Nostra Terra - Target Exceeded

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The blog first reviewed Nostra Terra (LSE:NTOG) when it was trading at 0.39p/share capitalising the company at £9.58m. At the time it was clear that 0.40p represented significant resistance and that a breach of this level would be indicative that a move upwards towards 0.50p is likely. Nostra Terra has since released several pieces of good news that has catalysed the move, exceeding the target significantly with the price today stabilising at 0.59p/share equivalent to a 51.3% rise in just over three months. This article will evaluate the movement of the share and the news that was issued.

This article is a follow-on from the below post. For full context and information, read this article first:
http://www.theel1tetrader.com/2012/10/nostra-terra-oil-and-gas-not-quite.html


As per the chart, there is some reason for optimism due to the characteristics of the share price rise. It has been steady but strong and without significant spikes. However, it must be noted this rise has been helped partially by unsustainable methods (i.e. share tips). I would expect some resistance to be approaching quickly that should slow down the movement, but news from Chisholm Trail testing may make this void. In the absence of news or average flow rates from these wells a target of 0.5p is likely. At this level the share may find medium-term support. If you have bought in at 0.39p, top-slicing your investment may not be a bad move considering a relatively sharp retrace this morning to 0.54p, closing at 0.56p. The rise has been quick thus future sideways movement is probable.

NTOG has released some significant news since the last article that I will now cover. The first RNS after the initial article announced that drilling had finished on both the first and second Chisholm Trail projects (in Oklahoma) and that fracture stimulation was planned to unlock the resources. Because this process involves injecting fluids into the well, it often takes time for production to stabilise. This is due to the injected fluids gradually being removed from the well as production begins. Consequently, hydrocarbon production tends to rise as time passes. CEO Matt Lofgran commented: "We are also pleased with the pace of development on the Chisholm Trail Prospect. The activity level is increasing in and around this highly productive project and we are delighted to have acquired a meaningful interest with an early-mover advantage in the development of this greater play."

Following this the third Chisholm Trail well was spudded where the company has a materially higher working interest of 12.58% in comparison to the first two wells (where NTOG had x < 0.50% working interests). Thus the result of this well will likely have a larger effect on the share price. The well had a stated 30 days expected for drilling to its total depth. Four days later, the expedited work program continued with the fourth Chisholm Trail prospect spudded also with an estimated completion time of 30 days. The swift progress in operations at these prospects certainly does iterate that the company is not taking a laid-back approach. This will have been helped by the arrival of Ward Petroleum to the licences earlier in the year. In addition, the company also has a fairly significant ~5% stake thus these wells are certainly more important than those that preceded it.

In early November Nostra Terra announced production test results for its Bale Creek well also in Oklahoma. Over 790 hours the well averaged ~60bopd, 20bopd of which is attributable to Nostra Terra. Whilst this is useful for future revenues, as mentioned in the last article, it is certainly not a company changing figure considering the huge range of properties Nostra Terra is involved in and the relative lack of cash to fund a sustainable work programme across the whole portfolio.

Courtesy of srqpix
On 12 November the first Chisholm Trail well had started producing very well (exceeding expectations) at 258boepd over the first ten days. However, Nostra Terra only has a tiny 0.47% working interest here which leads to total production of 1.2boepd (certainly not great in the scheme of things). The second well's results were then released with 555boepd received over the first ten days. This is an excellent result, but once again Nostra Terra only has a 0.16% interest thus they only receive 0.9boepd (once again not really material). Methods to unlock potential at the third and fourth wells had begun.

Yesterday (8 January), Nostra Terra announced that production had started at its Chisholm 3 and 4 wells. Considering the significantly larger working interests the results of these will be pivotal albeit it would be fair to assume that some of this is already priced in. Consequently rates in excess of 300boepd over the first ten days would probably be required in order to avoid a 'sell on news' basis. If both wells did retrieve 300boepd, this would translate through to 53.67boepd for NTOG. This would substantially aid the company in achieving the targeted 125bopd (although note some of the current production is gas).

The conclusion I arrived at during my last article was set out in the title 'Nostra Terra Oil & Gas - Not quite there yet'. It stated: At 0.39p/share Nostra currently looks a decent opportunity chart-wise...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 it should only be considered a speculative buy rather than on fundamentals.

Whilst success at Chisholm 1 and 2 have derisked the Chisholm 3 and 4 wells uncertainties still linger over Nostra Terra. Primarily the simple question of should the share price have risen so quickly on the fundamentals alone - the answer is probable no. Fair value may be 0.50p at the current point in time. Following Chisholm Trail 1 the company noted:

This play serves as a good example of how horizontal drilling and completion techniques can bring areas back to life that were considered to have been fully exploited. Nostra Terra will continue to invest in this area while seeking similar opportunities elsewhere."

A problem could arise from this. Despite drained areas supposedly being able to be 'tapped' through new methods, there is no escaping the fact that there are not substantial resources of hydrocarbons left in the area. This has seen large US operators such as Chesapeake Energy and EOG Resources leave multiple locations in the US following strategic reviews. In particular the pair have dumped multiple leases they owned across Oklahoma. Furthermore these type of plays tend to require continued investment to maintain production over a period of time - the reservoir pressure tends to fall quite quickly thus leading to lower production rates in the medium term. Perhaps the release of these to the market may cause a halt in the share price rise. After all the rates achieved are only over a ten day period. It's more important to see how they perform over 3-6 months.  If there is a marked decline in production rates towards the six month mark, then there is a clear issue as outlined. 

Another problem is the sheer number of shares in issue. Therefore rises tend to get sold into and it is difficult for the share to make any long-term meaningful progress. Despite a seemingly positive share price rise recently, a method to reduce the number of shares in issue (e.g. a reverse stock split) would not only boost perception of the stock, but also may help its share price. (It's unlikely this will occur though). On the flip-side, Nostra Terra will benefit from being able to cash-in its shares in Richmond and using the proceeds to drill more wells in the US. Future success at Bloom and Verde would add to the investment case and the stated 125bopd target. Currently I would be wary over the current share price movement being overdone (despite being in a fairly strong upward trend) - this may change with the forthcoming result of the Chisholm Trail 3 & 4 wells.

4 comments:

  1. Interesting perspective. Only have a minor holding in ntog so will ride it out

    CraigJ

    ReplyDelete
  2. Quick read and check of TA after seeing your link on ADVFN. Looks a good article, will read again later. Interesting, thnx . Oz

    ReplyDelete