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PetroFrontier looks for new prospects as first major asset carried by oil giant until 2015

Published: 07:00 26 Oct 2013 AEDT

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PetroFrontier (CVE:PVC) (TSX-V:PFC) is moving ahead as it looks for more opportunities globally and in Australia, home of the company's existing prospects that resulted in a game-changing deal with Norwegian energy giant Statoil. 

"We have a plan going forward, and have mitigated as many risks as we possibly can, but kept much of the potential upside," says president and CEO Paul J. Bennett, who is referring to an amended farm-in agreement with Statoil signed in June, which fully funds a US$50 million 2013/2014 exploration program in the Southern Georgina Basin, Northern Territory, Australia, after PetroFrontier had some hiccups in raising the capital previously required for the campaign amid dry capital markets. 

The new deal, while bumping up Statoil's potential interest in the blocks to 80% from 65% previously, allows for the drilling of up to six vertical wells at no cost to PetroFrontier. In fact, Statoil, which became the operator on September 1, could spend a total of up to US$175 million by the end of 2016 before PetroFrontier will be required to contribute further. 

"We're riding on Statoil's coattails a bit as they're the operator. We believe that there are other opportunities out there, with a range of options that could add value to our shareholders," says the chief executive. 

"We will look at deals that make financial sense and that complement our assets in Australia."

The company is no stranger to finding opportunities with value, as evidenced by its Southern Georgina Basin play that attracted the likes of Statoil, a company with a market cap of almost $75 billion. 

"They know unconventional assets and are serious about this play. They know the oil and gas is there. Statoil's objective is to get it out of the ground."

Bennett says that the potential value of the resource is so high that it doesn't matter whether PetroFrontier's interest is 20% or 35%. According to a Ryder Scott resource estimate from 2010, the play has total estimated conventional and unconventional resources of 27.5 billion unrisked, prospective recoverable barrels, at a best estimate. "The key is that the land gets worked and the capital gets spent."

PetroFrontier started its work on the Southern Georgina property in 2009, after becoming involved in the asset through a sister company during the financial crisis. It then proceeded to acquire the additional rights to neighbouring lands and created the entity it is known as today.  It amassed a large land position in the years that followed, now owning approximately 14.1 million gross acres in the area. 

While the property didn't turn up any economically viable conventional prospects for Pacific Oil & Gas - a subsidiary of Rio Tinto - back in the 1990s, chief financial officer Shane J. Kozak says the price of oil was "nothing like it is today", and the remoteness of the basin itself also was a factor. "It was before the time of unconventional oil and gas; the technology didn't exist back then."

But PetroFrontier saw an opportunity, being the first in Australia to use unconventional horizontal drilling tactics and open hole, multi-stage facture stimulation techniques, both of which have unlocked tremendous production volumes from similar plays in North America, such as the Bakken, the Eagle Ford, the Horn River and the Montney, at reduced costs. 

Shortly after a large capital raise, PetroFrontier listed on the public markets in January 2011, and began drilling later that year, a process that was held up by weather and equipment delays. "When the dust settled, we realized the capital costs of operating in a remote location were much higher than we had planned," says Kozak, leaving the company insufficiently capitalized to complete the original program that was aimed at drilling three unconventional horizontal wells and three conventional vertical wells. 

Looking at costs in the range of $14-$16 million to drill, frac and test a horizontal well and $8-$10 million for the same activities on a vertical well, PetroFrontier quickly burnt through most of its cash, and realized it would not have been able to complete its planned activities without a partner, or some other means of raising funds. Ultimately, this decision led to a strategic review process run by Macquarie, where the company says 12 parties came to the table, “some even bigger than Statoil”. 

The oil and gas explorer chose Statoil of the lot in June 2012, first agreeing to split 50/50 the costs of the initial $50 million program, only to amend the terms of the deal a year later, after PetroFrontier’s planned bought deal financing required to fully meet its commitment fell through amid challenging capital market conditions. 

The company did, however, manage to drill and frac two wells in 2012 with its available cash, as well as strengthened its management team with the appointment of chief operating officer Earl Scott, who has worked in technical roles with such heavy hitters as Exxon (NYSE:XOM), Schlumberger, AEC International and most recently, BG Group. 

And the results of the drilling, including notable hydrocarbon shows, were impressive enough to convince Statoil to amend the terms of the deal, carrying PetroFrontier until at least 2015. Two hydraulic stimulations were successfully completed, says Bennett, noting, however, that there were some unforeseen issues, such as the presence of hydrogen sulfide and a casing failure. 

“We are very encouraged by the fact that all three wells had very good gas log shows with oil indications, especially the Owen core which demonstrated the presence of oil,” asserts the chief, adding that the Owen well was crucial to Statoil’s decision to modify the terms of their agreement, as the well was successfully drilled, completed, frac’ed and flow tested, despite recovering water from another formation. “We believe it reinforced Statoil’s model. They saw it needed more capital.”

Now that the costs of the Southern Georgina Basin are no longer a worry, PetroFrontier has also done its part to conserve cash, closing its Adelaide office in Australia, initiating an Australian research and development cash rebate process and reducing its overhead substantially. It had positive working capital of $9.6 million at the end of June. “We’re in a very good position here to uphold our limited obligations under the farm-in deal with Statoil and to pursue opportunities that can add value,” says Bennett. 

Kozak also points out that the area surrounding the Southern Georgina play is ripe for picking, having an area of mutual interest agreement with Statoil on lands in the neighbouring region, meaning “PetroFrontier gets right of first refusal on 20% of these lands under whatever terms Statoil gets in.”  The area also seems to be a draw to oil majors, with Santos farmed into the south, as well as Total and CNOOC in the north and the east. 

But the company -- which is armed with board members such as Heritage Oil chairman Michael Hibberd and former Talisman CEO James Buckee -- will also not shy away from opportunities in Southeast Asia or Western Canada, though the latter may be a tougher option to execute. 

The oil and gas explorer counts Heritage Oil (TSE:HOC) (LON:HOIL) as a 20% shareholder, with the remainder of its investor base consisting of retail shareholders spread mainly in Ontario, Alberta and British Columbia, as well as in Europe and Australia. 

For prospective shareholders, the stock is potentially high reward, according to the chief executive, with the Statoil farm-in deal valuing the land at $17.93 an acre, or $218.75 million. When calculating PetroFrontier’s share of 20%, this amounts to $43.75 million, equaling some $53.4 million of implied market capitalization when adding current working capital. This is well above the $14 million market cap at which the company is currently trading, suggesting its value could go much higher. 

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