Oklahoma project to boost Northcote oil reserves

US-focused Northcote Energy on Monday expressed confidence that it could "significantly bolster our existing production and reserves through development at [the] Oklahoma Energy project (OKE) over the next 12 months".

The onshore oil and gas exploration and production company announced that the first stage of a work-over programme at OKE had been completed, increasing gross production by 150% to 37 barrels of oil per day (bopd) from 12 bopd at acquisition.

The second stage of the work-over programme was said to be underway, targeting an increase in gross production at OKE to 50 bopd by year end to accelerate the payout of the BlueRock royalty arrangement.

The former owner of OKE entered into the agreement with BlueRock Capital, whereby OKE sold a term overriding royalty interest to BlueRock to finance the acquisition and development of the project.

As from the date of the acquisition, OKE has an obligation to pay at least 41.5% of the gross revenues generated from the OKE project to BlueRock. This obligation will be extinguished once BlueRock has received in cash an amount equal to the facility balance, plus an internal rate of return of 15%.

During the term of the facility, Northcote will earn a maximum of 41.5% of the gross revenues in the project. After payout, the royalty will expire and the company's net revenue interest (NRI) increase to 80%.

Northcote has voiced its intention to boost production in the short term in order to accelerate the payout of the royalty. "Assuming achievement of our target of 50 gross barrels a day by year end, we expect to retire the BlueRock facility before year-end 2015 at which point, the NRI to Northcote will increase from 41.5% to 80%," stated chief executive Randy Connally.

"Of course, this timetable would be significantly accelerated by the drilling of new wells."

Analyst view

"Importantly, Encana and Chaparral Energy have recently experienced success to the north and south of the OKE project and, across the portfolio, we continue to see potential for material growth in both production and reserves, which are independently assessed to have an net present value (NPV) 10% of circa $62 million (£41 million; excluding OKE)," stated analysts at Shore Capital.

Investor view

'Elster', a user of the Interactive Investor discussion boards, called the news "electrifying", while 'Vanessaw' said: "Just a waiting game with exciting times ahead."