Rudi's View | Apr 05 2007
This story was first published two days ago in the form of an email sent to registered FNArena readers.
By Rudi Filapek-Vandyck
Many a CEO of a publicly listed micro cap company is forced to continuously put in crazy amounts of hours, often simply to keep the boat afloat. They seldom do it with the energy and commitment Anthony Kain puts in at emerging oil and gas company Nuenco (NEO).
We meet in between visits to stockbrokers, shareholders, industry contacts and a few prospective investors in a seedy sports bar underneath the lobby of a well-known hotel in Sydney. Kain apologises, multiple times, because of the location, and because he is tired of all the traveling in between California, Perth, Melbourne and Sydney. He’s had another busy day and is looking forward to lying on his bed, maybe watching some late night television.
Instead he’s sitting with this journalist in the bar underneath the hotel. Within five minutes the table is covered with maps and presentation folders and Kain confesses, while pointing at the table: “This is my life”.
The story of Nuenco is closely aligned with the re-discovery of California’s untapped oil and gas potential. It is just as much a story about priorities.
If we consider all individual US states on their own merits, California becomes the world’s fifth largest economy. It is also the fourth largest energy producing state in the US, after Louisiana, Texas and Alaska.
Although the industry has known for decades there would seem a far larger energy potential under Californian soil, large parts of this potential have been left untouched until today. The reason? Major oil producers, which still own most of the land positions and exploration leases throughout the state, considered easier targets elsewhere of a higher priority.
Nuenco is one of many junior players that have tried to carve out their own opportunity in the region. It has been a journey marked by more downs than ups – not in the least because one of the company’s main commercial partners turned out to have its priorities elsewhere.
Kain’s body language turns tense when he is asked about joint venture partner Orchard Petroleum. Both companies share a few joint ventures in the highly prospective San Joaquin Basin, mostly with Orchard owning the largest equity stake. Mentioning Orchard’s past behaviour clearly brings back painful memories and latent frustrations about a partner that was supposed to bring in the riches, but ultimately couldn’t be bothered.
According to market sources, Nuenco at one stage offered Orchard to take on the operational responsibility over the JV projects. Is this true? Kain says he has repeatedly thrown the offer on the table. At one stage he even proposed Nuenco would fully finance all drillings.
A radical change of fortune came with the arrival of Crosby Capital Partners, a Hong Kong headquartered asset manager and investment banker with Macquarie Bank-alike ambitions. Crosby, oddly enough listed on the London Alternative Investment Market (AIM), in 2005 unsuccessfully tried to buy then ASX listed Tethyan Copper for its enormous Reko Diq copper/gold project in the wilds of Pakistan. However, shareholders of Tethyan were not keen on considering the various lowball Crosby offers and in the end decided to sell out to Chilean resources giant Antofagasta.
Other attempts to buy undervalued assets from Australian companies proved equally unsuccessful – until the dealmakers at Crosby came across Orchard Petroleum. Market gossip has it Crosby was easily convinced about the significant potential among the various Orchard projects. The Hong Kong financiers’ swift actions recently would seem to support this.
Crosby bid circa US$130m for Orchard and did not even wait for the takeover to be fully completed to embark on a busy drilling program. One may suspect Kain is pinching his arm every morning at breakfast.
On Tuesday Crosby announced the full takeover of Orchard had become a fait accompli. The same announcement also vindicated Kain’s confidence in the joint prospects: fourteen holes have been drilled in between Lost Hills and South Belridge in the San Joaquin Basin and all fourteen successfully encountered oil and gas. Most results have exceeded pre-drilling expectations.
Already, eight of the wells have been successfully completed with multi staged hydraulic tracing. Three of these wells are currently in production. Five others are scheduled to start imminently.
The same press statement also reveals where Kain’s and Crosby’s confidence stem from: Eleven of the current top 100 US oil fields are in the San Joaquin basin, including four of the top 10.
The joint ventures with new-born Orchard Petroleum cover only part of Nuenco’s potential. Other ventures at other projects, such as the Kreyenhagen oil field, are equally considered to be of “company making” potential. The first well at Kreyenhagen spudded in February this year. Nuenco has a 5% free carried interest in the project.
Probably the largest upside potential stems from the significant acreage position the company has secured over the past few years. In fact, Nuenco’s gross acreage position today is considerably larger than total acreage from Orchard, Salinas Energy (SAE) and Livingstone Petroleum (LPL) combined. All three are similar California focused explorers/producers.
Kain says in-house petrophysics suggest oil-in-place (OIP) for Nuenco’s acreages runs into billions of barrels. (Note: oil in place is the total estimated hydrocarbon content of an oil reservoir, not to be confused with oil reserves which are the estimated technically and economically recoverable portion of the OIP.)
The only things that seem to be missing are increasing investor interest and a rising share price. At 16c Nuenco’s market capitalisation barely exceeds the $18m. But Kain is hopeful this too will change in a not too distant future. He says he feels some stockbrokers have started to show genuine interest lately. Some of them may even start following the company informally.
