Incremental Oil & Gas investor interest runs contrary to an out-of-favour oil sector
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Incremental Oil & Gas (ASX: IOG, Share Price: $0.048, Market Cap: $9m) has managed to generate solid investor interest (particularly within the context of the out-of-favour oil sector) as a result of steady appraisal progress and efficiency drives on its key US oilfields. With strong local management expertise, the company is aiming to extract maximum operating efficiencies and profitability from its fields.
Incremental recently advised that it had deployed a rig to its Silvertip Field in Wyoming, USA to commence its Phase II work program. It’s announced a 30-day average IP rate of 1,100 MCFD for the recompletion of the first well in the program, the 42-4F well, which was brought on production on September 1st, 2016.
The baby has been thrown out with the bath water as far as the energy space is concerned, with massive write-downs and underperforming heavyweight stocks severely impacting overall sentiment. As always, this sort of situation provides enormous opportunity, which is the reason we recently introduced IOG to our coverage universe. Producing assets such as Silvertip - with significant resource upside - represent a key component of IOG’s long-term strategic growth plan. The timing of the recompletion program also ensures that enhanced output coincides with the seasonal increase in natural gas prices during the winter period.
Announcement Detail – Silvertip Project Update
Incremental recently deployed a rig to its Silvertip Field to commence its Phase II Work Program. Historically, the majority of the wells within the Silvertip Field have been produced from the Frontier Formation at a depth of approximately 5,000-6,500 feet. As the primary target for production from the Silvertip Field, the Frontier Formation is an oil-bearing zone with associated gas.
The company has identified 24 wells that can be recompleted to access natural gas reserves within two shallower formations - the Meeteetse and Mesaverde Formations - which are respectively between 2,500 feet (~750 metres) and 4,000 feet (~1,200 metres) below surface.
Incremental Oil and Gas Limited (ASX: IOG) is pleased to announce a 30-day average IP rate of 1,100 MCFD for the recompletion of the 42-4F well which was brought on to production on September 1, 2016.
This well was the first Meeteetse formation recompletion in Incremental’s Phase II Work Program at the Silvertip Field (Wyoming, USA) which had recorded a 5-day average (IP) rate in excess of 1,200 MCFD with greater than 400 PSI flowing casing pressure. The results indicate virgin reservoir conditions with excellent flow characteristics.
Figure 1: Well recompletion rig and ancillary equipment, Silvertip Field
The gas from this well has resulted in gross sales of approximately $100,000 in the first 30 days with Incremental holding a 100% working interest (WI) and a net revenue interest (NRI) of approximately 82%. Incremental’s total capital expenditure on this well was approximately US$35,000.
Importantly, infrastructure to capture and transport the gas from the well to market is already in place. Gas is processed at Incremental’s gas plant and delivered directly to the purchasers’ pipeline. A further 15 gas well recompletions are due to commence in the second week of October and are planned be completed before the end of 2016.
The Phase II, 24-well recompletion program is forecast to produce more than 3BCF of natural gas from the Meeteetse and Mesaverde Formations. Existing well-bores that were drilled through these formations to the Frontier Formation (about 3,000 feet deeper) will be perforated and acid stimulation used to produce the gas at an estimated cost of $25,000 - $35,000 per well - compared with the more expensive fracture stimulation ($125,000) used by other operators. The 24 well re-completions are projected to provide circa $7 million of future net cashflow.
40 existing wells have been identified as having potential behind-pipe gas reserves that can be accessed from re-completions. The gas production from the Meeteetse and Mesaverde formation recompletions will be co-mingled with the Frontier oil and gas production, so there is no additional operating expenditure required to produce the increased volume of hydrocarbons.
The cost of the recompletions, which use existing well bores, is significantly lower than the drilling of any new wells. Testing has shown that acid stimulation is sufficient to increase production of gas from the target formations. Acid stimulation is less expensive, requires less regulatory approvals and is a quicker process than hydraulic fracture stimulation. This is a further cost saving to this program.
We initiated coverage of Incremental Oil & Gas around $0.055 during May 2016. In truth, there hasn’t been a lot to get excited about in the oil space. Incremental Oil & Gas represents a solid value argument and measured growth story, with key operational experience that is targeting low-cost production that could sustain earnings - even during a low oil/gas price environment. There will be a lot of interest in the company’s current work-over and recompletion program, aimed at boosting gas production levels in time for the Northern Hemisphere winter.
After a decade as a broking resources analyst with Intersuisse, Gavin helped establish the Fat Prophets Mining Report during 2005, writing and producing the report until he established MineLife during late 2010. He writes about mining and energy companies via his MineLife reports.
Disclaimer: Gavin Wendt, who is a director of Mine Life Pty Ltd ACN 140 028 799, compiled this document. It does not constitute investment advice. In preparing this report, no account was taken of the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this report, investors and prospective investors need to consider, with or without the assistance of a securities adviser, whether the information is appropriate in light of the particular investment needs, objectives and financial circumstances of the investor or the prospective investor. Although the information contained in this publication has been obtained from sources considered and believed to be both reliable and accurate, no responsibility is accepted for any opinion expressed or for any error or omission in that information.