Molopo Energy Limited (ASX: MPO) today announces a message to shareholders along with the monthly operational and corporate update on our activities and progress achieved through December.
Message to Shareholders
Tim Granger, CEO and Managing Director
Dear fellow shareholders:
In light of recent market activity, and questions regarding Molopo's drilling plans, I wanted to take this opportunity to share my views and provide context for you. I am disappointed that Molopo's year end exit rate will not meet our initial forecast, and am frustrated with lower than anticipated initial production rates from our drilling in Fiesta. The market's reaction mirrors this sentiment as our shares have traded to a price that is around the value of our projected cash balance per share, which excludes any value for our production, land base and large resource potential. However, I firmly believe that the true value of Molopo's high quality assets is yet to be realized. Through prudent investment in our assets along with the resultant production, cash flow and reserves growth, this value will be unlocked.
As I mentioned in my recent AGM presentation, the Wolfcamp is an emerging play that is still in its infancy, with only 2-3 years of exploration and development behind it. However, it is a vast resource, and Molopo is able to offer shareholders exposure to that resource. There is no question that our assets in Barnhart and Fiesta have producible hydrocarbons, which mitigates one of the most significant risks inherent in oil and gas exploration and development - whether a company will find oil or gas.
Despite the presence of producible hydrocarbons, there were many unknowns at the time we set our 2012 calendar year forecasts because valid well data from drilling on our acreage were not yet available (referred to as 'type curves'). Our 2,100 boe/d target exit rate was based on type curves we could obtain from other, third party analogous wells within the Wolfcamp. In Fiesta, we adjusted the available type curves downward to account for shallower depth and lower pressure in that part of the reservoir. However, until we drilled in Fiesta, we could not accurately predict how those wells would produce. Ultimately, the type curves used in forecasting were not reflective of the actual well data produced from drilling on our land, including the rate the wells would decline from their initial production levels. Since we did not have compatible type curves when making our original forecasts, it was expected that wells would come on production at higher rates, and then decline more slowly than what was actually observed.
Four of the six wells drilled in the second half of 2012 came on production through the last quarter, and continued fluctuations in volumes contributed to uncertainty about where the wells would ultimately stabilize through year end. During November, Molopo anticipated that production from our last two wells in the budget, Baggett 54-1H and Barnhart 24-2H, would be on production by the end of the year, enabling the Company to meet (or come very close to) its forecast 2,100 boe/d exit rate.
However, the Barnhart 24-2H well was drilled and completed too late in 2012 to contribute production until early 2013, which immediately reduced our exit rate by up to 600 boe/d. Further, the Baggett 54-1H well reached a peak production level of 431 boe/d which was lower than expected, and with declines that well contributed approximately 240 boe/d through the last week of December. The combined impact of these two wells coupled with the lower contributions from existing wells has resulted in Molopo's revised forecast exit wellhead production rate of approximately 1,000 boe/d.
We have gained significant data and learning from our drilling through 2012 and now have valid well data and type curves from our acreage. Although we are still determining the estimated ultimate recovery (EUR) from our wells, given our access to this large oil resource, we are confident that our assets in the Wolfcamp can be developed economically with cost structure adjustments.
The key to successful economic development depends on our ability to grow production, reserves and cash flow, ultimately generating positive value for the organisation. This growth is highly dependent on costs and commodity prices. In light of the current commodity price environment, we intend on delivering a capital program for 2013 with reduced overall program costs which can generate growth in shareholder value. With cost reductions and a drilling program targeting areas offering the highest potential, we believe that positive returns can be generated for shareholders.
In summary, we greatly appreciate the support of our shareholders and look forward to continued communications with you as we progress with the 2013 budget and future drilling strategy.
CEO & Managing Director
Molopo Energy Limited
December Operational Update
Molopo's first Bench B well drilled in Fiesta, Baggett 54-1H has achieved an initial 30 day production rate (IP30) of 238 boe/d, consisting of 59 bbl/d of oil, 79 bbl/d of natural gas liquids and 600 mcf/d of natural gas;