American Patriot Oil & Gas (ASX: AOW) is charging into 2018 at full speed, eyeing off bargain assets to upscale and flip like a renovator’s dream.
Setting its sights on conventional oil and gas in the US Gulf Coast and Texas, the exploration and development company will persist with an aggressive acquisition program that has already scooped up acreage in five transactions over the last six months.
The most recent deal is a signed letter of intent to acquire 43 leases in South Texas, boosting American Patriot’s combined proven reserves to 2.33 million barrels of oil equivalent.
As a result of these acquisitions, the company is on track to produce 500 barrels of oil equivalent per day by the end of this calendar year.
With plans to add further assets to its portfolio in the coming year, it is aiming to hit 1000 barrels per day by mid-2018, with an ultimate target of more than 2000 barrels per day by the end of next year.
American Patriot chief executive and managing director Alexis Clark told shareholders at the company’s Annual General Meeting last week the opportunities being pursued under this aggressive acquisition strategy would “provide a springboard for future activity and growth”.
American Patriot’s business model includes capturing distressed conventional oil and gas (not fracking) assets at a low cost, scaling up production and then repeating the strategy with new assets growing production reserves and cash flow.
In the second half of this year alone, the company acquired oil and gas assets in Texas and the Gulf Coast under five transactions, taking advantage of a recently announced US$40 million debt facility provided by significant New York based Institutional lender Arena Investors. The backing of this significant fund for a small cap Australian oil company is endorsement of the conventional oil acquisition strategy. Arena have reviewed and confirmed the reserves base of American Patriot.
After growing its reserves and resources base and building up production significantly, the company’s next goal would be to uplist to the NASDAQ exchange, then sell off the acreage after three years.
Clark told Small Caps the company’s aim was to “get in, grow the asset base and exit these assets”.
“We recognise once we grow it to a certain level, to get even bigger growth we would be up against some of the big players,” he said.
“The oil price is volatile,” Clark reasoned. “In 18 months it may plummet back down to $40 a barrel… we believe in managing the risk and taking our money off the table when we’ve made a return.”
According to Clark, the acquired assets are expected to make money even at low oil prices, thus protecting the company in a downturn and making its business strategy seem virtually failproof.
“The fact is we’re buying conventional assets. They’re economic at current oil prices and even down to $25 a barrel,” he said.
“And if oil prices rise, we make even more money.”
Clark said another aspect of the company’s economic strategy was to “strip cost out of the production, along with the lease operating expense, through various innovations and grow the net cash flow that way as well”.
“It’s an old school strategy – it’s conventional oil. We’re not going into shale, which is expensive,” he said.
“We’re not drilling, we’re just producing the assets and doing workovers… potentially to grow the production base.”
American Patriot holds existing interests in acreage in Montana, Colorado, Wyoming and Utah, although it is currently in discussions with several parties to sell them down as it turns its focus to production assets in Texas and the Gulf Coast.
According to Clark, the company’s original strategy when it listed on the ASX in mid-2014 was to build a land play joint venture with a US company to pay for the drilling and exploration, prove up the land and flip the asset.
However, this model is challenged in a low oil price environment, which is why the company chose to change tack and go after conventional oil assets with proven production.
“These [newly acquired] assets have existing production cash flow reserves,” Clark said. “They’re either distressed assets or we buy them at a cheaper price and there’s opportunity to enhance the production and grow the reserve base.”
American Patriot has set a production target of more than 2000 barrels of oil equivalent per day by the end of 2018, with an exit strategy planned after three years. However, Clark said ideally the aim was to build production up to 3000 barrels per day then flip the assets in 18 months to two years to a larger player.
Why Texas and the Gulf Coast?
According to American Patriot, Texas and the US Gulf Coast provide access to low cost and low breakeven conventional producing plays offering “compelling economics” compared to the more expensive shale plays.
The region contains proven oil producing basins with significant historical production and access to pre-existing pipeline infrastructure and transportation. Hence, drilling, operational and supply chain costs are all significantly reduced.
“Texas is the heartland of the US oil industry,” Clark said. “It’s where all the rigs are, all the infrastructure – it’s the lowest operating cost area and the biggest oil producing state in the US.”
“The opportunities are plentiful there,” he added.
American Patriot has also noted the Texas government and local community’s support of the oil and gas industry, as well as access to quality operators and a qualified and cost-competitive labour force.
American Patriot acquired the first lot of assets in August and September in two tranches worth a total of US$4.5 million.
Under the first tranche, the company purchased assets from Safari Oil and Gas Production Inc including a 100% operating interest in two producing gas wells, one producing oil well, one non-producing well and one salt water disposal well in the Cano-Mexico field in the Hidalgo and Hopkins counties in Texas. At the time of acquisition, the leases were producing 25 barrels of oil and 470 thousand cubic feet of gas per day, with proven reserves of 30 million barrels of oil and 709 million cubic feet of gas.
According to American Patriot, there is significant upside potential on the acreage with several additional zones to complete in the oil well.
The company also inked an agreement with Anasazi New Ventures Corporation to acquire non-operated stakes in one producing gas well and 22 producing oil wells located in Goliad County, Texas, and La Salle Parish in Louisiana. The gas well is operated by private US oil and gas company Alta Mesa and the oil well operators include Houston-based independent Sanchez Energy Corporation.
These assets were producing 20 barrels of oil and 300 thousand cubic feet of gas per day and have proven reserves of 62 million barrels of oil and 285 million cubic feet of gas.
The second tranche included the acquisition of the Lost Lake and Goose Creek Oilfields in the Harris and Chambers counties in Texas. The assets were removed from owner OTeX Resources LLC through bankruptcy proceedings.
The oilfields contain 65 oil wells with production shut in at 50 barrels per day. Analysis of existing 2D seismic surveying has identified up to 10 additional infill drilling sites with a potential 50 to 100 barrels of oil equivalent per well.
“Due to the distressed nature of the acquisition, we have acquired the assets at a low-cost entry point, with significant reserve potential and upside which the previous owner was unable to exploit,” Clark said at the time the deal was closed.
In November, the company completed its largest transaction to date, doubling the reserves base. It signed a letter of intent with several private vendors to acquire assets in East Texas for US$2.5 million. The fields include 21 producing oil wells and 17 gas wells over 43 leases in the Harrison, Gregg, Rusk and Upshur counties with a daily production rate of 110 barrels of oil equivalent and proven oil and gas reserves of 1.1 million barrels of oil equivalent.
The fifth and latest transaction, announced last week, is the acquisition of 38 producing wells in the Fayette, Lee, Washington and Burleson counties in South Texas. The US$1.2 million deal was made with Texas-based oil and gas company HJH Resources and allegedly has the potential to generate “over US$15 million revenue over a period of time”.
Thanks to the most recent deal, American Patriot’s total proven resources now tally up to 2.3 million barrels of oil equivalent.
According to the company, the combined assets are expected to generate over US$80 million revenue at current oil and gas prices over a period of time.
Ready to market
The newly acquired assets also have the advantage of ready access to existing infrastructure and pipelines to deliver into the market quickly.
In November, American Patriot achieved maiden production and booked first cash flows from the Anasazi assets.
It also believes low-cost workovers are required to scale up output at its other assets. For instance, minimal spending is needed to bring the shut-in Lost Lake and Goose Creek Oilfields back to life, with infrastructure including pump jacks, tanks, batteries and piping already in place.
“We can quickly restart the 50 barrels of oil per day shut-in production at a low or minimal cost and generate immediate cash flow,” Clark said.
“The upside potential is also readily achievable with workovers at low cost, which will double or triple production in the next 12 months,” he added.
This is also the case in East Texas, with minimal workover expenditure required to boost production and ready access to market through gas pipelines delivering to nearby refineries.
Clark said American Patriot’s view was that the next 12 to 18 months should be advantageous to the oil price.
This is in line with market expectations of many analysts, especially due to increased tensions in the Middle East and following the decision made by Opec and non-Opec producers led by Russia last Thursday to extend oil output cuts until the end of 2018.
Please note however that oil is a volatile commodity; there is no guarantee that its price will rise, and it could also fall.
Clark remained confident that the company’s business strategy accounted for this contingency.
“We make money now and even at lower prices. So, if the oil price rises – and at the moment it’s on a trend upwards – we make even more money,” he said.
Clark said American Patriot planned to continue to build up its asset portfolio throughout next year “in an aggressive manner”, with full backing by funders, to deliver on this strategy.
“With the pipeline of deals in front of us, 2018 is shaping up to be a significant year for the company,” he said.