"Management will begin utilizing funds for the drilling program immediately. The first six projects to be funded include: the Lennox test well, which is currently being completed; a second Caza Ridge well at Copperline; a test well at Gateway; a test well at West Copperline; a test well at Roja, which is currently drilling; and a test well at Madera. The initial drilling phase includes 12 wells in total to be drilled in 2013."
Background to the Agreement
The Company's current production revenues, existing cash resources and available financing (excluding funds available through the sale of the Notes) presently allow the Company to participate in drilling 3 to 4 wells per year. However, Management believes that accelerating and expanding the current drilling program through the utilization of funds made available through the Agreement will significantly increase both production and cash flows, which will optimize the work program and drive economies of scale.
While the Agreement does not require the approval of shareholders, Management and the Board believe that the Agreement is in the best interests of shareholders, and that the funds made available under the Agreement will provide the Company with sufficient leverage and capital to adequately exploit opportunities while mitigating equity dilution during the "value accretion" drilling phase. Obtaining this financing is a significant step in the Company's implementation of its stated strategy of achieving significant growth in reserves and production, thereby raising the Company's profile in the basin, while maximizing shareholder value.
The Company currently plans to use the proceeds from the Notes in the initial drilling phase to develop the following properties in southeastern New Mexico, by drilling 12 oil and gas wells and two salt water disposal wells, as described below:
-- Lennox - two Bone Spring wells and one Lower Brushy Canyon well;-- Copperline - one Bone Spring well and one salt water disposal well;-- Gateway - one Bone Spring well;-- West Copperline - one Bone Spring well;-- Forehand Ranch - one Bone Spring well, one Ramsey well and one salt water disposal well;-- Mad River - one Bone Spring well;-- Roja - one Lower Brushy Canyon well;-- Madera - one Bone Spring well or one Lower Brushy Canyon well; and-- Lynch - one Bone Spring well.
Roja and Madera are operated by OXY USA Inc., and Lynch is operated by Mewbourne Oil Company. This initial drilling phase may be adjusted as mutually agreed between the Company and the Note Holder.
In selecting these properties, the Company considered prospects with attractive proven and probable reserves that could provide long-term organic growth. Additionally, in line with its stated strategy, the Company utilized the following criteria to grade these properties:
-- Company operated properties, which provide the ability to control project execution and timing of drilling operations. Exceptions were made for non-operated lease-saving operations and non-operated properties at the highest end of the grading scale;-- properties close to existing, established infrastructure, allowing for quick, efficient hook-up and lower operational execution risk;-- drilling targets in close proximity to known producing reservoirs; and-- properties with an ability to deliver at least a 25% rate-of-return on investment.
The Company expects that expanding and diversifying its producing asset base within the Bone Spring play, and the ability to adopt a portfolio approach to future exploration, will not only grow the Company but allow it to be more resilient to any single project risk. In that regard, Management conducted a detailed analysis of typical decline curves, production profiles and success rates of wells, as well as other considerations in the Bone Spring play. Management risked these factors in generating projections of production, cash flow and repayment performance to comply with the requirements of the Agreement.