May 12 - New Zealand Energy Announces Strategic Acquisition in Taranaki Basin, New Copper Moki Oil Discoveries and First Quarter 2012 Financial Results

Source Press Release
Company New Zealand Energy Corp.Origin Energy Limited 
Tags Deals, Upstream Activities, Financial & Operating Data
Date May 31, 2012

New Zealand Energy Corp. is pleased to announce that it has entered into a binding agreement (the "Origin Agreement") with Origin Energy Resources NZ (TAWN) Limited, a wholly-owned subsidiary of Origin Energy Limited to acquire upstream and midstream assets (the "Acquisition"). These assets include four Petroleum Mining Licenses totaling 26,907 acres in the main Taranaki Basin production fairway (the "Petroleum Licenses") as well as the Waihapa Production Station and associated gathering and sales infrastructure.

NZEC is also pleased to announce new oil discoveries in its Copper Moki-3 ("CM-3") and Copper Moki-4 ("CM-4") wells, with the expectation of initiating continuous production from CM-3 toward the end of Q2-2012. Continuous production from the Copper Moki-1 well ("CM-1") along with the 16-day flow test from the Copper Moki-2 well ("CM-2") generated positive cash flow of $4.5 million during Q1-2012 based on a realized netback averaging approximately US$90 per barrel of oil sold.


Strategic Acquisition

  • Four Petroleum Licenses in key production fairway provide significant exploration and production potential 
    • Petroleum Licenses are permitted until 2016 and renewable without relinquishment thereafter
    • 93 km2 of 3D seismic data with coverage over approximately 50% of the Petroleum Licenses and 585 km of 2D seismic data
    • Well log data from 27 wells, a number of which demonstrate multi-zone potential in NZEC's target formations: Urenui, Mt. Messenger, Moki and Kapuni
    • 16 established drill pads, most with existing oil and gas production infrastructure
    • Uphole completion opportunities in existing wells for Urenui, Mt. Messenger and Moki formations
    • Significant expansion to NZEC's drilling inventory
  • Waihapa Production Station provides full spectrum midstream processing 
    • Provides direct access to markets for NZEC production through oil and gas sales pipelines
    • Gathering capacity in place to service NZEC's oil and gas production
    • Includes facilities for gas processing, liquefied petroleum gas ("LPG") recovery, oil processing and water disposal with associated gathering and oil and gas sales pipelines
    • NZEC will own the only open-access midstream production facility in the Taranaki Basin, providing cash flow potential through agreements with third-party producers

Copper Moki Oil Discoveries

  • CM-3 confirms third consecutive Mt. Messenger discovery, yielding 510 barrels of oil per day ("bbl/d") and 320 thousand cubic feet of natural gas per day1 ("mcf/d")
  • CM-3 confirmed reservoir potential in the Moki formation
  • CM-4 oil discovery in the Urenui formation, production test underway

1 Natural gas and associated natural gas liquids are currently being flared until the Company completes a pipeline to the Waihapa Production Station, with the pipeline on schedule for tie-in by the end of Q2-2012.

First Quarter Financial Results

  • 54,677 bbl produced and 49,486 bbl sold, representing a 170% and 172% increase over Q4-2011, respectively
  • Generated positive cash flow of $4.5 million from production, resulting from netbacks of approximately US$90/bbl
  • Reduced production costs by approximately 5% to $22.25/bbl from $23.44/bbl in Q4-2011
  • Closed a $63.5 million bought deal financing in March 2012 in which 21.2 million shares were issued at $3.00 per share
  • Strong balance sheet with $70.4 million of working capital as at March 31, 2012  "

With 170,649 acres of Petroleum Exploration Permits and 26,907 acres of Petroleum Licenses, NZEC will control a significant portion of the exploration fairway in the Taranaki Basin," said Bruce McIntyre, President and Director of NZEC. "We believe that the Petroleum Licenses are highly prospective across multiple formations, offering exploration, uphole completion and production potential from existing wells and the ability to rapidly drill new wells. Along with the prospects on our existing permits, NZEC's technical team has identified a number of Urenui, Mt. Messenger and Moki leads on the Petroleum Licenses, significantly increasing NZEC's drilling inventory in the Taranaki Basin.""

These acquisitions increase NZEC's presence in New Zealand from both an exploration and infrastructure perspective," said John Proust, Chief Executive Officer and Director of NZEC. "Controlling a central oil and gas production facility in the Taranaki Basin provides NZEC with the strategic opportunity and capacity to independently process production, at reduced operating costs, as well as generate cash flow through third-party processing agreements. This transaction is consistent with NZEC's business strategy of adding value for shareholders through acquisition and development."


The purchase price for the Acquisition comprises CDN$42 million in cash (plus adjustments) and a 5% gross overriding royalty on the Petroleum Licenses, payable to Origin. The Company will be using funds previously allocated for acquisitions, working capital on hand and cash flow from production to complete the Acquisition. With a current cash position of $61 million, post-acquisition NZEC will remain fully funded to complete its previously announced 2012 capital program and reiterates its forecasted exit rate of 3,000 barrels of oil equivalent per day ("boe/d").

Closing of the Acquisition is targeted for October 2012 and contingent on receiving government approvals, Origin completing the current recommissioning of the TAWN LPG extraction facility, Origin and/or NZEC entering into an agreement with Contact Energy ("Contact") regarding the use and development of Origin's Ahuroa gas storage facility, and standard TSX Venture Exchange approvals.

Exploration Assets

Pursuant to the Origin Agreement, NZEC will acquire four Petroleum Licenses in the main production fairway of the Taranaki Basin, contiguous with the northern border of NZEC's Eltham and Alton permits (Figure 1, Table 1). Totalling 26,907 acres (108.9 km2), the Petroleum Licenses offer multi-zone potential from the Urenui, Mt. Messenger, Moki, Kapuni and Tikorangi formations. The Petroleum Licenses are permitted and renewable without relinquishment, subject to government approval. Included are 16 established drill pads, most with full production infrastructure in place, which will allow for timely tie-in to the Waihapa Production Station upon exploration and completion success.

The Acquisition includes 93 km2 of 3D seismic data with coverage over approximately 50% of the Petroleum Licenses and 585 km of 2D seismic data. NZEC has access to well log data from 27 previously drilled wells, offering the necessary well control to expedite exploration cycle time and reduce drilling risk. Numerous existing wells offer uphole completion opportunities in NZEC's target formations. In addition, six of the wells contribute limited oil production from the Tikorangi limestone reservoir using existing gas-lift infrastructure.'

NZECs technical team has completed a preliminary review of the 3D seismic and well log data covering the southern half of the Petroleum Licenses and identified 8 Urenui leads, 14 Mt. Messenger leads and 8 Moki leads, significantly expanding NZEC's drilling inventory in the Taranaki Basin. NZEC will refine and prioritize these leads within the context of its 2012 exploration program. NZEC has also identified six leads on 2D seismic and will continue to evaluate exploration potential across the Petroleum Licenses, including an extensive evaluation of the deeper Kapuni group, as Origin's exploration and production data is incorporated into NZEC's technical database.

The Petroleum Licenses have a long history of oil and gas production that confirms the presence of substantial hydrocarbons in this region. While exploration and production has focused on the Tikorangi limestone formation, a number of wells have demonstrated production potential from the Mt. Messenger and Kapuni formations, as well as good hydrocarbon shows from the Moki and Urenui formations. NZEC intends to build on the success of its Copper Moki geological model by fully evaluating, exploring and developing its target formations on the Petroleum Licenses.

Production and Infrastructure Assets

The Waihapa Production Station (Figure 2, Table 1) will give NZEC strategic control over gathering, processing and sales infrastructure in the Taranaki Basin and provide NZEC with the ability to quickly bring on near-term production additions, reduce full-cycle development lead times and execute on longer-term growth plans. In addition, as the only open-access midstream facility in the Taranaki Basin, the Waihapa Production Station offers business opportunities for processing third-party gas, liquids, oil and water. The Waihapa Production Station is located approximately three kilometres from NZEC's Copper Moki site and is central to NZEC's inventory of exploration prospects, thereby reducing transportation and processing costs for NZEC's oil and gas production. NZEC is currently completing a pipeline from the Copper Moki site to the Waihapa Production Station, with tie-in scheduled for the end of Q2-2012.

Origin will continue as operator of the Production Station during a transition period through to mid-2013.

The Waihapa Production Station and associated infrastructure includes:

  • a 45 mmcf/d gas processing, gas compression and LPG extraction facility ("TAWN facility");
  • a 51-km 8-inch gas sales pipeline from the Waihapa Production Station to the Stratford Gas Power Generation Plant then terminating in New Plymouth;
  • 59 km of oil/gas mixed product pipelines including gas lift lines;
  • a 25,000 bbl/d oil processing facility;
  • a 49-km oil sales pipeline from the Waihapa Production Station to the Omata Tank Farm, capable of transporting up to 15,500 bbl/d; and
  • an 18,000 bbl/d water disposal processing system.

Origin Agreement

Under the terms of the Origin Agreement, and pursuant to an exclusive arrangement, NZEC has agreed to pay Origin consideration in the amount of CDN$42 million in cash and such other adjustments as may be required at closing. A $5 million deposit is payable immediately with the remainder due on closing, which is anticipated to occur in October 2012. Origin will retain the right to a 5% gross overriding royalty ("Origin GOR") on all hydrocarbons produced by NZEC from the Petroleum Licenses. The Petroleum Licenses are subject to a "grandfathered" New Zealand Petroleum & Minerals 10% net profits royalty.

Origin will maintain an option for a period of 10 years to use eight former production wells ("Option Wells") located within the Tikorangi limestone reservoir to inject, store, monitor and withdraw natural gas. If Origin exercises its option in respect of one or more of the Option Wells, it has the right to apply to New Zealand Petroleum & Minerals for a stratified carve out of a discrete area of the Tikorangi limestone for gas storage purposes ("Tikorangi Gas Storage Area"). Other than potential remaining attic oil reserves, NZEC sees limited exploration potential within the Tikorangi Gas Storage Area and this potential carve out is considered immaterial to NZEC's valuation of the Acquisition.

NZEC and Origin have agreed to collaborate on well location and design to drill one exploration well into the crestal interval of the Tikorangi formation to access remaining attic oil reserves. NZEC will fund 100% of the capital cost to drill and, if warranted, complete the well. If successful, net cash proceeds of any hydrocarbon production from the well will be split equally between NZEC and Origin.

In addition, NZEC and Origin have agreed to enter into an agreement to process Origin's remaining onshore oil and gas production through the Waihapa Production Station for a pre-determined, market-comparable fee.


Copper Moki-3

NZEC has completed an initial production test of CM-3, its third production well in the Taranaki Basin. CM-3 flowed through a 24/64-inch choke for seven days, producing 3,570 bbl of 40° API oil and 2,239 mcf1 at an average rate of 510 bbl/d and 320 mcf/d1. Following this initial production test, CM-3 will be shut-in for pressure build up before commencing continuous production toward the end of Q2-2012.

CM-3 was drilled in March through the Urenui and Mt. Messenger formations to the deeper Moki formation, with a measured depth of 3,167 metres and true vertical depth of 2,633 metres. NZEC perforated and tested the Moki formation and encountered reservoir rock with permeability and porosity and minor oil and gas shows, confirming two of the three elements required for an oil and gas discovery. NZEC's drilling inventory includes a number of leads with a Moki target. The technical and geological information gained from CM-3 in the Moki formation has resulted in NZEC confirming that at least two of the eight wells scheduled for the balance of this year will be drilled to the deeper Moki formation.

Copper Moki-4

NZEC reached target depth in CM-4 in April at a measured depth of 2,125 metres. CM-4's location was chosen to test the northeastern extent of the targeted Copper Moki prospect. Completion demonstrated that the well had encountered a portion of the Mt. Messenger formation that was faulted and had not retained producible hydrocarbons. NZEC then moved uphole and perforated the Urenui formation across approximately four metres of net pay, with the potential to perforate additional pay in the future.

The Company has commenced production testing of CM-4. The well is producing 29° API oil with a higher pour point than Mt. Messenger oil and characteristics similar to Urenui oil being produced from third-party wells in the immediate area. NZEC will continue to evaluate the well to determine the appropriate artificial lift system to unlock the potential of the Urenui formation in CM-4.

With completion of the four Copper Moki wells, NZEC has gained tremendous insight into the Moki, Mt. Messenger and Urenui formations. NZEC has also completed data acquisition of a 100 km2 3D seismic survey across the Eltham and Alton permits. Information gained from exploration to date and seismic interpretation will guide NZEC's future strategy for both exploration and acquisition in the Taranaki Basin.

Production Update

Company production over the last 30 days from CM-1 and CM-2 was approximately 991 boe/d (578 bbl/d and 2,475 mcf/d1). The wells are producing 41.8° API oil that is trucked to the Shell-operated Omata tank farm and sold at Brent pricing, resulting in a field netback of approximately US$90/barrel. NZEC calculates the netback as the oil sale price less fixed and variable operating costs and a 5% royalty. The netback reflects an average realized oil price in Q1-2012 of US$117, and will fluctuate based on variances in oil price. It is anticipated that CM-3 will be on continuous production toward the end of Q2-2012.


Financial Snapshot

During the period ended March 31, 2012, the Company produced 39,852 bbl and sold 34,659 bbl from CM-1. CM-2 flowed 14,825 bbl and 15,352 mcf1 during a 16-day flow test in February and was subsequently shut in for pressure build up. Preproduction revenue generated during the start-up and testing phase of the well was treated as a cost recovery of the capitalized well development costs. Total recoveries on the oil produced and sold during the start-up and testing phase of Copper Moki-2 amounted to $1,351,630 or $91.17 per bbl. The aggregate volume of oil produced during Q1-2012, including Copper Moki-2's preproduction, was 54,677 bbl with 49,486 bbl sold, resulting in positive cash flow from operations of $4,489,004.

Results of Operations For The Three-Month Period Ended March 31, 2012


During the period ended March 31, 2012, the Company produced 39,852 bbl and sold 34,659 bbl for total revenues of $4,087,676, or $117.94 per bbl. Total recorded gross production revenue was $3,908,683, which accounted for royalties of $178,993, or $5.16 per bbl sold. No revenues or royalties were recognized during the same period in fiscal 2011.

Expenses and Other Items

Production costs during the period ended March 31, 2012 totalled $771,309, or $22.25 per barrel. Included in production costs are all site-related expenditures, including applicable equipment rental fees, site services, overheads and labour; transportation and storage costs including trucking, testing, tank storage, processing and handling; and port dues as incurred prior to the sale of oil. No production costs were incurred during the same period in fiscal 2011.

Depreciation and accretion costs incurred during the period ended March 31, 2012 totalled $922,833, or $26.63 per bbl sold. Depreciation is based on using the unit-of-production method by reference to the ratio of production in the period to the related total proved and probable reserves of oil and natural gas, taking into account estimated future development costs necessary to access those reserves. No depreciation and accretion costs were incurred during the same period in fiscal 2011.

Stock-based compensation for the period ended March 31, 2012 totalled $579,230 compared to $1,000,000 during the same period in 2011. The non-cash charge incurred during the period related to the options granted to directors, officers and employees of the Company upon the completion of the Company's initial public offering in August 2011. The balance of stock-based compensation recognized in the same period in fiscal 2011 related to the issuance of 2,000,000 common shares to Ian R Brown Associates, at a deemed price of $0.50 per common share, pursuant to the asset purchase agreement.

General and administrative expenses for the period ended March 31, 2012 totalled $1,261,136 compared to $826,122 incurred in the same period in fiscal 2011. The general and administrative expenses incurred during the period related to professional fees, management fees, consulting fees, travel and promotion, rent, overheads, filing and insurance costs. See Note 10 to the March 31, 2012 unaudited condensed consolidated interim financial statements for detail.

Finance income for the period ended March 31, 2012 totalled $18,311 compared to $7,455 in the same period in fiscal 2011. Finance income relates to interest earned on the Company's cash and cash-equivalent balances held in treasury.

Foreign exchange loss for the period ended March 31, 2012 amounted to $29,596 compared to $1,611 realized in the same period of fiscal 2011. Foreign exchange gains and losses are a result of currency exchange differences being recognized on transactions during the period.

Total Comprehensive Income for the Period

Total comprehensive income for the period ended March 31, 2012 totalled $799,032 after taking into account an exchange difference on translation of foreign currency of $436,142, which compared to a total comprehensive loss for the period ended March 31, 2011 of $1,878,754.

Based on a weighted average shares outstanding balance of 102,934,380, the Company realized a positive $0.00 basic and diluted earnings per share for the period ended March 31, 2012. During the period ended March 31, 2011, the Company realized a $0.03 basic and diluted loss per share on a weighted average share balance of 72,131,778.

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