Brookside Energy Ltd (ASX:BRK) is implementing measures to allow the business to adapt to the recent slowdown in global economic activity which is impacting the demand for oil, resulting in lower oil prices.
While the company’s land and leasing focused business model provides some protection from volatility, the scale and duration of recent developments remains uncertain.
Brookside, together with its partner and manager of US operations, Black Mesa Energy, have moved to adopt new measures focused on the following key areas:
- Reducing general and administration expenses and simplifying the business structure;
- Adjusting the company’s land and leasing strategy in the SWISH AOI to preserve the core acreage position;
- Harvesting important cash flow; and
- Preparing to take advantage of opportunities for growth.
The company has reduced corporate support costs and directors’ fees, resulting in a 30% saving in general and administration expenses.
Immediate reductions to corporate support costs and directors’ fees have been implemented resulting in a 30% saving in general and administration expenses for Brookside.
This includes a reduction of the managing directors’ fees from A$180,000 per annum to A$120,000 per annum effective March 1, 2020, which will be reviewed on July 1, 2020.
The team at Black Mesa have also reduced the number of fulltime employees, utilising contractors as required, and reduced the reliance on external suppliers for accounting and other support functions.
The corporate structure of Black Mesa has been simplified via the redemption by mutual agreement of the Tulsa Equity Group’s shares in Black Mesa, resulting in Brookside increasing its equity in Black Mesa from 17.2% to 28.7%.
This has the net effect of reducing Black Mesa’s working interest back-in after pay-out for Brookside from 25% to 17.8%.
The balance of the Tulsa Equity Group's shares have been assigned to the executive management of Black Mesa (Messrs Francis, Girouard and Schumer) on a pro-rata basis.
Brookside has also appointed two new members to the board of Black Mesa and has appointed David Prentice as chairman and chief executive officer of Black Mesa.
Black Mesa’s board members do not receive fees for their services.
Storing unproduced oil and gas
The recent fall of the price of oil to the lowest level in almost 20 years has resulted in a dramatic decrease in capital being allocated to the drilling of new wells across the US, including plays in the Anadarko Basin.
While the breakeven pricing for the company’s flagship Sycamore horizontal wells produces an attractive rate of return at US$40 per barrel, the company believes that the current pricing environment does not support a decision to move forward with development and risk delivering ‘flush production’ into a low commodity price environment - thereby extending time to pay-out and negatively impacting future returns.
Instead, Brookside plans to store the unproduced oil and gas in the reservoir to be extracted later and delivered into higher oil and gas prices.
SWISH AOI acreage
The company has implemented a lease renewal and extension program for the SWISH AOI acreage which will see it continue with high-grading and trading activities with a focus on securing the future of core drilling spacing units (DSUs).
This program is designed to enable Brookside to maintain the dominant position in these key DSUs and extend leases as required so that it is set to commence operations when the pricing environment improves.
The renewal and extension program is being funded from existing working capital.
Brookside and Black Mesa teams are working on strategies aimed at capitalising on the current period of dramatically weaker prices and the opportunities that may emerge within the SWISH AOI.
The company believes this period presents a unique opportunity to further leverage its experience, expertise and the large amount of data collected (including production history, reservoir characteristics, geology and importantly land and title work) in the SWISH AOI and Anadarko Basin generally.
It said the goal was to continue to grow the asset base at this low point in the cycle.
Existing cash flow
As part of Brookside’s ‘Real Estate Development’ approach to its oil and gas investments, the company is taking the opportunity to harvest some cash flow from low-risk wells that have been drilled within its acreage position.
Brookside currently has an interest in 11 producing wells that are producing to sales and/or set to commence production.
The company’s share of revenue from oil and gas sales for the first quarter of 2020 averaged approximately US$25,000 per month.
Lease operating expenses amount to around US$7.50 per barrel of oil equivalent for this production stream, and the company is confident this provides a solid operating margin even at today’s spot prices.