According to the article “Opportune Time For Oil & Gas Exposure” (May 18, 2015), not only did oil prices collapse but also drilling costs to develop new wells:
“This represents best time to bring online new production wells... This appears to be an opportune time to build positions in oil & gas developers and producers, whereas ample focus can be put on companies active in the US and reporting in Canadian dollar.”
The Canadian company Cardiff Energy Corp. (TSX.V: CRS) is a junior oil & gas producer and developer active in the United States. On July 15, 2014, Cardiff entered into a joint venture with the private oil & gas producer and developer Martin Energies LLC to bring into production new wells in Runnels County, Texas, USA. On September 4, 2014, the drill start of the vertical well (Bearcat #4) was announced, and on September 17, 2014, the drilling was completed successfully. As can be monitored on the chart, the share price rose by 480% between July and September 2014. Bearcat #4’s initial production rate was 180 barrels of oil per day from the Palo Pinto Formation/Zone and 250,000 cubic feet of natural gas from the Gardner Lime Formation. At a current oil price of 60 USD/barrel, 180 barrels have a value of 10,800 USD/day (324,000 USD/month or 3.9 million USD/year). 1,000 cubic feet (1 MCF) of gas have a current value of around 3 USD (250 MCF = 750 USD).
On January 13, 2015, Cardiff announced its plans to drill a horizontal well (Clayton #1H) adjacent to Bearcat #4. Recently on May 28, Cardiff disclosed that preparations to drill Clayton #1H were already under way and that the drill start is aimed for June 15. The chart above indicates that the share price appears to be on the rise in a similar fashion as last year (currently +153%). This time I have every reason to anticipate a stronger appreciation phase being sustainable respectively without such a strong correction to occur. Project operator Martin Energies gave the following statement in Cardiff’s press-release of May 28:
“To be part of this project means being in on the ground floor of a major discovery. By drilling one horizontal well the results could be the equivalent of 5-7 vertical wells.”
Since Bearcat #4 showed an initial production rate of 180 barrels oil/day, the horizontal well may produce 5-7 times as much (i.e. 900-1,260 barrels/day). 1,000 barrels oil have a current value of around 60,000 USD (i.e. 1.8 million USD/month or 22 million USD/year) plus the revenues from continuous gas sales.
As management has decided to install a horizontal well on the property, Bearcat #4 was suspended after initial flow rate tests (currently the well is “on minimal production to retain gas reserves until the pipeline connection can be made”). On May 28, it was also announced that Bearcat #4 is capable of producing more gas than expected. Therefore, Cardiff has decided to tie both the Clayton #1H and the Bearcat #4 gas production together at completion.
Martin Energies gave following insight in January 2015:
“The key to determining where to drill a horizontal well is to know where decent production has happened historically in older vertical wells.”
Since the 1980s, Martin Energies have drilled a number of vertical wells into the Gardner Lime of Runnels County and a number of these initially produced between 180-240 barrels/day. Runnels County is known for its productive oil formations in relatively shallow depths (not less than 14 potential pay zones). Cardiff’s property is adjacent to other producing wells – thus, an economic production is expected. Clayton #1H will be the first horizontal well in the area.
The main target of Clayton #1H is also the Gardner Lime, whereas not less than 14 distinct zones, which have produced hydrocarbons in the area, will be drilled through on the way to the Gardner Lime target. The remaining oil reserves in the 5 most productive zones are estimated as follows:
Additionally, both the zones Middle Caps and Dog Bend Lime have potential for extractable petroleum and will be tested with Clayton #1H as well. The Gardner Lime is a fractured limestone, approximately 5 meters thick. Geologically, strong similarities are given with another major oil field in Texas: The Austin Chalk Formation, in which numerous horizontal wells are in production, whereas some of the more prolific wells showed initial production rates of 1,500 barrels oil/day (current value ~2.7 million USD/month or 32 million USD/year).
An important and valuable feature of the Gardner Lime is its naturally fractured limestone, which does not require a costly and risky hydraulic fracture treatment (fracking). Consequently, production costs of less than 5 USD/barrel are possible (also thanks to nearby infrastructure and pipelines).
Moreover, as mentioned earlier, drilling costs have nosedived significantly during the last months, which translates into total costs of ~1.3 million USD to connect Clayton #1H to a pipeline system. As per joint venture agreement, project operator Martin Energies pays 33% of the costs to earn 25% of the project. Hence, Cardiff must pay ~870,000 USD owning the remaining 75%.
On June 2, Cardiff announced a private placement of 1 million CAD (7 million common shares each at 0.15 CAD, including a full warrant exercisable at 0.20 CAD in the first year and 0.30 CAD in the second), whereas it was also noted that insiders will purchase a minimum of 3.5 million shares. According to Canadianinsider, 3 insiders sold a total of 3.9 million shares into the market at ~0.15 CAD in late May and early June; probably to use the proceeds to participate in the private placement.
The Clayton #1H well is planned to be drilled to a depth of ~1,250 meters with one horizontal leg of ~1,067 meters. Thus, an area equaling half a square kilometer (100 acres) is exploitable; a vertical well can drain only between 0.03-0.05 km2 or 8-12 acres according to some engineering studies. Another major upside catalyst would be Cardiff having the ability to drill many more horizontal wells in the area, whereas the company may use cash-flow from Clayton #1H to acquire more properties.
In consideration of the likely completion of the private placement, the already started construction of the Clayton #1H well, the start of horizontal drilling next week on Monday, and the market’s valuation of 7 million CAD, Cardiff appears well positioned for growth (up to 1.3 million barrels oil worth 80 million USD) and thus appreciation. More risk aware investors may enter the stock after the successful completion of Clayton #1H and announcements of initial flow rates (~3-4 weeks after drill start). Thereupon, a market capitalization exceeding 20 million CAD is anticipated.