Rose Petroleum plc (AIM: ROSE), a Rocky Mountain-focused oil and gas company, provides a further update on its project in the Paradox Basin, Utah, U.S. (the "project").
The Company is pleased to announce that it has negotiated a new agreement (the "Agreement") with its joint-venture ("JV") partner on the project, Rockies Standard Oil Corporation ("RSOC"). The project continues to offer substantial scale and value and is now, in the Board's view, better positioned for development.
The Agreement enables Rose to focus on a potentially highly economic core acreage position of circa 12,920 acres which contains 21 high-priority drilling targets and estimated 2C contingent recoverable resources, net to Rose, of 8.3 million barrels of oil equivalent ("mmboe"). This acreage position alone represents an estimated post-tax net present value to Rose of US$59m (at a 10% discount rate) ("NVP10"), a significant premium to the Company's current market capitalisation and demonstrative of the considerable potential of the project.
The agreement also allows Rose to reduce the overall cost of maintaining the project and, most importantly, gives the Company immediate ownership of the highest potential 12,920 lease acres, with a remaining nine year lease term on 5,240 of these acres, and a two year lease extension on the balance (subject to regulatory approval).
The Company's revised strategy to focus on the most attractive acreage is a logical step, informed by, amongst other things, the acquisition and analysis of the 3D seismic data covering the project area, the verification work undertaken by Schlumberger in 2018, and the positive feedback received from potential farm-in partners on how Rose can best optimise the project. Further details of the revised JV terms covering the remaining acreage are outlined below.
The Company also continues to work with the U.S. Department of Energy (the "DOE") and the University of Utah on a study related to improving production and raising the profile of oil drilling in the Northern Paradox Basin. Subject to contract, Rose may be eligible for a significant funding grant to assist in these efforts.
The Board's stated strategy for the Company is to build a balanced portfolio of assets, exhibiting both free cash flow and long-term development opportunities. The newly structured project sits squarely within this strategic vision and the Board looks forward to adding additional projects to the portfolio in the short-term.
In the Company's interim financial statement, which was released to the market in September 2019, it was outlined that since joining Rose, the new operational team had undertaken a review of the project, including a detailed look at the historical activity carried out on the project and the ongoing farm-in process. The team also reviewed the timeframe and plan for spudding the first project well in line with the expectations of the U.S. Bureau of Land Management (" BLM"), who continue to push for the development of the project as soon as commercially possible and in spite of challenging market conditions.
The clear conclusion from this review was that the scale and potential of the project are of sufficient magnitude to justify the Company's ongoing involvement in the project. The review also concluded that with more favourable positioning and better market conditions, investment from industry and financial partners can be achievable. Further, the review illustrated the need to balance the overall scale of the project with: 1) the current market backdrop; 2) timing obligations to the BLM; and 3) ongoing holding costs of the significantly sized acreage package.
On the basis of all of these factors, the Board elected to pursue a strategy for the project which included:
· Focusing on the most attractive acreage (as identified by the 3D seismic acquisition undertaken by the Company);
· Releasing acreage that the Company believes to be non-prospective or on too short a lease to merit further exploration work and / or expenditure; and
· Actively acquiring further contiguous acreage in areas the Board considers to have the greatest potential.
Following this review, the Company entered into discussions with RSOC to restructure the JV in order that the project might be positioned and developed in line with this new strategy for the project.
The Agreement, which supersedes all previous arrangements with RSOC, enables Rose to gain an immediate 75% working interest ownership and operatorship of key acreage, replacing the earn-in structure in the original agreement with RSOC. The Agreement will see a reduction in annual lease costs and allows further time to develop and market the project, while maintaining a highly valuable acreage position that is drill-ready.
Under the Agreement, the Company will focus on the high quality 12,920 acre position of which 5,240 acres have a nine year lease term remaining (and a 12.75% royalty) and the residual 7,680 acres have a two year lease extension subject to regulatory approval (and a 20% royalty). These leases are almost entirely covered by the 3D seismic data previously obtained and contain 21 drilling targets from the base case development, including the fully permitted GV22-1 drill location. The gross Estimated Ultimate Recovery (EUR) from each of the wells targeting the Cane Creek reservoir zone is estimated to be 0.85mmboe.
Based on the 2018 Competent Person's Report (CPR) methodology, as applied by Gaffney Cline and Associates ("GCA"), the 12,920 acres contain estimated 2C contingent recoverable resources of 8.3mmboe net to Rose. This acreage position alone represents an estimated post-tax NPV10 to Rose of US$59m, highlighting the significant scale and financial potential of the newly restructured project.
The resource and valuation metrics do not include the additional exploration potential contained within a further five stacked, high-graded prospective zones on the acreage. Successful efforts in these zones may create a multi-zone play which could add substantial further value through resource addition and from development cost optimisations.
In return for this restructuring, Rose will maintain the obligation from the original earn-in agreement to carry RSOC for a 25% working interest on the first well drilled on the project (expected to be circa $1.9m). Rose has also agreed to carry RSOC for a 25% working interest for the acquisition of specific targeted leases in and around the core acreage area, in aggregate, up to a total of US$500,000, but it is the current view of Rose and RSOC that the final figure will be considerably lower and any payments would be incurred over an extended period of time. If Rose does not drill its first project well within a five year period, all leases, with the exception of the 5,240 leases with nine year lease terms, will be assigned back to RSOC.
Further, Rose has terminated its remaining farm-in rights over less prospective acreage and has reassigned those rights back to RSOC. This re-assignment is consistent with the Company's intent to focus its efforts on the area covered by the existing 3D seismic data.
Colin Harrington, Chief Executive Officer, stated:
"By focusing on highest potential acreage, the Company maintains a project of real scale and value while reducing its on-going running costs and extending project term. Most importantly, the Company will also gain immediate ownership of core acreage and will become Operator across the project. I believe this restructuring will make the project more attractive to potential investors as we continue with our farm-in process.
"I am delighted we have been able to negotiate the new agreement. I would like to thank our JV partner RSOC for their continued commitment to Rose and the project and we look forward to working with them to spud the first well as soon as is commercially possible. We also look forward to our continuing partnership with the DoE and University of Utah in their effort to fund research and support development of the Northern Paradox Basin.
"In the Board's view, the high-grading of the project will create a long-term future for the project, one which meets the Board's selection criteria and which will positively complement the Company's future balanced asset portfolio."