The growing flow of improvement for Sacgasco in California

Junior oil producer Sacgasco (ASX: SGC), a conventional on-shore oil company operating in California, has told the market it has achieved a 70% improvement in production growth during the current quarter, from its 12 active production wells out of a total of 26, in the Northern Sacramento Basin.

Sacgasco told shareholders gross production has “increased materially” in the current quarter to over 1,000 Mcf per day, equating to a dollar terms gross revenue figure of US$3,000 per day.

According to existing joint-venture agreements and operational shares, Sacgasco’s net share of production is around 570 Mcf per day.

The figures demonstrate a 70% increase in the average daily gross production of 584 Mcf per day, as reported by Sacgasco in Q4 2017.

According to the company, “the increase is primarily due to the low-cost re-activation of two previously idle wells which are now producing profitably without the need for more costly workovers.”

Raising the rate of production

To further boost its production output (as well as to develop existing idle wells in its portfolio), Sacgasco has commenced an “active wellwork program” intended to deliver “material and progressive” growth in natural gas output via its as-yet untapped wells.

According to Sacgasco, based on a combination of re-activations, well-work and workover appraisal activities now underway, daily production is expected to exceed 1,500 Mcf per day by the end of March, and then forecast to hit 2,000 Mcf per day by the end of June 2018.

Sacgasco’s 14 idle wells are expected to be brought online in order of commercial viability, with the company identifying “numerous plugged wells on its leases that can be cost-effectively re-entered, deepened or side-tracked to enhance production and/or evaluate appraisal and exploration targets,” such as Alvarez-1.

Sacgasco also adds that development drilling the company is now planning across its extensive acreage “may increase production more rapidly,” and considers further acquisitions in the region as “under active review”.

Regarding its high-priority Dempsey 1-15 discovery, Sacgasco says that it is currently looking at the best way to commercialise Dempsey and expects to “provide an update shortly”.

Longer term, Sacgasco has aspirations to become a significant fixture in the Sacramento Basin and to be in a position to produce around 4Tcf of natural gas each year.

Sacgasco wants to become a wholesale supplier of natural gas to the local Californian gas market and more broadly, to the burgeoning liquid natural gas (LNG) market in North America. In a best case scenario, Sacgasco hopes to have sufficient production capacity to be able to export LNG to overseas markets.

Reviewing Sacgasco

To achieve its ambitious expansion plans in both oil market share and production rates, SGC has embarked on a quality-focused acquisition spree across California over the past 18 months, acquiring further land tenure and re-stocking its pipeline of prospects.

Last year’s acquisition of 18 additional operated natural gas wells in the Sacramento Basin put Sacgasco in the top three natural gas producers in the entire basin — considered as a significant boon for the company by market analysts, given its relatively small A$20 million market valuation.

Over the next 3-5 years, Sacgasco wants to contribute to California as a state, redressing the balance of its dysfunctional energy market that has seen the state resort to importing its own natural gas despite being one of the largest hydrocarbon-rich states in the US.

Sacgasco intends to deliver over 4Tcf in annual gas production, beginning with Dempsey-1 which Sacgasco says could produce 1Tcf per year.

One further method of reducing its capital expenditure burden is to continually reinvest the proceeds from its early natural gas sales to fund future exploration.

“Alongside our strategy of exploring and testing the under-explored older gas-bearing zones in the Sacramento Basin through drilling wells such as Dempsey, we have commenced an active works program to ramp up production from our existing portfolio, the majority of which was acquired last year,” said Gary Jeffery, Managing Director of Sacgasco.

“There is lots of upside here, and the growing cash flows underpin a more aggressive well development program across the seven fields which will in turn grow production even more. Our acreage in the Northern Sacramento Basin still has extensive untapped potential, and we will systematically exploit these fields fully,” Mr Jeffery said.

“Concurrently, we are actively pursuing multiple larger gas targets in older strata, with Dempsey and Alvares our first two priorities,” he added.