Caza Oil & Gas is cash rich and keeping its options open

8th Apr 2009, 9:41 am by Robert Waterhouse

Science is playing an increasingly crucial role in natural resources exploration. Not that Texas-based, TSX and AIM-listed Caza Oil & Gas (CAZA) needs persuading, for at the heart of its business is 8000 square miles of seismic data. With its expanding production and reserves – not to mention $14.1m in the bank at the start of 2009 - we take a look at the company’s operations and options for the future.

FIRST STEPS: ACQUIRING SEISMIC AND ACREAGE

Caza Oil & Gas came to AIM in December 2007, bringing with it a rather different approach to exploration than that of many other companies. Instead of acquiring exploration acreage - and then commissioning expensive seismic - the company had already acquired seismic data covering no less than 8000 square miles of Texas and Louisiana, as well as over 20 properties and prospects.

The experienced group of industry professionals who founded Caza considered that this data would help give them a competitive edge. Caza’s CEO, Mike Ford, had struck a deal to get cheaper access to seismic data from specialist seismic contractors; Executive Chairman John McGoldrick has called it “probably the biggest database of just about any independent” and he graphically likens the greater resolving power of 3D seismic, especially at depth, as being like “moving the aerial on the TV set – suddenly you get the picture” (15 August 2008). The cost of acquiring such 3D data from scratch has been quoted as some $4m per 100 square miles.  

American oil and gas companies often operate through holding percentages of various properties. A portfolio may therefore contain a number of varied components, the aggregate of which represents the company’s value. Caza Oil & Gas currently has over two dozen properties and prospects at various stages of exploration and production.  Rather than list them individually - which can sometimes serve to confuse the overall picture - we will focus on the resources that they contain, the current production levels and the potential production upside, before looking in more detail at a major prospect – Las Animas – on which a potentially significant step forward has just been announced by the company.

THE CURRENT PORTFOLIO: OIL AND GAS RESOURCES

Caza’s team made good progress during 2008 in substantially boosting the oil and gas resources of their acreage, and in all three categories – Proved, Probable, and Possible. This is summarised as follows:

Gas and gas equivalent (billion cubic feet)  2007   2008     change

Proved                                                            3.18      6.74      + 112%
Proved + Probable                                        17.77    28.52     + 58%
Proved + Probable + Possible                      72.80   91.25     + 25%

The strong increases in the Proved and Probable categories reflect Caza’s successes with its drilling programme throughout the year (note: ‘Possible’ reserves do not include the speculative ‘Potential’ category of resources).   

The Proved reserves which are not yet on production are an indicator of near-term upside in a company’s output; at the start of 2009 Caza had 31.3% of its Proved reserves on production, with a further 13.2% awaiting production. This indicates significant scope for the 2008 output to be raised. But as noted below, whether more near-term development drilling to bring substantially more of the Proved reserves onto production would represent the optimal use of capital in the current extraordinary capital markets is an issue that needs careful consideration.

The present cash flow values, at a 10% discount rate, of the net Proved and Probable reserves at 31 December 2008 were:

Pre-tax $85.49 million (c. £58 million, at current $1.48 exchange rate)

Post-tax $55.54 million (c. £37.5 million, ditto)

This valuation excludes the Possible category of reserves.

BUILDING PRODUCTION

Many exploration and production companies have yet to achieve production; Caza Oil & Gas has steadily raised its output during the past three years. In early 2006 it was producing 0.145 million cubic feet of gas per day, raised this to 0.381 million in early 2007, and then averaged some 1.148 million in the last quarter of 2008. The company has not yet released production figures for the first quarter of 2009; we note that of the 11 wells successfully drilled out of a total of 12 in the 2008 drilling campaign, 3 were still to be brought on production at year-end.

Using the 2008 total production of 0.374 billion cubic feet as a guide, Caza’s Proved reserves alone would have a theoretical life of some 18 years, a long time in industry terms. This is another useful indicator of the potential of the Proved reserves.

LAS ANIMAS

One part of Caza’s acreage that warrants individual attention here is their Las Animas prospect in Duval County, Texas. The company has leasehold interests in various tracts which total some 5980 acres in this substantial target; these interests, which vary from 28% to 100%, give a weighted average working interest of 42.8%, and a net revenue interest of 30%.

Las Animas is 7 miles from Shell’s Rosita field, which will produce about 400 billion cubic feet (bcf) of gas. John McGoldrick believes that Las Animas and Rosita may be similar. Netherland, Sewell Associates assigned best estimated net prospective resources for Las Animas of 41.4 bcf to the company in their report of 30 June 2007, though the drill bit is the only proof of what is, and what is not, some three miles below the surface.

This prospect targets two three-way high side closures in the Upper Wilcox Duval Complex. One of these is estimated to be 5000 acres in extent at the primary objective Upper Wilcox sand interval, and the other is estimated at 1500 acres; both are at depths of 14,000 to 18,000 feet.

Caza Oil and Gas announced on 26 March 2009 that the company has agreed to work with Prolithic Energy Company L.P. to progress the Las Animas opportunity. Prolithic also have leasehold within the prospective limits of the property; the partners have agreed that combining their leaseholds and working together is the most efficient way to proceed. The exploration agreement names Caza as operator, and allows for an initial test well to be jointly funded.
This looks like a good move: exposure to risk is reduced, as is the initial cost. And the arrangement is not dilutive as a farm-out would be.

FINANCIALS

Two key appraisal measures currently being applied to companies are: (a) the arrangements for funding, going forward, and (b) the rate of cash burn. Few small to medium natural resources companies, even those with profitable production, have sufficient cash flow to fund their exploration programmes without the need for external funds.

Caza Oil & Gas raised $23m (gross) in July 2008 through a placing at $0.46 (23p at that time) per share. In the light of subsequent financial turmoil worldwide, this can be seen as a timely move. At the start of 2009, despite the 2008 drilling programme investment, the company had $14.1m in cash and cash equivalent (currently equivalent to £9.5m). This is a very valuable asset which Caza is seeking to use to optimal effect.

For 2008, the company has declared a pre-tax loss of $4.66m, though this is partially due to some exceptional costs, including expenses involved in achieving plc status and reversal of tax provisions. The underlying loss appears primarily attributable to general and administrative costs; the operations have shown a fairly good level of netback from production though the recent decline in oil and gas prices is unhelpful, at least in the near-term. Management of costs is clearly a high priority for the company; Caza has recognised this, and has announced that that it is reducing its general and administrative overhead - including salaries and benefits by 20% from February 2009 which will save $0.5m in a full year.

The company’s current market capitalisation of £4.18m (3 April 2009) appears somewhat odd, in the light of the post-tax NPV valuation of the Proved and Probable reserves of £37.5 million (see above), the substantial cash asset of £9.5m at the start of 2009, and the difficult-to-value but clearly important seismic data set. Indeed, at 3 April 2009 the market capitalisation was markedly lower than just the cash-at-bank; in effect, the company’s reserves and seismic are currently being assigned a negative value by the market.

Caza is keeping its strategic options open at the present time, seeing its cash as a powerful asset that can potentially be used in a number of different ways. For example, additional wells could be drilled as rig costs come into line with product pricing. Or alternatively, capital could be leveraged into a strategic joint venture, merger(s), or acquisition(s).  

John McGoldrick and his colleagues will doubtless be burning the midnight oil at present, evaluating various opportunities that might allow Caza Oil & Gas to take best advantage of its cash assets. It is surely a problem that quite a few other natural resources companies would love to have.