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Elixir Petroleum – Cash flow and upside

Published: 19:23 10 Sep 2008 AEST

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There has been plenty of speculation that we’d see consolidation in the junior oil sector, due to a general lack of funds and difficulties in securing drilling equipment. However, to date at least, not a lot has actually happened on this front. One company that has made its move though is Elixir Petroleum which tied up a merger with Gawler Resources at the tail end of last year.


Elixir had a prospective North Sea portfolio – expensive to drill but offering plenty of upside – while Gawler brought some low-risk assets to the table, in the form of production in the shallow waters of the Gulf of Mexico.


Proactive last checked on the company’s progress at the beginning of this year. Since then it has begun to earn decent revenues from its US assets, firmed up its plans for next year regarding the North Sea, been awarded an exciting new licence area off the coast of Sierra Leone and bolstered its balance sheet. No one can accuse the company of sitting on its hands!


Gulf of Mexico
Elixir has an interest in two offshore producing fields in the Gulf of Mexico, which together net the company revenue of around US$1m a month. High Island lies some 65km from the coast of Texas in 50m of water while Pompano is in shallower waters of 18m and lies just 7km off the coast.


At High Island, Elixir has a 30% working interest in two wells that are producing around 4.5 million cubic feet of gas per day and 200 barrels of condensate. One of the wells has proved problematic and an intervention is planned to raise production levels. Efforts are continuing to resolve this issue, but both wells are expected to shift to produce from shallower reservoirs in a year or so anyway.


At Pompano, there are another two wells with a third due to be drilled this month. Current production is around 10 million cubic feet of gas per day and 50 barrels of condensate, with Elixir’s working interest standing at 25%. An independent reserves review of the first two wells at Pompano showed 2P reserves of 17.1 billion cubic feet of gas and about 50,000 barrels of condensate.


The third well at Pompano should be followed by others in 2009, plus drilling is expected to begin at the nearby Redfish prospect, which should be relatively easy to hook up to existing infrastructure if a commercial find is made.


UK North Sea
Elixir holds stakes in a several licence areas in the North Sea and has also applied for three more in the latest UK licensing round, the results of which are expected by the end of 2008.


Of the current portfolio, three prospects called Mulle, Leopard and Bobcat look to have the most potential and all of them will hopefully be drilled in the next twelve months or so. With Elixir’s North Sea prospects, the strategy is generally to attract farm-in partners to keep drilling costs to a minimum.


Mulle lies in Block 211/22b, where Elixir drilled the Jaguar prospect back in 2006. Jaguar had hydrocarbon shows, but was deemed to be non-commercial. Nevertheless, the data collected and the Causeway discovery in a neighbouring block led to the identification of this new target. The block’s operator, DNO, has a P50 estimate of 17 million barrels recoverable. The data room is open to potential farm-in partners with drilling pencilled in for 2009. Elixir’s current working interest is 40%.
Leopard is higher risk, targeting a new play in the northern North Sea, but is potentially much larger.

The most likely recoverable resource is estimated at 350 million barrels. It lies in Block 211/18b and Elixir is looking to farm down its current working interest of 56% before drilling a well next year.
Several companies have apparently visited a data room for the Bobcat prospect that was opened at the end of June. Elixir has a 40% working interest and is also the operator of this licence. It lies further south than both Mulle and Leopard in Block 21/16b of the central North Sea.


Sierra Leone
Tullow’s giant Jubilee discovery has whetted the appetite of many UK investors for West African oil plays. Elixir was assigned a 15% working interest in block SL-4, off the coast of Sierra Leone, in February of this year and has an option to raise its stake to 35% by issuing US$2m of shares.


The licence covers over 4,400 sq kms with the water depth ranging from 100m to 3,500m. 2D seismic was acquired back in 2003 which identified 16 large prospects and was used to design a 3D seismic programme covering 1,222 sq km that was completed this June. Processing of the data is ongoing with Elixir expecting to receive the results sometime in the final quarter of this year.


Cash
Now that Elixir is a producer, it has managed to be broadly cash neutral over the last two quarters. It also raised A$7m of share capital in May, boosting its coffers to A$10.6m. The original plan had been to raise double this amount, but this was scuppered by the poor stock market conditions of the time, particularly in Australia where the majority of Elixir’s investors reside.


Blue Oar, Elixir’s broker, reckons profits for the year ending June 2009 could be around A$5m. This makes the current market value look relatively modest even before taking the exploration upside into account. With cash in the bank, albeit slightly less than it was hoping for, Elixir is well-placed to expand its portfolio over the course of the next year.

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