Red Sky Sees Blue Sky in US Oil & Gas
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Red Sky is using the oil price downturn to put together a portfolio of North American oil and gas assets that are not only producing but profitable in the current market environment, but contain significant in-ground reserves - meaning they are leveraged to improving prices.
For most of the last two years, the oil price has started with a 4. In February, when concerns over weakening global growth turned into actual fear of recession, the price started with a 2. At US$45 a barrel, oil has recovered, but it is a long way from its glory days.
US shale production, the return of Iran to the market, and Saudi Arabia’s decision to lower its prices to its largest customers – because it does not want to lose market share to the first two factors – are keeping the oil price subdued.
At some point it will rebound, but that depends on three things: what happens with US shale oil production, how Saudi Arabia and the Organisation of Petroleum Exporting Countries (OPEC) responds, and how strongly (and how fast) the global economy grows.
As for natural gas, it is at its lowest point – in real terms – since 2000.
For producers, these are painful days – unless you take a counter-cyclical view.
And that’s where oil and gas company Red Sky Energy Limited (ROG) comes in. Red Sky is using the oil price downturn to put together a portfolio of North American oil and gas assets that are not only producing but profitable in the current market environment, but contain significant in-ground reserves – meaning they are leveraged to improving prices. Red Sky’s strategy is to buy (or buy into) these under-exploited assets in existing oil and gas fields, and use modern-day technology to boost production.
Red Sky has three of these assets.
The first acquisition, in May last year, was the Cache oilfield on the border of Colorado and Utah. Discovered in 1964 by Amoco, Cache has yielded 5 million barrels of high-quality, sweet oil in its lifetime, at peak production of 100,000 barrels a day, and Red Sky estimates that only about 20 per cent of the original oil in place has been produced. A total of 23 wells have been drilled on the field – mostly in the 1960s and 1970s – of which 20 have produced oil. Red Sky believes that 19.3 million barrels remain in place, with up to 6 million barrels still remaining recoverable.
The second pick-up was the Gold Nugget gas field in Wyoming, in October 2015. Located in the Wind River Basin in Wyoming, one of the largest gas producing basins in the US, Gold Nugget was a very sweet deal for Red Sky. It is a proven gas field that has historically produced 150 million cubic feet of gas (plus 5 barrels of oil) a day: the existing well and associated pipeline cost more than US$8 million to complete, but the field cost Red Sky US$800,000.
In January Red Sky told the Australian Securities Exchange (ASX) that its well optimisation work could improve Gold Nugget’s production from 150 million cubic feet a day to between 350 million and 1.6 billion cubic feet a day. Production got under way at Gold Nugget in July, commencing cash flow for Red Sky.
Initial daily rates were above 500,000 cubic feet a day, with two days above 600,000 – at the prevailing gas price, the well was generating about US$1,500 a day. Red Sky says the field has an expected production life of between 30 and 50 years. At the moment, with the optimised flow rate yet to be determined, Red Sky reckons that Gold Nugget can generate revenue of between A$600,000 and A$1.2 million a year.
In August, Red Sky identified its third North American asset, an oil and gas field in Jack County, in West Texas. The company proposes to buy a 50 per cent working interest and 37.5 per cent net revenue interest in four oil and gas wells. To fund the acquisition, Red Sky is currently seeking to raise A$3 million through the issue of a secured loan note to professional and sophisticated investors, at $1 a note: the note pays 12.5 per cent a year interest, over three years.
Red Sky expects the four wells to produce 720 million cubic feet of gas and 100 barrels of oil a day, enough to generate revenue of more than US$130,000 a month. At current oil prices, the company anticipates that the wells will generate net revenue (after taxes and royalties) of about A$1.66 million through to 31 December 2016, and A$1.36 million for 2017).
The Jack County field has estimated recoverable reserves of 1.34 million barrels of oil equivalent (BOE), with estimated reserves of 5.3 million barrels of original oil in place.
Red Sky says Jack County will bring it to a cashflow-positive position, but also allow for strong growth through acquiring more wells and further developing the Jack County acreage. The company describes the upside development of the Jack County opportunity as exceptional.
The Gold Nugget and Jack County purchases are clear examples of Red Sky’s strategy of buying in-ground reserves at a discount, so as to be leveraged to rising energy prices. However, the company has placed the Cache field on a “care and maintenance” basis until the oil price improves, before investing in new wells at Cache.
Red Sky Energy is a tiny stock – its share price is 0.1 cents, or $0.001, which is the lowest share price allowed on the ASX. It has been that way for two years – and the stock hardly ever trades. That capitalises the company at $6 million – meaning it would have to grow significantly to become a ‘nano-cap,’ let alone a micro-cap.
But no-one can say that Red Sky Energy isn’t doing things: it has a strategy and so far, it is putting that strategy in place. Assuming the Jack County acquisition is completed, the company would be cashflow-positive, which is a long way from profit, but it’s also a long way from being a listed ghost. The shares will probably have to be consolidated before anyone really notices the company, but you never know, Red Sky might be worth keeping an eye on.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au