SGY Mar 12

March 16th 2012
CORPORATE
AFSL: 259730
Solimar Energy Ltd
Californian Heavy & Shale Oil
Capital Structure
ASX Code
SGY
Shares
445.8 m.
Options
106.1 m. @ av 14 cts
Notes *
56
Price
$ 0.09
Market C ap
$ 40 m.
Net cash (est)
$ 1.3 m.
* C$2.8m Dec '13 @ C 10 cts
Valuation
Valuation
Maricopa
Net cash
C orporate
New Equity
Unissued Equity
Paloma
Heavy Oil
Krey'gn Shale
Other Exploration
Target Value
$m
$/Shr
1.5
0.00
1.3
0.00
(12) -0.02
10
0.01
15
0.02
98
0.14
102
0.15
330
0.48
200
0.29
$ 745 $ 1.08
Risked Value
$m $/shr
1.5
0.00
1.3
0.00
(12) (0.02)
10
0.01
15
0.02
25
0.04
46
0.07
32
0.05
19
0.03
137
$ 0.20
♦ Strachan Corporate assesses a risked value of 20 cps for
Solimar after assuming that all notes convert and that new
equity is added in a staged fashion to unlock its petroleum
resources. Assuming success is achieved at each of its
exploration and development projects, the company has an
un-risked upside target value of around $1 per share.
♦ Solimar has a 25% working interest in the recent Paloma
Deep oil and gas discovery in California. Testing from two
deep zones flowed oil and gas at commercial rates.
Ongoing testing of an additional 6 shallower zones of
interest will be followed by trial production and drilling of
additional development wells.
♦ The company and its partner Neon Energy continue to
acquire leases over the Paloma structure where up to 30
mmbbls of oil is targeted.
♦ The company’s Kreyenhagen project in California’s
northwest San Joaquin Basin, has opportunities for
conventional heavy oil, plus gas field development, along
with light oil extraction from an organic rich shale play.
Board & Management
♦ Production testing of three existing wells through the
Temblor sandstone, overlying the Kreyenhagen shale will
provide data for establishment of a steam assisted heavy oil
production project, aimed at recovering 17 mmbbls of oil.
Frank Petruzzelli
John Begg
Exec
Charle Gamba
Jason Bednar
Mark Elliott
♦ The lower Avenal Sandstone will also be tested in an
attempt to discover if previously recorded oil and gas
flows can be replicated with gas earmarked to fuel steam
production for heavy oil extraction from the Temblor
sandstone.
Chairman
Director & CEO
Non-Exec Director
Non-Exec Director
Non-Exec Director
Opinion*
Solimar has positioned itself well for growth with
judicious permit acquisitions. It can work to
improve shareholder value by testing heavy oil
deliverability from the Temblor Sandstone and
secondly by working with Neon Energy to test
shallow zones at the Paloma oil and gas discovery.
Further work to establish steam flood assisted oil
production from the Temblor Sandstone and to redrill Paloma will require additional equity support.
Solimar has an attractive risked valuation of 20 cps,
supported by the ongoing lease acquisition and
drilling activity by majors targeting the Kryenhagen
Shale in neighbouring leases in the San Joaquin
Basin. It has a newly appointed basin expert as its
COO, two North American Directors for guidance
and has access to the Canadian capital market,
placing it in a strong position to fund upcoming
development programmes.
0.12
0.11
0.10
0.09
0.08
0.07
0.06
0.05
0.04
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
Strachan Corporate: 15 Florence St, Cottesloe, WA, Australia, 6011
May-11
Apr-11
*No recommendation is offered for commissioned research.
1 Year Share Price
0.13
Mar-11
Peter Strachan.
♦ Solimar has a Board and Management whose members
have the skills as well as industry contacts and credentials
to develop its target projects.
Page 1
March 16th 2012
STRACHAN CORPORATE
AFSL 259730
Projects
The US Office of Energy Administration has found that Solimar’s area of focus
in the San Joaquin Basin is volumetrically the richest of California’s oil shale
Carbon rich, new oil shale play in basins. Two main oil shales are found in the basin, namely the Monterey
California
Shale, which is the subject of ongoing production testing at Solimar’s Paloma
project and the Kreyenhagen Shale, which is thick and extensive throughout
much of the Company’s Kreyenhagen Project acreage.
High equity offers funding
flexibility
KREYENHAGEN
84% - 100%
Solimar has increased its exposure and now holds strategic acreage targeting
oil shale in the northern part of California’s San Joaquin Basin. The targeted
Kreyenhagen Shale outcrops in the west of Solimar’s leases, within the
project area and plunges to approximately 3,350 metres in the east. Solimar’s
main focus is on the western flank of the Basin, where the shale is relatively
shallow and thus cheaper to drill and develop. Most of the Solimar acreage
occupies a position where the shale has very rich oil source rock
characteristics as published by the USGS. Total organic carbon content
averages a high 5.4% while a supportive hydrogen index of up to 726 has
been measured in wells within the project area from an approximately 46
metre thick zone near the top of the shale. The shale formation is pervasive
over most of the project, thickening to more than 300 metres on the eastern
side of the acreage.
Map of Solimar’s Kreyenhagen Permits
Source: Solimar
Reservoir engineers and consultants Sproule Unconventional Limited
undertook a scoping level independent assessment over one nominal 640 acre
section which has well control data within Solimar’s acreage. Its assessment
of undiscovered light oil resources or Petroleum initially in Place (PIIP) ranges
from 21.7 mmbbls (Low Case), 35.9 mmbbls (Best Case) to 59.4 mmbbls
(High Case) for that section of land. Sproule also described the Kreyenhagen
Shale as a viable exploration target with potential for development using
horizontal well technologies.
Strachan Corporate assumes that recovery of between 6% and 12% of the oil
Target of 3-6 mmbbls per section in shales could be targeted with the appropriate drilling and hydraulic fracture
of 400K to 750 Kbbls per well on techniques, resulting in a target of 3 to 6 million barrels of recoverable oil
80 acre centres
from each 640 acre section. Solimar believes that more than half of its
approximately 14,000 gross acres (10,000 acres of which is held under a
100% owned, single long term lease) is prospective for the oil shale. If 11
Target of 33 mmbbls looks
Sections of Solimar’s holdings can be considered as reasonable Kreyenhagen
reasonable @ Kreyenhagen,
Shale targets, then the company should target between 33 and 66 mmbbls of
worth >$200 million
oil from its Kreyenhagen Shale project.
Strachan Corporate: 15 Florence St, Cottesloe, WA, Australia, 6011
Page 2
March 16th 2012
STRACHAN CORPORATE
AFSL 259730
While new shale oil production technology has been well developed in areas
such as North Dakota’s Williston Basin and along the Eagle Ford Shale in
Texas, it has yet to be widely applied in or adjacent to Solimar’s project area.
At this early stage of development within the Kreyenhagen, considerable work
will be required to de-risk the project by undertaking laboratory test work on
core samples. Typically, the learning curve towards commercial exploitation of
oil in shale in such cases progresses swiftly over a 2 year period.
Active neighbours adding value
for Solimar
Solimar may have found itself in the middle of the next big shale play in the
USA, where much of the early learning could be paid for by neighbouring oil
majors. Solimar observes that Hess Corporation, Occidental Petroleum and
New Gulf Resources have been expanding portfolios within the Kreyenhagen
oil shale play fairway to the south and east of Solimar’s permits. Hess
Corporation plans to drill up to six test wells in a location that is up-dip to the
east from Zodiac Exploration’s acreage, where a deep horizontal well was
recently tested at an uncommercial rate of between 60 and 126 BOPD of 290
API gravity oil. Solimar understands that shale oil specialist Hess, will target
the Kreyenhagen Shale with an upcoming programme.
Solimar holds a right to back in for a 10% interest in a package of acreage
that New Gulf Resources is planning to drill on the flanks of the Kettleman
Dome, targeting both the Monterey and Kreyenhagen Shales.
Schematic Cross-Section across Solimar’s Kreyenhagen Project
Source: Solimar
Solimar plans an initial $500,000 programme in the current quarter to test at
least 2 of 3 wells that were previously drilled through the Temblor Sandstone and
Test for heavy oil potential June down into the Avenal Sandstone unit. The wells were suspended and the Temblor
quarter
was never tested after the operating joint venture broke down and dissolved.
Tests on the Avenal Sandstone have recovered small amounts of oil and gas,
along with water. Solimar will test the deeper Avenal with a view to seeing if gas
can be produced. A flow of even 200 Mcf per day per well, would be sufficient to
run a gas generation plant, lowering costs for later application of steam assisted
production of heavy oil from the overlying Temblor sandstone.
Target 17 mmbbls adjacent to
900 mmbbl Coalinga field, with
upside to >20 mmbbls
The Temblor unit in Solimar’s permits is estimated to hold 48 mmbbls of oil in
place, setting target reserves at 17 mmbbls, however recovery of over 40%
from this unit in the adjacent Coalinga project indicates potential to recover
over 20 mmbbls of oil from Solimar’s project. Following an Avenal test, cold
flow testing from the Temblor will provide reservoir data. Even a flow of 5
Strachan Corporate: 15 Florence St, Cottesloe, WA, Australia, 6011
Page 3
March 16th 2012
STRACHAN CORPORATE
AFSL 259730
BOPD of this 130 - 180 API oil would be considered significant since the
adjacent Coalinga heavy oil field has recovered 900 mmbbls of oil from the
same formation. Solimar will then arrange for purchase and installation of a
steam generation unit on site and will begin steam assisted recovery test
work with an initial cyclical steaming and recovery programme, working up to
a steam flood programme, which would involve drilling a pattern of wells with
dedicated steam injectors and others for oil recovery.
Strong oil & gas flows from an
early test of deep zones
PALOMA DEEP
25% WI
The company drilled a well at Paloma Deep late in 2011. The well failed to
reach the deeper Round Mountain Formation, where direct hydrocarbon
indicators on seismic data and nearby well information indicated a target
zone. However, eight zones showing hydrocarbon indications over 275 net
metres of reservoir within a gross 520 metre column were intersected.
Testing of the most promising reservoir at the deeper Lower Stevens
sandstone and Fruitvale Shale delivered early flow rates of 226 barrels of oil
per day (BOPD) plus 1.9 mmscf/d of gas. Damage to the packer system and
influx of unconsolidated sediments has impacted the JV’s ability to accurately
flow test these lower zones and it is not known which of the two zones
produced most of the petroleum to surface. Provided that flow rates can be
sustained in upcoming tests, the Paloma Deep project should prove to be a
commercial discovery. In the meantime, testing will be undertaken on
shallower zones of interest, with results expected by late March ’12.
Paloma Deep Well
Source: Neon
Strachan Corporate assesses that the Lower Stevens and Fruitvale Shale hold
combined potential for over 15 mmbbls of recoverable oil, while shallower
sands could deliver 4-6 mmBOE and the Antelope Shales are targets for a
further 7 to 10 mmBOE, if advanced completion technology can be applied.
Project operator Neon Energy (ASX: NEN), has commitment to an additional
appraisal well later in 2012, highlighting Neon’s confidence in the test results
to date. This new well will employ a different completion technique to ensure
better testing and flow performance.
Target value over $60 million to The pre-drill estimates of oil and gas in place at Paloma Deep indicated a
recoverable target of 30 mmBOE, which would be worth $60 to $90 million or
SGY
up to 16 cps to Solimar.
Strachan Corporate: 15 Florence St, Cottesloe, WA, Australia, 6011
Page 4
March 16th 2012
STRACHAN CORPORATE
AFSL 259730
STH EAST LOST HILLS
100%
Solimar controls the shallow rights to depths of 1,220 metres over 3,900
acres on the south-eastern portion of the Lost Hills anticline, where it
estimates a target for 40 Bcf of gas. The company plans to drill 4 wells on
these permits once permitting and funding are in place. On-site gas
processing facilities capable of processing 5 mmcuft per day would lower
operating costs, with completed wells estimated to cost $550,000 each.
TEJON FOOTWALL
75% WI
Solimar has one permitted well site on these permits which total 3,200 acres,
located at the southern end of the San Joaquin Basin. Recent acquisitions have
opened up opportunities to expand a drilling programme, guided by 3D seismic
data showing two tilted fault block traps. A recoverable target of 50 mmbbls is
estimated. Subject to funding, the company plans a 3,650 metre deep well
costing $3.5 million in 2013 or earlier if farm-in support can be attracted.
ZODIAC JV 1.13% WI + 0.5% RTY
Solimar has a small interest in a large acreage (101,000 gross acres) to the west
of its Kreyenhagen leases. Operator Zodiac has drilled a deep vertical well and
added a horizontal completion to test for deliverability from the shale. So far only
small test flows of 29o API oil have been achieved but this is very early stage
evaluation of the targeted shale and early work shows promise.
Zodiac’s horizontal work was carried out at a depth of around 4,400 metres,
but target shale in Solimar’s permits sit at around 3,350 metres, reducing its
cost for drilling and well completion.
New Chief Operating Officer
Will Satterfield has joined the company late in 2011 as Chief Operating Officer
Skilled and experienced technical (COO) based in the operations office at Ventura, California. He is an experienced
management
petroleum geologist and oil company manager and an expert on the oil producing
conventional and unconventional (oil shale) reservoirs of the San Joaquin Basin.
He has worked for Occidental Petroleum in the Basin and was previously Country
Manager in India for Hardy Oil and Gas Inc., where he was responsible for a
business with operated production of 3,500 BOPD and a staff of 35.
Valuation
Risked value target of 20 cps
Strachan Corporate assesses a
risked value target of 20 cents
per share for Solimar and sees
significant
upside
for
development success.
Valuation
Target Value
$m
$/Shr
Maricopa
1.5
0.00
Net cash
1.3
0.00
C orporate
(12) -0.02
New Equity
10
0.01
Unissued Equity
15
0.02
Paloma
98
0.14
Heavy Oil
102
0.15
Krey'gn Shale
330
0.48
Other Exploration
200
0.29
$ 745 $ 1.08
Risked Value
$m $/shr
1.5
0.00
1.3
0.00
(12) (0.02)
10
0.01
15
0.02
25
0.04
46
0.07
32
0.05
19
0.03
137
$ 0.20
Solimar is in the process of
selling its interest in the oil
producing Maricopa field. The
company’s convertible notes are
assumed to convert to shares at
10 cents and new equity is
Source: Strachan Corporate
added at 9 cents per share for
this valuation. For the sake of
this valuation, all options are assumed to exercise, contributing $15 million.
The price of Californian heavy crude is running in line or slightly ahead of
West Texas crude. Strachan Corporate’s evaluation of a modelled Temblor
heavy oil project delivers oil with an NPV of $9.10 per barrel but a
conservative value of $6 per barrel is applied to its risked valuation matrix.
While experience suggests that similar projects in Texas deliver oil with an
NPV of closer to $14 per barrel or more depending on deliverability, costs and
recoverability, because of engineering risk, an NPV for shale oil of $5 per
barrel is applied.
Strachan Corporate: 15 Florence St, Cottesloe, WA, Australia, 6011
Page 5
March 16th 2012
STRACHAN CORPORATE
AFSL 259730
Risked Valuation Matrix
Asset
Target NPV
Equity mmBOE $/bbl
WI
Temblor Heavy Oil
100%
17
6
Kreyenhagen Oil
100%
30
5
Kreyenhagen Oil
100%
36
5
Avenal
100%
0.74
18
Paloma
25%
6
15
Paloma Shale
25%
25
12
SELH
100%
5
5
Tejon
75%
12
18
* POC = Proof of concept; POS = probability of
POS Unrisked
POC *
Risked Risked Un-risked
%
Target Cost $m. Value
$/Shr
Value $m
$m.
50%
102
5
46
$ 0.07 $
0.15
30%
150
20
25
$ 0.04 $
0.22
15%
180
20
7
$ 0.01 $
0.26
25%
13
3
0
$ 0.00 $
0.02
60%
23
5
9
$ 0.01 $
0.03
35%
75
10
16
$ 0.02 $
0.11
40%
25
8
2
$ 0.00 $
0.04
15%
162
8
16
$ 0.02 $
0.23
success
Source: Strachan Corporate
As a point of comparison, ASX listed peer Redfork Energy (ASX: RFE), holds
over 73,000 net acres of leases that are prospective for shale oil and gas in
Oklahoma on which it estimates 3P reserves totalling 2.9 mmbbls of oil and
138 Bcf of gas. Redfork trades with an impressive market capitalisation of
over $304 million and an enterprise value estimated at $275 million, while it
has a substantial operating cash flow shortfall and generates operating
revenue of about $3 million per year at a cost of ~$1.2 million pa.
By comparison, Solimar’s current market capitalisation of just $40 million
looks modest, especially when compared with the potential of its Paloma and
Kreyenhagen permits.
S.W.O.T Analysis
Strengths
Opportunities
MANAGEMENT: Solimar has a strong technical and TECHNOLOGY: Solimar can be amongst the first to
commercial management team with skilled people use horizontal drilling and multi-stage fracture
on-site in California.
stimulation technology in Californian shales.
SIGNIFICANT EQUITY POSITION: Solimar has a NEAR TERM PRODUCTION: Solimar’s Paloma project
100% interest in its key Kreyenhagen asset giving could develop into a substantial oil and gas
it an ability to farm-out to fund development.
production project during 2012, providing cash
flow support from operations.
LOCATION: California is a great place to find oil &
gas.
COMMODITY PRICES: The outlook for prices of oil and
gas is favourable over the coming 1 to 4 years.
Weaknesses
FUNDING: Small companies are always more at risk Threats
of market volatility, being reliant on capital COSTS AND SKILLS: In common with all smaller
markets for growth capital.
companies Solimar will need to compete for capital
and specific skill sets in the USA.
TESTING LOGISTICS: Solimar will need to access
directional drilling along with hydraulic fraccing skills TECHNICAL RISK: Solimar faces risks associated with
and equipment in a highly competitive market.
applying new well completion processes to shales
with unknown chemical and physical responses.
CAPITAL COST HURDLE:
Solimar
will
need
considerably more funding to progress its projects
on the ground.
Strachan Corporate: 15 Florence St, Cottesloe, WA, Australia, 6011
Page 6
March 16th 2012
STRACHAN CORPORATE
AFSL 259730
Board & Management
Frank Petruzzelli BBus(Acc),
Non-Executive Chairman
Frank is an accounting and management services specialist and principle of Australian accounting firm
MDB. He is a Fellow of the National Tax and Accountants Association and a Member of the NIA and a
registered Tax Agent. He was a founding director of Orchard Petroleum Limited and is also a director of
Permian Basin Oil Shale player Golden Gate Petroleum Limited
John Begg, B.Sc
Executive Director & CEO Officer
John is a petroleum geologist with over 30 years experience in the upstream oil and gas industry. He
has been a member and leader of teams that have discovered large reserves of oil and gas leading to
commercial developments in Australia, Asia and the US.
Previously John was Managing Director of Salinas Energy Ltd and was the founding Managing Director
of Voyager Energy Ltd.
Charle Gamba
Non Executive Director
Charle is President and CEO of successful oil producer and TSX listed Canacol Energy, which he has
guides from a start-up company in 2008. He was also a senior technical executive of Occidental
Petroleum, which is a significant player in Solimar’s area or operations.
Jason Bednar
Non Executive Director
Jason is a Chartered Accountant and professional CFO. He was the founding CFO for Pan Orient Energy,
managing its growth from Thai oil production. He is a Director of Canacol and Gallic Energy.
Mark Elliott
Non-Executive Director
Mark has over 27 years experience in owning and running private companies in Australia and in the
USA. He has extensive experience in the resources sector through investments in companies involved
in that sector.
Mr Chris Bowyer BCA,CA(NZ)
Company Secretary
Chris is a chartered accountant with 15 years experience in practice. He is also the Company Secretary
of Golden Gate Petroleum Limited and was previously the Company Secretary of Orchard Petroleum
Limited. He is an employee of MDB, an Australian accounting firm.
Will Satterfield
Chief Operating Officer
Will is a geoscientist with corporate management experience who joined Solimar from Hardy Oil & Gas
in India where he was Country Manager. Previously he worked with Occidental Petroleum, which is a
significant player in Californian heavy oil and shale exploration. His local knowledge and connections
are seen as a significant asset for Solimar.
Disclaimer
The information herein is believed to be reliable but the author, Strachan Corporate Pty Ltd, ABN 39 079 812 945; AFSL 259730 (“Strachan”), does not
warrant its completeness or accuracy. Strachan has relied on information which is in the public domain and has held discussions with management.
Opinions and estimates constitute Strachan’s judgment and do not necessarily reflect those of the Board and management of Solimar Energy Ltd and
are subject to change without notice. Strachan believes that any information contained in this document is accurate when issued however, Strachan
does not warrant its accuracy or reliability. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.
The investments and strategies discussed herein may not be suitable for all investors. Any advice in this report has been prepared without taking account of any particular person’s investment objectives, financial situation or needs. Therefore, before acting on the advice, you should consider the
appropriateness of the advice, having regard to your objectives, financial situation and needs. Strachan, its officers, agents and employees exclude all
liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This material is
not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be
suitable for all investors. If you have any doubts you should contact your investment advisor. The investments discussed may fluctuate in price and
changes in commodity prices and exchange rates may have adverse effects on the value of investments. This work was commissioned by Solimar Energy Ltd and Strachan will receive a fee for its preparation.
Strachan Corporate: 15 Florence St, Cottesloe, WA, Australia, 6011
Page 7