31 July 2018
ASX Limited
Electronic lodgement
June 2018
Quarterly Activity Report
Summary
• Xstate’s Singapore lawyers attended scheduled hearings and court proceedings in Singapore in relation to uncovering the assests and commencing committal proceedings against two of the three defendants (Hong Hung Thiam and Tanzil Hidayat) in Singapore.
• The Company announced the sale of its working interests in the Dempsey Project area to Raven Energy Limited (ASX:REL) who has paid Xstate a non refundable deposit of US$70,000 for exclusivity until August 31, 2018.
• Post quarter end the Operator advised that the Dempey 1-15 well (XST 10% WI) was selling natural gas at a flow rate of ~1,300 mcf per day.
• The Operator is planning to connect nearby idle wells in which Xsate has an interest to further increase production.
Comments
Xstate Resources Limited (ASX: XST) (“Xstate” or “the Company”) is pleased to provide the following operational update in relation to its June 2018 quarter activities.
The Company’s activities during the quarter continued to be dominated by our legal action against the three Singaporean defendants. During and post quarter end, the Company’s Singapore lawyers attended scheduled Court hearings in relation to uncovering the assets of the defendants to satisfy the Judgment which has been entered against them in favour of Xstate and pursuing committal proceedings against Tanzil Hidayat and Hong Hung Thiam.
Xstate will earnestly continue to take all reasonable legal steps available to it to pursue the defendants for full recovery of the Australian judgment debt.
The Operator of the Dempsey 1-15 appraisal and exploration well advised that the “Dempsey 1-15 well is flowing natural gas to sales pipelines at a combined rate of 1,300 mcf per day. Dempsey 1-15 is producing gas from Ranch Capay Field Level Kione Sandstone and the combined older Zones 2, 3 and 4”1.
In addition to the Sacramento Basin activities the Company continues to pursue new production opportunities onshore California that have the potential to add significant value to the Company via production enhancement, cost control, and the drilling of new development and appraisal wells.
The focus for the Company in the next quarter is to successfully conclude its new business priorities, continue to grow gas production in the Sacramento Basin and to participate in a successful production test of the Dempsey discovery well.
Legal Update on Singapore Supreme Court Enforcement Action
During the quarter, Xstate’s Singapore lawyers instigated various further steps in the Singapore High Court to enforce the Judgment against the three defendants: Hong Hung Thiam, Chloe Kwok and Tanzil Hidayat. The defendants have continued to attempt to delay the enforcement process which the Company has dealt with in accordance with Singaporean law. The Company has been pursuing further court orders to uncover the assets of the defendants capable of satisfying the Australian judgment debt and by commencing committal proceedings against Hong Hung Thiam and Tanzil Hidayat for breaches of court orders and court imposed deadlines. Whilst these deliberate delays on the part of the defendants are disappointing, they weren’t unexpected and the Company is well prepared to deal with any matters raised.
The Board continues to vigorously pursue the enforcement of the Judgment in Singapore, despite the process being slower than the Company had expected to ensure that shareholders will recover funds from the defendants.
Xstate will continue its endeavours and determination to take all reasonable legal steps available to the Company to pursue the defendants for full recovery of the Australian judgment debt worldwide.
The Company will continue to keep shareholders fully informed of its progress.
New Ventures
The Board and Management has continued to actively seek to identify and evaluate further asset opportunities that meet Xstate’s investment criteria and are capable of being delivered in a timely manner.
The Board have reviewed many opportunities which have varied in size and location that fit the Company’s criteria; namely existing oil production operations and material proven reserves with associated proven undeveloped development drilling locations. Very few have met the Company’s rigorous technical and commercial requirements.
The identified projects under review are typically production opportunities onshore California that have the potential to add significant value to the company via production and reserves enhancement, cost control, and the drilling of new development and appraisal wells.
Despite not concluding a new business opportunity to date, the background work carried out and ongoing engagement with potential sellers of assets places the Company in a good position to access suitable new opportunities in the near future.
Cash and Liquid Assets
As at 30 June 2018 the Company held cash and cash equivalents of $0.412m.
The main expenditure during the quarter related to the Company’s share of capital expenditure for the drilling of the Dempsey 1-15 appraisal and exploration well in the Sacramento Basin.
The Company remains committed to maintaining expenditure and overheads to a minimum until it has acquired an asset and associated operating activity. Key Management and Board members have deferred receiving payments for services rendered for the immediate future until Xstate secures a suitable producing asset.
Shareholder Base
At 30 June 2018 Xstate had 783,490,897 shares on issue and 1,593 shareholders. The top 20 holders held 376,790,139 shares representing 48% of the Company’s issued capital.
Sacramento Basin Appraisal and Exploration Activities
The Dempsey 1-15 appraisal and exploration well (“Dempsey well”) flowed gas from two separate zones during the quarter.
Post quarter end on July 18, 2018 the operator reported the Dempsey 1-15 well was flowing a combined rate of 1,300 mcf per day of sales gas into the pipeline from four zones; Kione Sandstone and the combined older Zones 2, 3 and 4.
The forward plan is to connect a number of idle wells in the area in which Xsate has an interest that are expected to materialy add to production according to the operator1.
The Dempsey discovery is part of a portfolio of acreage and prospects, which the joint venture has secured in the Sacramento Basin. Xstate is very well positioned in the gas play which has been identified by the Dempsey well (in which Xstate holds 10%) due to the fact the Company has a significantly greater working interest (24%) in the wider Dempsey Area of Mutual Interest.
Ongoing success at Dempsey will therefore enhance the potential for Xstate in follow up leads and prospects along the Dempsey trend.
The JV is also evaluating appraisal options for the 1,500m of gas shows encountered in the Alvares -1 well gas discovery in which Xstate holds a 21% working interest. The Alvares Conventional Gas Prospect is an appraisal project testing the Alvares-1 gas discovery drilled in 1982 on a large structure mapped on 2D seismic.
The Alvares Joint Venture is currently evaluating how to best evaluate the commercial potential of strong gas shows recorded over more than 1,500 metres below a thick, sealing shale at 2,350 metres. Wireline log data from the Alvares-1 well indicates several zones with conventional gas reservoir potential.
The Alvares 1 well bore will be assessed for its suitability for re entry and a possible production testing as a cost effective way of evaluating the potential of extensive gas shows encountered in the discovery well while drilling for oil in 1982. The upper 500 metre thick interval where the best gas shows were encountered were not previously evaluated due to logging difficulties related to high-pressure gas influx.
Divesture of Dempsey Project Interests
On May 7, 2018, the Company announced the sale of its working interests in the Dempsey Project Area to Raven Energy Limited (“Raven”; ASX:REL). Under the terms of the Binding Letter of Intent Raven has paid US$70,000 as non refundable deposit and has an exclusivity period until August 31, 2018 at which point the balance of US$430,000 (total US$500,000) is due and payable.
A final payment of A$500,000 is payable in cash or Raven shares and is due 90 days after tranche 1 closing (November 28, 2018) and the payment method is at the sole discretion of Raven. In the event that Raven elects to pay the final tranche in shares, Xstate will receive approximately 278 million ordinary Raven shares (at an agreed price of $0.0018 per share) that will be escrowed for a period of 12 months.
Post completion of the Dempsey Project sale to Raven, Xstate will retain its working interest in the Alvares appraisal well and the surrounding Area of Mutual Interest.
The sale of the Dempsey project area is part of the Company’s strategy to derisk its asset base from higher risk exploration to appraisal, development and production orientated opportunities.
Part of the proceeds from the sale will be utilized to fund Xstate’s participation in the Alvares appraisal well, in which Xstate holds a 21% working interest.
Production – Sacramento Basin
Xstate acquired a working interest in minor gas production rights in the Sacramento Basin onshore California in 2013 and early 2017. The purpose of the acquisitions was to acquire the leases for further exploration and to access an extensive 3D seismic database from which to generate new exploration opportunities whilst also securing strategic infrastructure and growing gas production.
Gross production during the quarter averaged 887 mcf /day largely in line with the previous quarter and reflects prior wells having been brought online as part of the well work program focused on increasing production from the idle well portfolio.
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