“…With the prospect of stable and increasing production at Pine Mills, further exploration at Grant East, and the expectation of ever higher oil prices, the fundamental case for #NTOG looks sound….”


Two years ago at the height of the pandemic tough questions were being asked about the future of the Texas oil industry. Just when would prices pick themselves off the floor? Would demand ever again match historic levels? Were exciting new clean energy companies set to leave unloved fossil fuel producers in the dust? Would a Green New Deal promised by an environmentally conscious Democratic administration further accelerate the energy transition?

How things have changed. It’s now clear that excitable commentary generated by the downturn had overlooked the world’s stubborn structural long-term requirement for fossil fuels. The oil price continues to surge. And the Biden White House is trying to balance long-term support for green power with the short-term imperative of ramping up oil production to ease soaring energy prices. Producers with access to the Permian Basin, the engine behind US oil production, now have exceptional economic and strategic power. Nostra Terra Oil and Gas (AIM:NTOG) an exploration and production company developing a set of low risk, producing assets in three different Texas basins, is seeking to capitalise.

NTOG’s assets in East Texas include 100pc ownership of Pine Mills, a 2,400 acre field which has produced over 12 million barrels of oil since its discovery in 1950s. Two years ago the company farmed out an undrilled portion of the acreage to Cypress LLC, retaining a 32.5pc interest, and carrying a 25pc interest in the first well drilled. Put into production early last year, Fouke #1 achieved payback in five months and has continued to produce without decline. NTOG also has stakes of between 50pc and 100pc in the West Texas basin, which accounted for 11pc of the company’s sales last year, and 100pc ownership of the producing Caballos Creek asset in South Texas, which contributed 10pc.

Like other Texas operators NTOG battened down the hatches during the storm of 2020, though its relatively conservative asset base did not leave it as exposed as many of its indebted neighbouring operators, particularly shale producers. Through 2020 the company cut its operating and overhead costs by nearly two-thirds and hedged more than half its production. Workovers on existing wells and other operational improvements facilitated an increase in average net daily production from 84 bopd in H1 2021 to 100 bopd in September 2021, and net proven resources increased from 763,760 in 2020 to 973,180 barrels in late September, rising to 1,073,960 barrels early this year. NTOG’s tight ship allowed it to become cashflow positive at the corporate level.

Operations through 2022


The company entered 2022 with plans to increase cashflow further through the drilling of ‘one new development well in Pine Mills’ and ‘two to three new wells in the Permian Basin’. Operations commenced in January at Fouke #2, targeting the same horizon as its predecessor, and it was completed in May the well began flowing at a rate of 145 bopd, a production rate 77pc higher than Fouke #1, which had been capped by field rules to 82 bopd. NTOG says that due to the continued strong performance of Fouke #1 and the test rate achieved at Fouke #2 the operator ‘plans to request a substantial increase in the field allowable rate so that both wells can be produced at much higher and more efficient rates’. The regulator’s decision is anticipated later this year. In the interim each well will be produced at around 140 bopd to allow the operator to obtain sufficient technical information to support the application for an increased field allowable. 

NTOG also began drilling at the Grant East lease at West Texas, pursuing a drilling and development plan focused on eight well locations, with the potential for eight more across the 160 acre site. Three permits have secured so far. The first well, Grant East #1, was intended to test the area’s producing Clear Fork (primary) and San Andres (secondary) formations, which NTOG believes have ‘the potential to be a bigger contributor to the Company’s net production than Pine Mills’.

The programme suffered an initial setback earlier this month when the well was ‘temporarily abandoned’ after encountering water. The wellbore will be suspended pending a decision on whether to re-enter ‘based on results of a future offset well’. NTOG CEO Matt Lofgran said that though the result ‘isn’t what we wanted’ there are ‘still 15 viable drilling locations within the Grant East Lease and the information obtained from the Grant East 1 well will be used to improve and optimise future completions.’ Analysis will inform the completion procedures of subsequent Grant East wells, which will be funded from existing resources.

Revenues moving north


A Q1 operations update confirmed that the overall picture for NTOG continues to brighten, reporting a 6pc increase in revenue to $810,699 (Q4 21: $767,000), a 25pc increase in Q1 oil sales price per bbl to $88.16 (Q4 21: $70.46), and total company production up 37pc to 140 bopd. Final results to 31 December 2021 published earlier this month reported that revenue was up 123pc to $2,282,000 (2020: $1,025,000), reflecting a combination of a 26pc increase in production sales and an increase in the average price per barrel sold to $61.42 (2020: $34.17). Gross profit before non-cash items (depreciation, depletion, and amortization) was $574,000, up from a loss of $85,000 in 2020. 

In March the company reported that increasing asset value had allowed a significant expansion of its Senior Lending Facility. Proven resources were up 10pc from 1,073,960 net barrels oil in September 2021 to 2,148,090 gross barrels, projected future net income was up 37pc to $32,426,450, and net present value was up 39pc to $14,632,340. The Borrowing Base of the company’s $10,000,000 Senior Facility had accordingly been increased to $3,350,000 from $2,550,000. NTOG expects that progress at Fouke #2 and higher oil prices will allow ‘a substantial increase in average monthly net operating cashflow’.

The rise and rise of oil prices


Indeed, oil prices seem set to rise further. Brent is trading around $115 a barrel at the time of writing, its highest point for 10 years, and the International Energy Agency’s latest monthly report forecasts that global oil supply will struggle to meet ever rising demand next year. 

Producers in NTOG’s neighbourhood are expected to do their bit to increase production, the US Energy Information Administration forecasting that oil output in the Permian in Texas and New Mexico is due to rise 88,000 barrels per day to a record 5.219 million bopd in June. Oil is cheaper to produce in the Permian than other basins like North Dakota’s Bakken, Colorado’s DJ, the Scoop Stack in Oklahoma and the Powder River in Montana But even here the recovery continues to be cautious. Burned by support for over zealous production through the shale boom investors have imposed a new regime of capital discipline on larger producers, demanding that returns be prioritised over freewheeling investment. Drilling remains significantly lower than before, despite the exertion of considerable political pressure by the President himself, much of the new production coming from wells drilled but not completed before 2020.

Right place, right time?


Producers like NTOG, then, seem to be in the right place at the right time. It’s worth noting that the company has referenced a possible new opportunity in Tunisia, ‘a large block with existing discoveries, offering both exploration and appraisal activity’ for which it ‘has negotiated terms and is waiting final approval’. But right now the focus is very much on continuing to generate organic growth through maximising the potential of its Texan resources.

NTOG’s share price has fallen to around 0.4p at the time of writing, the setback at Grant East knocking it back from highs of 0.7p touched in May. At its current low price, then, NTOG may be in value territory. With the prospect of stable and increasing production at Pine Mills, further exploration at Grant East, and the expectation of ever higher oil prices, the fundamental case for the company looks sound.