American Patriot Oil & Gas (ASX: AOW) has emerged from the shadows, announcing a pair of deals set to transform the company into a prominent US conventional oil and gas producer and drive a period of “significant growth”.
After spending the second half of 2017 announcing a string of acquisitions to greatly expand its leasehold across Texas and the US Gulf Coast, things have been a little quiet for the company over the last few months.
However, American Patriot has been busy behind the scenes for some time, thoroughly pursuing suitable deals that will propel the company into its next phase of growth and set it up to become the largest operator in the region.
Today, it has announced the biggest transaction in its history – the acquisition of a 300 barrel-per-day conventional oil producing asset in the Gulf Coast for US$15 million.
To top it off, it also announced a second, separate deal to acquire assets in South Texas for more than US$3 million.
Combined with the previously announced Peak Energy acquisition, these deals will collectively deliver a total net production of 550 barrels of oil equivalent per day and bolster the company’s total 2P (proven and probable) reserves by 5.6 million boe to 7MMboe.
The combined cost of all the acquisitions was US$20.5 million, though according to independent engineering reports, the assets are estimated to be worth US$48 million PV10 based on current NYMEX strip pricing.
With a low capital expenditure investment of US$1.8 million, American Patriot aims to add an additional 180boepd of production and is expecting net production to grow from 570boepd in 2018 to 750boepd in 2019.
The current net production from the assets generates a net cash flow of US$6 million per annum at current oil prices, although the company is anticipating estimated EBITDA will increase to around US$12 million in the 2019 calendar year following the planned capex program.
Importantly, 75% of production will be hedged at current oil prices, which average US$70/bbl.
Speaking with Small Caps, American Patriot chief executive Alexis Clark said the company deliberately took a methodical and conservative approach to executing the transaction.
Clark said this method entailed confirmation of the engineering and reserves on the assets, as well as securing the funding.
“Whilst this has taken some time, we believe this has been the best approach to ensure success and we appreciate shareholders patience in this matter,” Clark explained.
Growth on the horizon
According to Clark, the “transformational” deals are expected to drive a period of significant growth and would result in the company becoming cashflow positive.
“The production and reserves base of the assets acquired… more than underpins the value of the company,” he said.
“The net cash flow per annum is more than the current market cap of American Patriot and for very low capex spend, we can double this production and net cash flow,” Clark explained.
Clark said thanks to the Foothills transaction, American Patriot is on the road to becoming the most significant operator in the region and as such, has been introduced to a number of “bolt-on acquisition targets in the region.
“We will not be stopping here – this is just the beginning of an exciting acquisition programme which will be increased significantly over the coming months, supported by the funding from our partner as we continue to build a significant reserve base with upside potential to grow production and cash flow in line with increasing oil prices,” Clark said.
American Patriot today reported it has signed a purchase and sale agreement to acquire 100% of the conventional oil and gas assets of private company Foothills Resources Inc for US$15 million.
The acreage covers 4393 net acres (17.77sq km) in the Harris, Liberty and Hardin counties of Texas and has been independently certified to hold 1P (proven) oil and gas reserves of more than 2.8 million barrels of oil equivalent. It comprises 62 producing wells with a current net output of 297 barrels per day of oil.
According to the company, the Foothills project also has significant upside potential to grow production by more than 200bpd via a low-cost capex program involving workovers and well recompletions. This program is expected to commence immediately following the closing of the transaction.
The main asset within the project is the Goose Creek oilfield, though it also contains the smaller Cleveland and Saratoga oilfields.
Foothills is located adjacent to American Patriot’s existing Goose Creek and Lost Lake assets, which it acquired last year through former owner OTEX Resources’ bankruptcy proceedings.
The company said it planned to integrate these existing assets into the Foothills project, operating them with the one team and utilising the existing infrastructure.
Future development at the Goose Creek field will target numerous (around 40 have been identified), vertically stacked pay reservoirs between 800 and 4500 feet deep.
Magnolia and Burnett
The company also today announced it had signed a letter of intent to acquire oil and gas assets in South Texas and the Gulf Coast from two separate private companies, Magnolia Petroleum Company and Burnett Petroleum, for a total of US$3.2 million.
The combined assets have been estimated to contain 1P reserves of 1.048MMboe and comprise 51 wells producing an aggregate of 62bpd of oil and 535,000 cubic feet per day of gas.
Under this transaction, American Patriot will acquire non-operating interests ranging between 5% and 30.9%.
The assets span 10 counties in Texas with various operating companies and include the Rose Joint Venture and Lucky Leon fields.
American Patriot’s business model is based on the concept of buying distressed producing assets at a low cost and upscaling them.
It has a production target of 3000 barrels per day by the end of 2019, to be achieved with the help of additional future acquisitions, and an exit plan of selling the business to a mid-cap oil company or private equity fund in the next 24 months.
The combined Foothills, Magnolia and Burnett acquisitions will add 450bpd of production, bringing the company’s total output in 2018 to a net 570bpd.
This is expected to grow to 750bpd in 2019 via the planned US$1.8 million capex program at Foothills.
While unveiling the news to the market, American Patriot said the acquisitions would be backed by a US$17 million debt facility secured with a major US lender.
“Funding is in place to complete the deal with the lender completing initial due diligence on the assets, with only confirmatory due diligence required to be completed,” Clark said.
Clark added that this endorsement from the US lender would provide the company with “significant resources to secure larger deals in the future”.
“The lender has advised that they see this partnership as just the beginning and want to partner with American Patriot on its future acquisition program, growing the facility to well over $100 million of new transactions,” he claimed.
In addition to the facility, the company planned to fund the balance of the transactions, which also includes US$2.2 million for the purchase of the Peak Energy assets in East Texas, via a A$4 million share placement and a A$3 million rights issue, fully underwritten by American Patriot major shareholder Capital Investment Partners.
Clark said the market response was “overwhelming”.
“Our capital raising was heavily oversubscribed, creating an opportunity to take more but we strategically chose not to, instead focusing on creating shareholder value,” he said.
The transaction is expected to close in August.
American Patriot is anticipating the debt facility be fully paid back in less than four years, based on current oil prices and the projected cash flows from the new assets.