Equities

An update on microcap US Oil & Gas explorer Fremont Petroleum (FPL.ASX $0.008) having made an important announcement last week on funding. Having removed the funding overhang, via a convertible note with an existing major shareholder, the company is well-positioned to capitalise on what could be a significant period of potential newsflow. That is worth stepping through. 

Resilient Investments (existing major shareholder 7.85%) has agreed on the facility and terms and has effectively removed the overhang. This was critical, as they have been getting little share price traction on what should be an exciting phase of development with the results of the Amerigo Vespucci well. 

Catalysts - what might they be? 

1. Amerigo Vespucci - A success adds important confirmation that FPL's acreage is an extension of the Wattenberg to the North, the 4th most productive field in the US. It confirms FPL can produce from the Niobrara formation. This well has been designed to flow significant oil and gas. They are already collecting oil and flaring gas (announcement attached). The IP rate is due any day. The last well, JW Powell, flowed 220 BOE/day, and my view is a great result would be if Vespucci flowed anywhere between high 200's up to 400 BOE/day, with high oil component. Remember, when JW Powell was announced, FPL hit 1.9c on the day. 

2. Gas Contract - FPL has been talking about an imminent gas contract since I have followed the stock. If I was committing up to $6m in funding (Resilient), I would want to believe it was going to happen. Vespucci flow rates could be the final piece of data needed before signing off with a counterparty. Gas contract with a local user means cashflow from gas in a relatively short space of time (short connection and build time) and enables to oil sales (they are not flaring gas to allow oil flow currently).

3. Reserve Upgrade - currently they have P90 resource (90% probability) of 54m barrels of oil/540 BCF of gas. With JW Powell and Vespucci, does that push them through 1 TCF? If so, how high does the P90 reserve go?

4. Seismic Data - 3D Seismic was run over 1,173 acres, and the interpretation package yet to be announced. This data could allow them to focus on the shallower Pierre formation if they wish to target oil primarily, whilst waiting for gas connection and sales. The JW Powell and Vespucci wells confirm that the field resembles the Wattenberg Field from the North and that there are significant gas reserves. The 3D Seismic allows them to identify natural fracturing in the shallower Pierre, which hosts more accessible oil (the biggest Pierre wells have flowed up to 1000 bpd in the past). (Seismic Survey

Good Geo! If you go back to the June 2017 presentation, their geologist, Vanessa Lintz selected 22 successful well locations in a row in the Pierre formation when with Pine Ridge. Ave IP was 135 BOPD. She should have a good grip on the seismic interpretation.

5. Schlumberger (SLB) - what does the worlds largest driller want to say about a new drilling technique for tight shale in the US (when they are ready)? For those not familiar with the story, SLB has been supportive of FPL. They allowed a microcap like FPL to release their Petrophysical evaluation following JW Powell, confirming pathfinder is comparable to the Wattenberg field in May 2019 (see attached). A byproduct of any publications SLB may decide to release could see more eyes on FPL and the Pathfinder field. And that cannot hurt FPL. 

6. Attract a superior funding package - FPL needed Vespucci results to attract US interest, prove its real and an extension of the Wattenberg, and a gas contract to position it for a larger funding package for field development (note - they can get US Govt backed funding for any infrastructure). If we look at the term of the facility announced  $4-6m (4 -12 months), it appears structured to give the company clear air, and potentially convert in 4 months. If FPL string together successive positive announcements, other funding, other than equity placement could open up. Further, if they can deliver, and the share price places the options in the money (FLPOB, 2c strike), then that exercise could provide significant runway.  Hard to get attractive financing for $4-6m in the US as it is too small, so this facility makes sense in the interim.

In Summary, it is all about delivery now. The Pathfinder acres are still cheap compared to Wattenberg. If the convertible note holder elected to convert the full $6m facility at $0.007 into equity, then we are looking at an A$MKT Cap at $0.008 of A$20.2m. This has their full Pathfinder 21,500 acres trading at US$631 per acre. Wattenberg has traded btw US$3,000 to $17,000 per acre from 2016-2018. So there is plenty of reasons to get it right for FPL. 

Author - Tom Schoenmaker


Disclosure - The author of this desk note owns shares in FPL and FPLOB

Important Note - This note is not a recommendation or advice for readers to buy or sell FPL shares mentioned. FPL shares should be considered very speculative, high-risk, and volatile. There are significant risks inherent in oil and gas exploration that are not discussed in this note. You should always seek professional advice before considering any share purchase or sale. This is a desk trading note, and not a research document, and the view of the authors only. Information is taken generally from public sources. Wentworth has not independently checked all information contained in this note for its accuracy. 



Comments

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Michael Whelan

It’s a secured convertible note, at that. Hold on tight if you’re a shareholder.

Andrew

Looking at it from the other side of the coin - every time you write something on FPL or they announce something, there is some momentary interest in their shares and then the price sinks again back to where it started. Why do you you think that none of their announcements are gaining any traction? If you had to write a bear scenario what would you say?