Sun Resources (ASX: SUR) has more than doubled its Eagle Ford Shale acreage in Texas and could participate in an early drilling program under a deal with Chinese company Amerril Energy.
The 12,000 acre (48.6 square kilometre) project in the highly prospective Woodbine shale oil acreage, which is part of the Eagle Ford, is currently the subject of advanced farm out negotiations with a number of potential partners that could lead to an exploration and development program.
It adds to the existing Delta Oil project acreage of 8347 acres that Sun holds in the Woodbine giving the company a strong presence in an area where majors such as Gastar Exploration (NYSE: GST), Encana Corporation (NYSE: ECA) and Chesapeake Energy (NYSE: CHJK) are actively acquiring leases.
“We continue to build the landbank and follow the journey of Aurora in terms of building growth in this tight oil play called the Woodbine,” Sun managing director Matthew Battrick told Proactive Investors.
He said that by taking interests in leases that were hopefully on the verge of reaching a deal with a farm in partner for an early drilling program next to its existing Delta Oil project, it would add value to its 100% owned project at a smaller cost.
“Basically what are doing is buying a working interest in the leasehold next door and using the results of future drilling programs to add value to our own acres without having to dilute our own acres.
“We can use results from those wells to book reserves (in the Delta Oil project) without us having to drill, which could lead to better farm-in deals or valuation.”
The Woodbine has been identified by former Petrohawk Energy chief Floyd Wilson and current head of Halcon Resources (NYSE: HK) as one of the top developing tight oil plays in the U.S.
Sun is paying Amerril US$5 million ($A4.9 million) in cash and issuing the Chinese company 200 million shares priced at A$0.05 each for its 50% working interest (37.5% net revenue interest) in the acreage.
This will make Amerril the largest shareholder in Sun, which currently has about 1.09 billion issued shares.
Sun has currently paid Amerril US$750,000 for a 2.5% working interest in the acreage and is seeking shareholder approval to acquire the remaining interest by paying US$4.25 million and the 200 million shares.
The deal is also subject to Sun carrying out a successful capital raising of at least A$9 million.
Sun has until the first week of August to secure shareholder approval and complete the capital raising.
Amerril is a subsidiary of Chinese conglomerate Qingdao Kingking Group.
Sun’s deal comes as interest in the Eagle Ford grows with Aurora Oil & Gas (ASX: AUT) making a A$107 million offer for fellow Australian Eureka Energy (ASX: EKA) in a bid to increase its stake in the Sugarkane field, which targets the Eagle Ford.
Large companies have also picked up large tracts of Eagle Ford acreage and launched major drilling campaigns to increase their reserves and production.
Marathon Oil (NYSE:MRO) considers the Eagle Ford to be one of its core areas, holding 350,000 acres and has 11 rigs operating in the area to deliver its targeted Eagle Ford production of 30,000 barrels of oil equivalent per day (boe/d) by the end of this year and 100,000boe/d in 2016.
Fellow North American independent Pioneer Natural Resources (NYSE:PXD) has built a large 310,000 acre Eagle Ford portfolio and has brought in Indian major Reliance Industries as its partner
Resources giant BHP Billiton (ASX: BHP) also owns a large 332,000 acre tract that it inherited from PetroHawk Energy, which it acquired in mid-2011, and has described the Eagle Ford as offering the highest economic return of all U.S. shales.
Sun had said previously that the experiences of other Eagle Ford Shale operators near its Delta Oil project in Texas indicated that payback on wells could be achieved within 12 months.
The company said operators in Leon and Madison counties are having the greatest success with horizontal well bores of up between 6000 and 7000 feet (1829 to 2133 metres) that are completed with multi-stage fracture stimulations.
These produce oil at initial rates of 1000 barrels per day or more with lower than expected decline rates, adding to the commercial potential of the Eaglebine/Woodbine play.
Average cost of drilling, fraccing and bringing these wells into production is about US$5 million (A$4.8 million) to US$6 million each.
Battrick added that Sun would consider other acquisitions, both within the Delta Oil project and elsewhere in the area subject to capital constraints.
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