Silvermere Energy Plc - SLME
USA Oil and Gas Producer
Shares In Issue - 20.7 million
Production About to Start in Gulf of Mexico
Silvermere began life on the July 14 2011 when Chalkwell Investments was renamed, and had its sights trained on the oil and gas sector after the acquisition of its current interest in the Mustang Island 818-L field in the Gulf of Mexico, Kleberg County, Texas. Silvermere has a 33.3 per cent WI and 20.83 per cent NRI in the Mustang assets, except for the I-1 well where it has a 33.3 per cent WI and 16.65 per cent NRI. The I-1 is a re-entry well that was completed and will be tied into production by the end of 2011. Testing of the well flowed at up to 2 mmscfpd, but Silvermere expects 3-4 mmscfpd and 84-160 bopd once the well is stabilised, cleaned up and has an initial 45-60 day production period under its belt. Should production fall short of expectations, additional zones can be perforated to increase output to more acceptable levels.
An independent evaluation of 3D seismic and well bore data by RPS Energy estimated total net (to Silvermere) reserves of 4.73 Bcfe in the 1P category, 11.53 Bcfe in the 2P category and 30.38 Bcfe in the 3P category. The high amount of Possible (3P) Reserves is due to the fact that RPS were unable to attribute their production to individual sands, and thus Silvermere is confident that once production commences, these reserves will be capable of being upgraded into a higher category. Indeed, the intention is to get RPS back post production to re-analyse I-1, rather than waiting for the drilling of the 3 new wells to improve the reserve profile.
Mustang Island Figures net to Silvermere:
Proven reserves (1P)...........4.73 Bscf - value - $4.49m / �2.84m* or 15.5p/share
Probable reserves (2P).........11.53 Bscf - value - �24.87m / �15.73m* or 85.7p/share
Proven and Probable (1P+2P)...16.26 Bscf - value - $29.36m / �18.58m* or 101.2p/share
Possible reserves (3P).........30.38 Bscf - value - $94.36m / �59.67m* or 325p/share
Total Potential Reserves................�78.25m or �426p* per share
*Based on Exchange Rate of 1 GBP = 1.58007 USD
The I-5 sands are the initial production horizon estimated at hosting 19.5 feet of net pay, while the G-3 sands are for the medium-term where there is also the potential to upgrade and enlarge current reserves. Three new wells (in addition to I-1) are expected to be drilled over the next 2 years, with the first pencilled in for the 2nd quarter of 2012. The 3 wells will test the structural highs of 3 fault blocks identified from historical 2D seismic run by Samedan Oil Corp in the 1980s. Silvermere�s share of these drilling and associated costs is US$8 million, the funds for which will need to be found, but given the company has US$5.8 million in existing warrants outstanding, as well as a range of other financing methods at its disposal (farm-in, debt, equity), CEO Andy Morrison does not foresee any issues.
Confidence in such claims is no doubt founded on its recent fund raising history, where the company raised �1.52 million through the issue of equity at 25p in August and �750,000 in convertible loan notes issued in June. The former was used for tie-back costs (�600,000), working capital (�400,000) and RPS�s CPR, due diligence and Silvermere�s re-admission to AIM having been suspended since January (�500,000). Mustang Island was acquired from convertible loan note issue.
Silvermere�s strategy is to acquire US onshore and shallow offshore oil and gas assets which are value for money, near production and capable of having their resources easily upgraded. To this end the company expects Mustang Island to develop into its cornerstone asset, throwing off sufficient cash flows to enable it to acquire and develop other assets without diluting shareholder capital unduly. Due to the ongoing financial crisis in the US, there is a significant shortage of capital for small development projects in that country, meaning there are tremendous opportunities to acquire quality assets at low prices. These circumstances have Silvermere rubbing its hands, and the company is already looking to acquire material, but minority interests in assets meeting its criteria, as it looks beyond Mustang Island. Working alongside the operator appeals to Silvermere at the moment, not only due to the fact that its skill set is financial, administrative and managerial, but it also allows the company to remain lean and flexible.
GECR REPORT FROM DECEMBER 2011
Silvermere Energy* – Speculative Buy at 18.5p with a 60p target price
Silvermere Energy is a US focused oil and gas development and production company which is on schedule for its first oil production by the end of December 2011. On 6th December 2011, the Company was able to report that preparations for production from the I-1 well on its Mustang Island asset by the operator, Dominion Production Company LLC, are proceeding to plan with the platform construction now in its final stages with load-out operations about to begin in Galveston. The completion of the load-out operations (expected by 13th December) is to be followed by work to lay the remaining 1,250 feet of connecting pipeline.
At the time, Andy Morrison, Chief Executive, commented that, “We are excited about the progress of the project and the approach of production, and we are working closely with the Operator to minimize any delays. Assuming reasonable co-operation from the weather, our objective of production before the end of the year is achievable.”
Investors are witnessing the birth of a US energy business. The corporate strategy is to acquire and develop a portfolio of low risk, near production oil and gas assets onshore and shallow offshore in the US. Silvermere is not one of those drill or bust casino AIM stocks but more of a US style P&L–focused oil and gas producer, which seems more to suit the mood of the times.
The firm is an obvious value play in the oil and gas sector. The Competent Person’s Report (CPR) on the Mustang assets published by RPS Energy in August 2011 valued the proven and probable reserves attributable to the Company at £18.4 million with a further £59 million of upside in the possible reserves. The CPR study assumed that three wells would be drilled one after another, whereas in all likelihood these will eventually be drilled over the space of the next two years. Our analysis takes these two variations into consideration in calculating a Net Present Value of $24.8 million or £15.7 million for Mustang Island. Our target price of 60p is calculated on a fully diluted basis.
We therefore recommend the shares as a Speculative Buy with a 60p target price.