Caza Oil & Gas (LON:CAZA, TSE:CAZ) today revealed two recently agreed deals which see the firm take its first steps in the Bone Springs play, in New Mexico.

Firstly an asset swap sees Caza taking a stake in the Bradley 29 Prospect in Eddy County, New Mexico, where work on the first well is already underway.

To acquire its stake in the project, Caza has traded some of its acreage in its Lynch property, also in New Mexico. It also acquires interests in two other prospects through the deal.

The new acreage hosts twelve locations for horizontal drilling on the Bone Springs play. 

Caza says its new partner, Mewbourne Oil Company, is one of the foremost operators in the Bone Springs Play and it will be the operator the wells within this project.

"We are very pleased to be drilling our first horizontal Bone Spring well in New Mexico with Mewbourne,” said chief executive Mike Ford.

“Mewbourne is an accomplished operator with extensive knowledge in this basin, and we are looking forward to working with them on these projects.  

“This will be Caza's first foray into horizontal drilling in this exciting oil and liquids-rich play.”  

Mewbourne spud the first well at the end of April and drilling is still underway. The well’s primary target is the ‘Second Bone Springs’ sand, which is expected at a depth of 8,221 feet. And following the asset swap, Caza has a 20 per cent working interest and a 15 per cent production interest in the well.

Separately Caza has also agreed a deal to participate in the Quail Ridge prospect.  The plan is for the company to be a minor partner in a number of upcoming wells – owning between 0.25 and 4 per cent.

Caza says that while these interests are not material financially, they will provide access to valuable information about the Bone Springs play in this area, as well as ‘very important’ information about the frac designs and drill plans.

Drilling of the first well is already underway. Caza has a 0.25 per cent working interest and a 0.125 production interest in this well, which is primarily targeting the ‘Third Bone Springs’ sand.

Caza now has around 4,000 net acres in the Bone Springs Play with properties in Lea and Eddy Counties. Its prospects include Lynch, Forehand Ranch, Lennox, Copperline, Mad River, Bradley 29, Two Mesas and Quail Ridge.

And the assets were assessed last year to have total 3P reserves of 16.7 million barrels of oil - not including newly acquired Bradley 29, Two Mesas or Quail Ridge.

Additionally Caza also reported that it plans to participate in a further operation to assess the San Andres zone in the Sombrero prospect. The project is operated by CML and Caza has a 20 per cent working interest for a 17.125 per cent production interest.

Cenkos analyst Ashley Kelty highlights that Caza has built a substantial position across the Bone Spring play in recent months.

“Overall, we believe that Caza offers deep value with the company trading at a 65% discount,” Kelty said in a note to clients.

The analyst adds: “Near term catalysts such as the Bone Spring play in New Mexico coupled with further development wells at San Jacinto provide the opportunity for a near term share price revaluation in the event of success and a commensurate increase in production levels.”

Kelty says the current share price of 9.6p is underpinned by production which the analyst values at 15p per share. Caza also has cash worth 3p a share, Kelty adds.

While Cenkos rates Caza as a ‘hold’ the City broker’s 28p a share target price suggests considerable upside to current levels.

Firstly an asset swap sees Caza taking a stake in the Bradley 29 Prospect in Eddy County, New Mexico, where work on the first well is already underway.

To acquire its stake in the project Caza has traded some of its acreage in its Lynch property, also in New Mexico. It also acquires interests in two other prospects through the deal.

The new acreage hosts twelve locations for horizontal drilling on the Bone Springs play. 

Caza says its new partner, Mewbourne Oil Company, is one of the foremost operators in the Bone Springs Play and it will be the operator the wells within this project.

"We are very pleased to be drilling our first horizontal Bone Spring well in New Mexico with Mewbourne,” said chief executive Mike Ford.

“Mewbourne is an accomplished operator with extensive knowledge in this basin, and we are looking forward to working with them on these projects.  

“This will be Caza's first foray into horizontal drilling in this exciting oil and liquids-rich play.”  

Mewbourne spud the first well at the end of April and drilling is still underway. The well’s primary target is the ‘Second Bone Springs’ sand, which is expected at a depth of 8,221 feet. And following the asset swap Caza has a 20 per cent working interest and a 15 per cent production interest in the well.

Separately Caza has also agreed a deal to participate in the Quail Ridge prospect.  The plan is for the company to be a minor partner in a number of upcoming wells – owning between 0.25 and 4 per cent.

Caza says that while these interests are not material financially, they will provide access to valuable information about the Bone Springs play in this area, as well as ‘very important’ information about the frac designs and drill plans.

Drilling of the first well is already underway. Caza has a 0.25 per cent working interest and a 0.125 production interest in this well, which is primarily targeting the ‘Third Bone Springs’ sand.

Caza now has around 4,000 net acres in the Bone Springs Play with properties in Lea and Eddy Counties. Its prospects include Lynch, Forehand Ranch, Lennox, Copperline, Mad River, Bradley 29, Two Mesas and Quail Ridge.

And the assets were assessed, last year, to have total 3P reserves of 16.7 million barrels of oil - not including newly acquired Bradley 29, Two Mesas or Quail Ridge.

Additional Caza also reported that it plans to participate in a further operation to assess the San Andres zone in the Sombrero prospect. The project is operated by CML and Caza has a 20 per cent working interest for a 17.125 per cent production interest.

Dwindling US gas prices have added a great deal more risk to Caza’s high impact exploration strategy, and Ford sees this as an opportunity to grow the company organically, while still using  Caza’s seismic library to generate high impact projects in Louisiana.  

Ford says deep Louisiana gas wells typically produce large amounts of associated liquids making them economically viable despite low natural gas prices.

Ford’s plan going forward is to primarily focus on lower risk oil targets through horizontal drilling. He is confident this approach will provide a stable and sustainable future for the AIM quoted company.

“In the short term, the type of targets we are going after have far less risk associated with them compared to what we’ve been doing in the past, but our strategy has always included a good mix of projects with varying degrees of risk and reward,” he says.

“Previously we have drilled our share of pure wildcat projects that had the potential for a single well to discover significantly large reserves with some shallower, lower risk projects included in the mix.

We are currently targeting oil projects that have much lower risk than the wildcats and - not always, but typically - smaller single-well reserve profiles.

That said, they still have the potential to prove up significant reserves with multiple development locations, it's repeatability that we are striving for.”

These new projects are found in the Bone Spring play, Southeast New Mexico, where Caza has now amassed over 100 viable horizontal drilling locations. 

“The Bone Spring is a horizontal play. What makes it significant is that it has up to five different pay zones that you can drill separate laterals in for each 160 acre location.

With 100 such locations, Ford explains just how the potential reserves quickly stack up.

According to Ford, each lateral could yield around 365,000 barrels of oil equivalent, meaning that Caza could be looking at significant reserves for each 160 acre location.

“We’re very excited about the play. There have been over 400 wells drilled in the play since 1998. 

Caza has been watching the play for a couple of years. It has become quite obvious to us that this play is working. It appears very commercial, and represents significant reserves.”

The play comprises five sequential targets. The first target, drilling top to bottom, is the Avalon Shale, the next three targets are the First, Second and Third Bone Spring Sands, which are followed by the fifth target, the Wolfcamp Formation, which sits below the Bone Spring Formation.

Ford says all of these intervals or zones have been drilled horizontally in Southeast New Mexico..

“The idea for Caza is to go in on individual acreage blocks and prove up an Avalon Shale, a First (Bone Spring Sand), a Second (Bone Spring Sand), a Third (Bone Spring Sand) and the Wolfcamp, when possible, this allows us to prove up all the potential in each block.

The first month average production in Bone Spring wells is 415 barrels of oil per day equivalent and the first six months production average is 46,000 Boe, so you can see the play throws off pretty significant cash flows in the first year, Ford says.

As new wells come on, the statistics are ever changing but Caza is currently working its internal model using the 415 barrels a day.

Furthermore, he says, the Bone Spring reserves are long term, with 20 to 30 years of production ahead of them. 

“We’re sitting on a large number of locations in this play and the risk profile here is very acceptable.

Granted, it is not a case of drilling a wildcat and being able to say ‘wow, look what we’ve found’, but we have been able to build a good position in a play which has significant reserve potential for oil.”

While Ford takes this increasingly measured approach to future exploration efforts, he says that some high impact, single well prospects do still offer an opportunity at an acceptable level of risk.

Notably, the Consilience prospect in Atchafalaya Bay and the Lewis prospect in Vermilion Parish, South Louisiana.

Here Caza is targeting a modelled direct hydrocarbon signature, which unlike the signature targeted by the Arran well, has already been confirmed in recent nearby discoveries.

He explains that this doesn’t in itself mean that Caza is guaranteed success here, but it is clearly a positive for the prospect and helps to reduce risk.

In the months ahead Ford hopes to negotiate a partnership deal with an industry partner, before starting a drill programme to test these prospects. Talks are already underway with a number of Texas and Louisiana based firms, he said.

“Caza was originally founded upon the massive geophysical database it has covering the Gulf Coast, but we’ve always believed in maintaining a good mix of projects with varying risk profiles within our portfolio.

The problem we now face is that most of the Gulf Coast exploration is gas. Even so, last year we were targeting liquids-rich projects, and we’re still working the seismic data looking for new projects, preferably with high liquid content.

Gas reservoirs with associated liquids, like our Louisiana prospects, help to keep the economics at a point where it still makes sense for Caza to explore for those resources.”

Nevertheless, low North American natural gas prices, the events of the past year and the acquisition of leases in the horizontal Bone Spring play have changed the risk profile of Caza’s portfolio.

Caza Oil & Gas chief Mike Ford is taking a lower risk approach to exploration, as he plans a horizontal drilling programme to establish a profitable oil business in New Mexico. 

Caza Oil & Gas (LON:CAZA, CVE:CAZ) today told investors it is putting its controlling stake in the San Jacinto property in Texas up for sale.

It said that recent operations on the property were a success and the Caza Elkins 3401 and 3402 wells are both performing as expected.  

However, Caza says it is looking to sell the property because it has even more favourable investment opportunities elsewhere and attractive sales prices for similar properties.

"We are very pleased with the progress made at San Jacinto and recognize that there is a strong and growing market for this type of asset.  A successful exit would have the potential to unlock the increased value that we have created at San Jacinto,” said chief executive Michael Ford.  

“At present, we are exploring the options and opportunities available to us with the successful sale of this property and will look to further update shareholders as and when there are further developments." 

Caza owns an 85 per cent working interest in the Caza Elkins 3401 well, with a 63.75 per cent net revenue interest. And it has a 75 per cent stake, with a 56.25 per cent net revenue interest, in all the other wells drilled on the property.

The asset has now been listed with property marketing firm the Oil & Gas Asset Clearinghouse. It will determine the level of interest in the current market.  

Caza says that the orderly marketing of the property is most likely to achieve a desirable valuation but it is under no obligation to sell if offers don’t meet its expectations.

The future sale proceeds would be used to develop existing assets and make in investments.

“Caza remains actively involved in reviewing and grading such opportunities on an ongoing basis, and management remains keen to continue growing the company's asset base and production profile using a variety of means,” the company said.

It said that recent operations on the property were a success and the Caza Elkins 3401 and 3402 wells are both performing as expected.  

However, Caza says it is looking to sell the property because it has even more favourable investment opportunities elsewhere and attractive sales prices for similar properties.

"We are very pleased with the progress made at San Jacinto and recognize that there is a strong and growing market for this type of asset.  A successful exit would have the potential to unlock the increased value that we have created at San Jacinto,” said chief executive Michael Ford.  

“At present, we are exploring the options and opportunities available to us with the successful sale of this property and will look to further update shareholders as and when there are further developments." 

Caza owns an 85 per cent working interest in the Caza Elkins 3401 well, with a 63.75 per cent net revenue interest. And it has a 75 per cent stake, with a 56.25 per cent net revenue interest, in all the other wells drilled on the property.

The asset has now been listed with property marketing firm the Oil & Gas Asset Clearinghouse. It will determine the level of interest in the current market.  

Caza says that the orderly marketing of the property is most likely to achieve a desirable valuation but it is under no obligation to sell if offers don’t meet its expectations.

The future sale proceeds would be used to develop existing assets and make in investments.

“Caza remains actively involved in reviewing and grading such opportunities on an ongoing basis, and management remains keen to continue growing the company's asset base and production profile using a variety of means,” the company said.

At the San Jacinto property in Midland County, Texas, the Caza Elkins 3401 and 3402 wells have been fracture stimulated and are producing across multiple pay intervals.

The 3402 well is scheduled to be fracture stimulated in the Spraberry interval next month, which should bolster the producing rates associated with this well, said the firm.

"Caza has five additional proven undeveloped locations to drill on the San Jacinto property. The next two wells on this property were planned for the fourth quarter of 2011, however, the scheduling of these wells may be subject to change in the context of a more comprehensive drill plan for 2012," it said.