After a dire run of results with jerky profits and haphazard production in 2011/201200 TSX and AIM listed Caza Oil & Gas changed direction in late 2012, switching its focus from higher risk/ higher impact drilling in Louisiana and Texas for fast emerging liquid- rich, low risk hydrocarbon development opportunities in Bone Spring properties in the Permian Basin in New Mexico.
The results for the year ended December 31 2012, released immediately before the Easter break, suggest what has been termed a “make or break” strategy has started to work. What the company actually did was divest its interest in its San Jacinto property in Texas and sell down in the group’s Copperline, Lennox and Forehand Ranch Bone Spring properties from 100 per cent to the current average levels of 58.75 per cent, 50 per cent and 63 per cent respectively. It then proceeded to drill, in the Bone Spring, two wells pretty quickly and a third, which it recently reported on. All three wells came good.
A point about the Bone Spring is that apart from being liquids rich, is that there are multiple formations to target. These include the Delaware, the Avalon Shale, the First, Second and Third Bone Spring Sands and the Wolfcamp. But of these, it seems, the Bone Spring has the best economics.
The operated Caza Ridge 14 State #3H well on the Copperline prospect was something of a breakthrough well. The horizontal well was fracked in 12 stages in the Third Bone Spring sand. It began flowback in late October 2012 and delivered a peak of 1,262 boepd, with output in January averaging 1,244 boepd. In this well Caza has a pre-pay payout working interest (WI) of 45 per cent and a net revenue interest (NRI) of 35.21 per cent.
The Forehand Ranch well in Eddy County hasn’t been quite so strong. The well was fracked in twelve stages in the Second Bone Spring Sand, and while cleaning up was taking place produced at a stable rate of 170 bopd and 103,000 cubic feet of gas in a 24 hour period (around 187 boepd) along with 1,444 barrels of frac fluid. Caza has a 54.83 per cent working interest before payout (42 per cent NRI) and 63 per cent working interest post payout ( 48.27 per cent NRI).
A third well on the Lennox Property, Lea County, New Mexico, the Lennox State Unit 32 No 2HJ horizontal well reached the intended total vertical depth of approximately 11,850 feet subsurface on March 12 and log data was obtained. There were good mud log shows for oil and gas throughout the Bone Spring formation while drilling the vertical section, notably in the 1st, 2nd,and 3rd Bone Spring Sand intervals. The company plans to fracture stimulate the lateral section of the well in multiple stages. Once completed, the well will be flowed back to establish initial production rates. Caza has a 40 per cent working interest before payout (31.88 per cent net revenue interest) and a 50 per cent working interest after payout (39.85 per cent net revenue interest) in the well.
In its 2012 results statement Caza said annual revenues for 2012 increased 22 per cent to US$4.97 million (US$4.09 million 2011) and quarterly revenues for the three month period ended December 31, 2012 increased 31 per cent to US$1.58 million(US$1.21 million) for the comparable three month period ending December 31 2012.
Average production volumes for the twelve month period ended December 31 2012 increased 19 per cent to 285 barrels of oil equivalent a day (boepd) (2011:240 boepd). The Lennox well did not contribute to the 2012 figures, obviously, and the first two wells, though drilled in the tail end of 2012 did not chip in mightily either. But the importance of the first two Bone Spring wells was obvious.
Commenting on the results Caza said: “Notwithstanding the divestiture of the San Jacinto property and the selling down of the company’s Copperline, Lennox and Forehand Ranch properties from 100 per cent ownership, the two wells on Copperline and Forehand Ranch quickly replaced and surpassed the oil and natural gas production cash flows and reserve figures lost with the sale of San Jacinto…… Management expects these figures to continue to improve as more Bone Spring wells are drilled, completed and brought into production.”
And this is really the point, as broker FoxDavies Capital rather less than prosaically put it: “Ingredients. Check. Now Time for the Pudding”. This is taken to mean that Caza has proven that the model of a small company taking a less than a 100 per cent stake in liquid rich, low cost /low cost wells close to infrastructure really does work in terms of quickly monetising the asset and generating strong cash flow. This is the case whether you are the operator or not. Caza is sometimes operator on its properties and sometimes not.
Since 2011it is reckoned that operators have now brought 309 wells into production from the Bone Spring. The first six months average for these wells has been 320 boepd with a 30 day initial production range of between 205 boepd and 1,003 boepd.
Another key “ingredient” is finance. And here Caza is well placed. It gained US$6 million from the sale of San Jacinta. The company had US$6.8 million in cash and cash equivalents as at December 31 2012. Also it has entered into a £6 million Standby Equity Distribution Agreement (SEDA) and a US$12 million SEDA-backed Loan Agreement with YA Global Master SPV, an investment fund managed by Yorkville Adviser LP (Yorkville).
There is plenty it can do with the cash. The company has leveraged its existing Bone Spring assets to get into new Bone Spring opportunities. In addition to the three known properties, the company has acreage in the following properties, Lync, Forehand Ranch South, Mad River, Azotea Mesa, Bradley 29, Two Mesas, Quail Ridge, Rover, West Rover, West Copperline, Chapter 33, Madera and Roja, to name but a few.
The company had, as at December 31, 2012 3P (proved, probable and possible) reserves of 14.3 million barrels of oil (mmbbl) and 79.1 million cubic feet of gas (mmcf) making 27.4 million barrels of oil equivalent(boe) on its leases which cover 41,000 net acres in the play. An independent report completed by NSAI assigned 253 viable drilling locations to the company’s current leasehold.
The company’s shares have sagged somewhat since the exuberance following the early success of the Bone Spring drilling late last year saw the price reached 20p in London. However, they are still off the bottom at reached at the beginning of April at around 10p now. The short term news flow should be positive.