(Financial Press) – “Looking at the economics of spending half a million bucks to get 75 barrels a day or better, it works!” says Brad Nichol, President of Edge Resources, a smallcap oil company based in Calgary. Less than 6 months since making a splash in Saskatchewan, Edge Resources (TSX.V: EDE and AIM: EDG) announced today the strategic addition of two sections of land to their heavy-oil Primate property.
“You can’t beat this, because the geological risk is low, the capital risk is extremely low, and the operational risk is low because they only take 2 to 3 days to drill. It’s almost like shooting fish in a barrel,” explains Nichol. Bringing the total from 18 sections to 20 sections, Edge’s Primate play is directly aligned with the development track of Twin Butte Energy (TSX: TBE), which has drilled over 30 wells in the region with 100% success at an average initial rate of over 125 boe/d.
According to the press release, the addition brings Edge’s core landholdings in the area of Primate, Saskathewan to 12,800 (net) acres, of which the company has 100% working interest. Total consideration for the two undeveloped sections (12 and 15, in Township 37, Range 27, West of the 3rd Meridian) of crown land came at a price of $60,000 ($47/acre or $116/Ha) plus a non-convertible overriding royalty of 3%. (A map of the existing Primate land base plus the additional two sections can be found at http://www.edgeres.com/projects/primate).
“The two sections that we just acquired are strategically located,” said Nichol. “One of them is on the eastern side of the hot block that we’ve got that’s immediately adjoining the western side of Twin Butte’s hot block and the other shows some very promising undeveloped Manville Sands potential.”
The region itself has been extremely competitive since Edge entered the fray in Primate, earlier this year in February. Now at 20 sections of land, Edge’s land position now nearly doubles that of Twin Butte, and provides a very enticing takeout target to be aware of for the future.
Before Edge’s phones start ringing, President and CEO Brad Nichol and his team have work to do to improve the value of their Primate properties, beginning with a drill program that is set to commence near the beginning of August. As of yet, no new drilling locations have been added to the summer drilling program, even with the addition of sections 12 and 15, but the potential in the package as a whole is enhanced through the position increase.
Looking at the map as it stands, it doesn’t appear that the two sections reside within the main channel that was previously identified. However, the main channel is only one of five channels that have been identified, all of which the company has expressed intense interest in. Each of the channels are within 100m in the Mannville group, so it’s not likely that they’ll have to drill another 1km deeper to get to these channels. They’re actually 100m shallower than the channel that’s currently producing today.
So far, the company is only producing out of one section in the Primate, and with the calculated reserves on that section, it has been valued at $22 million (whereas the initial purchase price of the first 18 sections for the company was only $8.8 million, and included an additional 25 sections of proprietary 3D seismic, and another 125 km of linear 2D proprietary seismic). Upon commencement of the summer drilling program, the company will be drilling on a previously undrilled section, in an effort to duplicate the value of the initial section.
“If you just extrapolate the first section’s worth of $22 million, if we drill on this next section that’s currently worth $0 on our balance sheet, and are successful, we should hypothetically see another $10-30 million worth of value,” said Nichol. “There’s huge value creation sitting in front of us on the remaining undrilled sections.”
Coming on the heels of an announced financial partnership with Henderson Global Investors (a $100B UK fund) that amounted to an initial $4.5 million, it appears that Edge is properly financed to move forward with the drilling program unfettered by any financial obstacles. Each of the wells to be drilled are slated to be conventional, shallow and low risk, with a price tag of approximately $500,000 per well, and estimated payout slated at under 8 months.
The first section that the company will be drilling is immediately tucked into Twin Butte’s corner, where TBE has drilled over 30 wells with 100% success. The average production in the first 90 days of those wells was 125 bbls/d, and the best well, now 8 months after completion, is still producing 230 bbls/d.
With over $4 million slotted for oil-focused drilling, at a price tag of half a million per well, there’s a potential for some serious addition to production by the end of the summer. If the trend that Twin Butte has chased effectively stays true within Edge’s fairway, then there’s a potential to add between 600-800 barrels per day of heavy oil by year’s end, given the averages that Twin Butte have put up.
The company currently is producing at a rate of 800 boe/d, of which 40% is oil. With the low risk geology involved with the Primate play, it’s not far fetched to believe that the market will respond positively to Edge’s increase in oil output by the end of Q3.
Edge’s neighbour, Twin Butte has been extremely successful in this region, keeping costs low, and pulling in economic production numbers. With nearly double the land base, and a fully funded capital program, it’s easy to see that Edge has picked an effective business model to emulate in a region set to explode. With Twin Butte publicly hinting at aggressively seeking M&A possibilities, this neighbourhood is about to get a lot more interesting.
by G. Joel Chury for FinancialPress.com