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Enegi Oil boosted by Newfoundland tie-up

Thursday, June 13, 2013 5:13
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Enegi Oil (LON:ENEG) shares advanced as much as 18% on Wednesday after it unveiled an agreement to bring in a partner to take forward the development of the company’s assets in Newfoundland. 

The AIM quoted oil firm signed a letter of intent with Canada’s Black Spruce Exploration (BSE) which sets out the terms for a partnership. This is expected to be formalised into a definitive farm-out deal next month.

It is proposed that BSE pay for up to twelve new wells on the Newfoundland properties. And in return it can earn a 60% working interest in the projects. 

Initially BSE will pay for five wells – three for appraisal and development, and two for exploration, to earn a 50% interest in all of Enegi’s Newfoundland assets It can earn a another 10% by paying for seven more wells. 

BSE will also take a £1.2mln stake in Enegi and an ‘area of mutual interest’ will be drawn up, whereby the two partners will pursue certain onshore and offshore plays. 

The deal promises to accelerate the development of Enegi’s Garden Hill field, which is part of the portfolio, as well as the broader Western Newfoundland area. 

According to stockbroker Shore Capital the arrangement could transform the amount of activity in the region as he believes BSE’s participation will combine strong operating capability with financial firepower. 

“The proposed farm-in provides Enegi with a lucrative carry and this is excellent news, in our opinion, given the expected implementation of a multi-well drilling programme, positive funding implications and substantial implied value to Enegi,” Shore Capital analyst Craig Howie said in a note. 

Indeed, for a small company, worth just £11mln on AIM today, Enegi will certainly be getting a lot of ‘paid-for’ work through the deal. 

Based on average well costs in the area the proposed work programme could feasibly amount to US$100-120 mln, which would in turn imply Enegi’s carried share of the programme would be worth US$50mln.

Speaking with Proactive Investors Enegi chief executive Alan Minty explained that BSE’s plan is to take control and consolidate a number of oil and gas operations in western Newfoundland.

Understanding the Garden Hill discovery, which has produced over 20,000 barrels of oil through various testing programmes, is likely to be the key to unlocking many of the plays in the surrounding area, he says.

“Small cap companies like ours rarely pull off deals of this scale,” Minty said.

“We’ve talked with Black Spruce for quite a time because we all realise that in Western Newfoundland, which has got huge potential, the activity has always been funded by small caps.

“Black Spruce strategy is quite clear, it is that somebody has got to take control of these discreet operations that have been undertaken by small caps. And I think we’ve been in the best position because, I think, we’ve probably got the best assets.”

“They are now putting the plan into action and they’ve got the financial strength to see it through. So we’re very confident. They’ve got very good experience and we’re very pleased to have them as a partner.”

BSE already has a workforce and equipment on the ground in Newfoundland and Minty expects wells on Garden Hill to feature in the initial work programmes, which could get underway in a matter of months.

As well as covering the costs BSE will take on the role of project operator.

Crucially this will allow Enegi to focus on its other ventures, particularly the recently formalised partnership with ABT which AIMs to unlock margin offshore fields with unmanned technology.

Having begun the day strongly on AIM Enegi shares had eased back somewhat and this afternoon were changing hands at 8.38p, up 1.5% on the day.

Story by ProactiveInvestors


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