The Speculator: loaded up in oilsBy David Haselhurst, ninemsn...

The Speculator: loaded up in oils

By David Haselhurst, ninemsn Money
April 23, 2008,
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Four out of six of our portfolio stocks now comprise oil and gas juniors with the addition this week of Modena Resources .

Modena listed on the ASX on November 21 last year to acquire interests in oil and gas projects in California and Texas. It has since reported some early successes including early initial production revenue.

The company’s float involved a non-underwritten issue of 30 million shares at 20c to raise $6 million. The float took issued capital to 63 million shares, of which 20 million are escrowed as vendor shares. Net cash on listing amounted to $6 million plus $600,000 in tradeable investments.

The board is led by experienced deal-maker Peter Hampshire, a Sydney-based sometime broker and investment banker, plus executive director and project manager Craig Willis and chartered accountant Neville Bassett.

Their initial investments were:


A 10% working interest in the South Lost Hills project in Kern County, California, purchased from Nuenco NL for $100,000 cash plus an expected $1.25 in further development costs, and
A 10% working interest in the Wilson project on Padre Island, Texas, bought from the American-owned Kindee Oil and Gas for 20 million vendor shares plus future expenditure of $1.07 million.

Although those projects came with the prospectus, initial field activity has blossomed from new deals entered following the float. In particular, the company has formed an alliance with BNP Oil and Gas Properties Ltd, a company controlled by Texas petroleum engineer and wildcatter Paul Black.

In their first deal in February, Modena signed up for a 12.5% interest in the Manzano Prospect, in which BNP is operator and a 52.5% equity holder. Under the terms of the deal, Modena paid $US100,000 up-front plus a commitment to pay 16.63% of the initial well cost, with Modena’s share estimated at $US914,650. Thereafter it would be liable for 12.5% of well costs on a leasehold area covering more than 1.5 square miles.

On April 7, Modena reported the first well (spudded on February 2) delivered a strong gasflow and within seven days it was connected to the sales grid with a daily flow rate of 3.1 million cubic ft plus condensate from a perforated 6ft (2 metres) section of the 10,500ft hole, which was drilled directionally out of the rig site to the eastern part of the indicated reservoir.

Better, Modena’s share of the drill cost was about $US600,000 and its 12.5% interest should see it gross $US1.2 million as its share of sales (net of royalties) in the first 12 months with expectations the well will remain a revenue producer for another five years.

Before the drilling of the first well, three wellhead sites were prepared, each 5 metres apart, so that the rig could drill the first hole, then move just 5 metres to spud an appraisal well for a directionally drilled hole to the south of the block. A result for the second well should be known this coming weekend, with an estimated cost of Modena for its share of just $US350,000.


Under another deal, Modena will participate in three shallow wells in Jackson County, Texas, with an expected back-to-back drilling time of seven days each beginning on April 29. The deal involves Modena paying 60% of $US327,839 to Seisgen Exploration Inc for past exploration expenses plus 60% of the first three well costs with operator BNP.

In an area where the success rate of drilling is acknowledged at about 70%, the company is looking forward to a well cost of $US250,000 each for its share then a return over perhaps a couple of years of $US1.8 million/well before the structure is exhausted.

The company has also farmed-in for a 15% interest in the planned Bullseye prospect in Louisiana on a 1700-acre structure with estimated potential (P50 potential reserves) of 12.5 million barrels or oil and 33 billion cubic ft of natural gas. That is expected to spud at the end of April and if it comes in at the top end of hopes it will be a company maker.

To help finance these moves since the float, the company has issued $2.5 million in 12% notes with $1 million convertible at 35c and $1.5 million at 45c in February, 2010.

After the float at 20c last November, the shares traded up from a low of 23.5c to a high of 48c before sliding in the recent market malaise to 35c last week. As a further incentive to punters, the company remains pregnant with a promised one-for-one options issue at 1c, which will add $630,000 cash to the bank. These options will be well worthwhile with a planned issue price at 1c for exercise at 20c by June, 2010, but the company is expected to announce an “ex” date for entitlements within the next couple of weeks. I’ve bought 20,000 Modena at 35c each.

Don’t forget to look out for the Speculator’s exclusive magazine only picks for the forthcoming print edition due out in the first week of May.