Benchmark Oil & Gas has signed a ‘letter of intent’ to acquire 100% of gas field KYTX, located in Corbin, Kentucky. The field consists of 55 producing wells from Devonian Shale formation on an area of 41 square kilometers. The total production of shale gas amounts to 300 000 MCFPD, equivalent to 75 barrels of oil per day. An additional 120 wells are planned and should be exploited.
Valuation Institute Ralph E. Davis estimates the proven reserves ‘tests’ to an undiscounted value of $ 5 million, and puts the probable reserves ‘probable’ to a value of another 7 million.
The existing infrastructure consists of 40 km of pipeline and has a capacity of up to 9 million MCFPD. The pipeline is also directly connected to the buyer Delta Natural Gas Co. In addition, there is a fleet with a value of around $ 2 million. Since the field was put into production in 2006, there has been around $ 12 million invested in development and infrastructure. The company has stable cash flows and a 10% premium to the spot price on the NYMEX Natural Gas.
Benchmark Oil & Gas intends to acquire KYTX from the owner through in kind and cash consideration. The seller and the total purchase price are not disclosed until the closing for reasons of confidentiality.
“We have finally reached an agreement to acquire this asset. Negotiations started over a year ago but was completed this weekend. The positive is that throughout the negotiations, the terms of the Benchmark Oil & Gas owner enhanced with a soaring stock price the past six months. Acquisition of KYTX will give an injection of both reserves and cash flow, as well as machinery that is well suited to the existing fields.
It’s not principally the existing cash flow in KYTX as justification for the acquisition, but mainly the opportunities in the undeveloped sources as well as our assessment of future natural gas prices. Since we started negotiations gas prices have risen by 50% and our belief is that we continue to see rising gas prices. When the new export terminals for LNG (liquefied natural gas), completed in 2015, the consensus is that gas prices may stabilize at a higher level than we have seen in recent years. We are now evaluating the economy of drilling planned wells and will come back with a development plan as soon as it is completed. Development risk in these type of sources are limited and the risk we all can see would be a falling price of natural gas. Each new source is expected to open with a flush production that is 20 to 30 times higher than the long-term stable production level. The development of all planned sources could increase the field’s production manifold.
Drilling cost per well is estimated to be between 100 to 120,000 USD. There are additional potential drilling locations on the leased land, but also opportunities to acquire additional land. Our bank has responded positively to the acquisition and offered to finance the acquisition and future development. The bank has confidence in much stronger gas prices from 2015 onwards. The development of onshore shale gas in the U.S. is probably the biggest threat to today’s oil prices. With this asset in our generation portfolio, we are well diversified if oil and gas prices converge. We get a huge upside with a potentially significant gas production in Kentucky. ”
Pål Mörch, CEO.