Nostra Terra Oil and Gas - Not quite there yet

http:www.ntog.co.uk/home/


Nostra Terra (LSE:NTOG) is certainly one of the more volatile liquid shares on the Alternative Investment Market. It has been at the centre of market speculation for months on end regarding its operations and specifically its recent drilling programs. Rather than participating in wildcat exploration, Nostra Terra operates in established US hydrocarbon districts. Nostra Terra currently has ~2.45 billion shares in issue and has a market capitalisation of just under £10m (£9.58m). Nostra's current share price stands at 0.39p/share.

As shown by the chart, Nostra Terra is certainly not a long-term component of any portfolio in its current state. The best way to make profits on it is to trade the highs and lows. The share price looks like it has found good support at the current levels thus may be a decent purchase if you are looking for a 10-20% profit in the short-medium term. However, as seen Nostra should not be held for prolonged periods after a sharp rise as it tends to spike and retrace back down in the following weeks. On a longer timescale, this pattern is also repeated. This occurs due to the large number of shares in issue; Nostra is consequently considered a trading opportunity as investors will often take gains in anticipation of a gradual retrace. For this scenario to change, a sentiment change needs to occur - long term growth prospects need to be unveiled to help build the price and keep it higher. At 0.39p/share Nostra currently looks a decent opportunity chart-wise.

Nostra Terra (NTOG) has focused its operations of developing previously expired or used oil fields. Through the use of new technologies and recovery techniques, NTOG has been able to exploit these in various US states to gradually build a range of producing acreages and build contingent and prospective resources. Most notably, hydraulic fracturing has allowed more projects to become economically viable and potentially quite profitable for smaller outfits such as NTOG. Another rapidly emerging option is to utilise horizontal drilling which NTOG is pursuing. This alleviates the need to drill multiple wells to access multiple separate targets in the same rock strata. The potential upside was highlighted in a recent US geological study which showed that US oil reserves have grown by 13% over the past five years.

NTOG currently operates in four locations; Kansas, Texas, Colorado and Oklahoma. Geographically, these locations neighbour each other hence are an advantage in terms of work efficiency. Due to the fields NTOG is working on having already been established, they represent low risk prospects with potential upside surprises. However, these fields are generally mature and thus do not represent huge gas or oil targets. The benefit of owning these fields is derived from owning many of them and creating a cumulative stream of income. This is a similar method of operation that Magnolia Petroleum (LSE:MAGP) has taken although in recent months MAGP has been more proactive in seeking new investment opportunities.

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Politically, these regions provide a good area for hydrocarbon businesses. Environmental legislation is fairly relaxed due to its influence on the economy of the US mid-continent. Additionally infrastructure exists on site as it has been developed by previous oil and gas companies. The combination of these factors means that drilling in the US for NTOG is a low risk project.

NTOG's main operations are centred around Kansas, Colorado and Oklahoma - only very small interests are held in a few Texan licenses. In Kansas, the project is known as 'Bloom' and is operated in the 'Central Kansas Uplift' where NTOG holds a 100% interest. Positively, the use of 3D seismic here in recent years has meant that the chance of success has doubled from circa 35% to 70%. However, flow rates are generally low due to exhausted reservoirs with low pressures so have flattened out at ~15bopd.

Another main asset (located in Colorado) is known as Verde where NTOG holds a 16.25% working interest. A well has already been drilled here thus de-risking the already low risk project which has led to a flow rate of approximately 50bopd. A further well is currently being drilled here with production anticipated prior to the end of the calendar year.

Another of NTOG's main assets lies in Oklahoma and is entitled the Bale Creek project. Nostra Terra has a 30% working interest in this project that is primarily a multi-stacked oil target. Two wells have been drilled here which are currently on 'production testing'. A third well is ready to drill following evaluation of the  results for the previous two. Also in Oklahoma, NTOG holds a 10% interest in the 'Warrior' project. Once again this prospect has already been drilled with NTOG as a partner and has a flow rate of 30-40bopd. More recently, a new project has been acquired known as the 'Chisholm Trail'. The geology of this prospect is very similar to NTOG's other assets. Two wells are being drilled here with a further one planned for late 2012. Surrounding wells have been generating up to 200boepd. This hints that gas is a component of the find, which despite being out of favour recently with lower gas prices, may be of value considering the price is now readjusting towards higher levels.

Clearly these results are far from phenomenal hence until a bigger prospect is drilled and found, Nostra remains a technical trade only.

Financially, Nostra seems fairly adequately versed to deal with potential cash constraints. According to the latest corporate presentation, there is sufficient cash to complete the drilling of six wells. Also, three non-dilutive funding options have been lined up if necessary. Whilst these wells may now start to pay back the original costs of drilling, losses are being registered by the company. The FY 2011 results revealed a £1m loss up from £0.59m a year earlier. However, coupled with this revenue was up by £100,000 to £240,000. This highlights the need for good flow rates from upcoming drills. The loss mainly consisted of far higher administrative fees for the period.

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To combat the issue of cash drain, NTOG signed a potential $3m loan facility with YA Global in May. However, the amount that can be drawn from this is likely to have significantly decreased with the work program since May. In June NTOG released an operational update for the Warrior prospect which began initial flows at 50boed. Soon after, an RNS stating that the first Verde well had repaid its costs in under a year, was released. This bodes well for the upcoming drill in the same basin.

CEO Matt Lofgran and COO Alden McCall were also issued options during the period. However, the price at which these 5 year options were set appears fairly unambitious. The exercisable price stands at 0.47p, which is around the level that the price has been trading at for many months. Perhaps this indicates the nature of an investment in NTOG - it is not a long-term hold at the current price. Additionally, production targets were added to the options with a 12 month target of 125boed and a 24 month target of 250boed. During H1 2012, production totalled 3592 barrels thus being equivalent to roughly 20 barrels per day. Clearly this needs to be increased significantly and does not really provide adequate basis for a long term investment as noted earlier.

A placing was undertaken in early September at 0.36p/share including issuing roughly 240 million new shares to raise £870,000. This will help fund the Chisholm Trail Project which saw its first well spud four days after. The second Verde well was also spudded in mid-September. A placing followed this with the issuing of 55m shares to raise £200,000 at 0.36p/share. The reason given for this was to capitalise on the demand for shares. The counter for this is; 'If the wells will be a success, why not issue shares at a much high, less dilutive, price after the result'.

The final piece of the financial puzzle was given through the interim report released in very late September. A 69% in H1 revenue was noted (to £162,000) which does give confidence that there is a future for the company aside from dilutions. The second Verde development well was also being 'completed' which should boost future production rates.

However, the CEO also mentioned that, 'We continue to identify abundant opportunities to upgrade our portfolio. Having the SEDA and P-note at our disposal increases our flexibility in financing further acquisitions.' I would disagree with this strategy - NTOG should not be involved in too many projects but rather focus on its existing ones, build production, build revenues and then with the retained profits seek new ventures rather than build up debts and reverse the order.

Whilst Nostra Terra will benefit from increasing production rates, this is unlikely to spark the share price. Results of the drilled wells, may do this hence from a technical point of view NTOG looks a decent buy. However, I would wait until production increases to the point where the company is cash flow positive prior to investing too deeply. Whether this takes one/two years, then so be it, but currently money is running out, Nostra Terra are aiming too high and thus itis a speculative Buy at 0.39p on technicals, rather than on fundamentals.

20 comments:

  1. You say that "...NTOG should not be involved in
    too many projects but rather focus on its existing ones..." Maybe they are trying to emulate the business plan which has been so successful to date for MAGP who are operating in similar areas.

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    1. Of course this may be what they are trying to do, but as you said, MAGP have been successful so far with it hence have a stream of income that they can use. MAGP has just over a quarter of the shares that NTOG has in issue also. NTOG has a decent set of assets so should seek to exploit these first rather than diving into new projects. They have restricted cash thus should not risk increasing their already growing administrative expenses by keeping the assets they, have rather than expanding. They are simply too small to be expanding at the point.

      Good point nonetheless - MAGP have done well and act as a model for what NTOG could achieve, but they need a catalyst first.

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    2. no mention here re/ their own play coming up soon or monies due from richfield inc interest and expenses, surely this is a large plus for us, heres to decent results from bale creek then we shall re/assess

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    3. ...but NTOG is a pump and dump stock

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  2. Good article - one of the best sources

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  3. SOlid and truthful writeup

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  4. Very well written in my view, and a realistic conclusion too.

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  5. Pump and dump ... CEO very sneaky and shady with a very poor past!! .... Cannot be trusted anyone trying to phone investors all the time flogging stock Should be wary of. I wouldn't put matt lofgran in charge of anything to any value. Would not suggest anyone to invest in this family destroying stock!! Stay clear

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  6. hi guys
    I have been with NTOG for two years but disappointed with theresults. They are very slow in there field compairing with similier company. I would say WEAK BUY

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  7. Its easy to knock the company with past history. But things will be changing and very soon. Its all building to multi play with bigger WI i.e. 20%, and soon 100%. I want judge it until end of year, which aint far away.

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    1. Just be cautious - increasing WI in undeveloped locations and acquiring new licenses means increasing costs. Hence why I think they need to boost output from existing licenses first.

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  8. ML is building a portfolio of assets to deliver growth. He is by far the largest shareholder in the company and is also a great guy. Very ambitious and smart to boot. No mention in your article of the IN-HOUSE play. This is the transformational play imo and importantly it is targetting multi pay drill locations in OK. STRONG BUY

    ps We are not gambling on one asset or one well. Diversified portfolio.

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  9. If you want to invest and watch your money go down the pan daily then this company is for you. People say matt lofgran is a nice guy etc probably is but a disgraceful business/oil man. Company's only ran for directors not investors . Beware

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  10. I dont think its right to call NTOG nothing but a trading share. If you believe that the company is stronger now than it was 1 or 2 years ago then what is to say that it will not break the mould on the next rise it gets and establish higher lows and higher highs. People will always sell on the way up as they see a profit they are happy with. This can be buying at 0.40 and selling at 0.45 but you are not guaranteed to get the 0.40 entrance again. Its gambling on other people doing the same thing. Why do I think this tactic will fail to be relevant to NTOG ?? The answer is that with lots of different projects on the go, and lets be honest here the company now compared to 2 years ago is vastly different. With various projects on the go, lots of drilling activity - then there is the strong likelihood of regular newsflow. When you get regular newsflow and have solid assets there is less chance of the stock becoming off people radars and its will suffer less peaks and troughs in fact - based on continued stream of solid news it will have more of a succession of rises, with odd fall for natural profit taking along the way. But, far less troughs than before because anyone worth their salt will knwo the next RNS ops update on the next project will not be far away and they wont want to miss the next rise. NTOG is fast becoming an investment rather than a trade, for me its definitely an investment.

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    1. People have been saying the same thing for ages. The number of shares in issue also means a rise will be even harder to sustain. It really will need some epic news to blow this share out of the water and into investment territory.

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  11. Good balanced outlook on the stock.

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  12. I would just like to add my thanks to El1te for another excellent and well balanced article. Although NTOG are a small player right now they are in what has become one of the single most exciting oil and gas plays in the world with the US rapidly moving into pole position as the largest producer in the world. Currently second only to Saudi Arabia, having passed Russia this year.

    Recent developments in Fracking and horizontal drilling, along with the US's declaration to be self sufficient in O&G within 10 years has made this a very interesting place to be.

    NTOG might be a small player right now but, as MAGP have found out, small plays add up and with them comes positive sentiment. This might be a trader's share for now but, in my opinion, will not remain so for much longer.

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  13. Neil REX Bennett20 October 2012 at 22:21

    be nice to know who is who on LSE or iii on this little article imvho, lol

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