Javascript Menu by Deluxe-Menu.com

Delta Oil Project

The Board of Sun Resources NL (“Sun Resources”, “Sun” or “the Company”) is pleased to report that further to the Delta Oil Project acquisition announcement dated 26 August 2011, Sun Resources has completed the acquisition of the fourth tranche of oil and gas leases in the Delta Oil Project, Texas.

Sun Resources now controls a 100% working interest in total of 6,053 acres of leases in the Delta Oil Project, which is situated along trend of the prolific Eagle Ford Shale oil and gas fairway in Texas, USA. Sun will continue to progress towards the acquisition target of 10,000 acres.  This is particularly pleasing in light of scout reports of recent oil and gas drilling success in close vicinity to Sun’s leasing area.

The acquisition of the first 4 tranches of oil and gas leases have been funded through a combination of the loan arrangement with Brad Farrell (also announced on 26 August 2011) that has since been fully repaid; from existing cash reserves, and Sun’s recently completed equity raising of $10.8 million (before costs). Further lease tranches will be purchased from the vendor, subject to completion of due diligence.

Background to the Delta Oil Project

The Board of Sun Resources announced on 26 August 2011 that it had entered into a binding Term Sheet with a Houston based, private oil and gas company (“Vendor”), to acquire up to 10,000 net acres of oil and gas leases (Delta Oil Project), all located within the oil zone of the Eagle Ford Shale trend in Texas, USA. Sun Resources will acquire 100% working interests in all of the leases, each with a minimum 75% net revenue interest, a three year lease term and in most instances, also have a two year option to extend the lease term. Sun Resources will work with the Vendor to acquire up to 10,000 acres however, less than 10,000 acres may ultimately be acquired. The numbers used throughout this section of the Annual Report are based on the acquisition of the full 10,000 acres.

The Delta Oil Project leases are located in the rapidly expanding new ‘Eaglebine’ play within the overall Eagle Ford Shale trend in Houston, Madison, Leon and Robertson Counties, Texas. In this new resource play, horizontal, fracced wells have obtained significant oil production from brittle, sandy units (Woodbine Sands) near the base of the Eagle Ford Shale at relatively shallow depths. Recent horizontal wells within 35 miles of the Delta Oil Project have obtained initial flow rates of 900 to 1,200 barrels of oil per day from multi-staged fracced laterals of 6,000 to 7,000 feet in sandstone units and operators are reporting Estimated Ultimate Recoveries (EUR) of 300,000 to 600,000 barrels of oil per well. These results are comparable to wells in the Eagle Ford Shale oil zone in the well known producing areas. In addition, the Eaglebine target reservoir depths of 5,000 to 8,000 feet are shallower than typical Eagle Ford Shale wells resulting in materially lower well costs which should significantly improve the net present value (NPV) of individual wells.

Early recognition of the potential of the emerging Eaglebine play by the Vendor has enabled Sun Resources to acquire a substantial lease holding at lease costs significantly lower than those in the well known areas of the Eagle Ford Shale oil trend. Utilising information from old vertical wells situated within the boundaries of the leases and recent horizontal well production history from nearby Eaglebine producing wells, independent Houston based petroleum engineering and geological consultants, Ralph E Davis Associates Inc. (Ralph E. Davis) has estimated unrisked net Prospective Resources within the Delta Oil Project of 10 million barrels of oil from one sand unit and potential upside of a further unrisked 10 to 20 million barrels of oil from other sand units within the 450 feet thick target zone. The Ralph E. Davis net Prospective Resource estimate uses the following assumptions:

  • a total of 30 wells spaced at 320 acres (i.e. 30 wells across 10,000 acres);

  • each well with an Initial Production (IP) rate of 700 barrels of oil per day (Bopd);

  • each well with an EUR of 452,000 barrels of oil (bo) per well from one 20 feet thick sand unit located over all of the Delta Oil Project area;

  • oil at US$90 per barrel and gas at US$4 per thousand cubic feet (Mcf) held flat for the well life of 30 years; each well has a productive life of 30 years;

  • capital cost of US$6 million per well; and operating costs of US$10,000 per month per well.

Assuming production of the 10 million barrels of Prospective Resources, Ralph E. Davis estimated the NPV of the Delta Oil Project of US$310 million which equates to:

  • NPV of US$10,333,333 per well; and

  • NPV of US$31 per barrel of oil for 10 million barrels of oil from one 20 feet thick sand unit.

  • Based on 10% discount rate, net of royalties, operating costs but excluding corporate taxes

Background to the Eaglebine Oil Play

Independent American oil company, Petrohawk Energy Corporation (Petrohawk), drilled the first horizontal Eagle Ford Shale (EFS) well in South Texas in 2008 and, since then, hundreds of wells have been successfully drilled and completed across the EFS trend by a growing number of EFS oil and gas producers. On 14 July 2011, BHP Billiton announced an offer to acquire 100% of Petrohawk through an all-cash offer which valued the company at US$15.1 billion (total enterprise value). Early development of the EFS was in the gas-condensate zone where tight carbonate layers were targeted by long horizontal wells with multiple intervals (multi-stage) of hydraulically fractured (fracced) zones along the well bore, producing commercial flows of gas and oil/condensate. The depth range for this zone is traditionally between 10,000 to 14,000 feet. That experience has shown that the EFS can be productive where there are either carbonate-rich or sand-rich intervals in the shale that are brittle enough to be successfully fracced to deliver productive wells. The exploration of the trend has also moved up dip through the volatile oil zone into the ‘black oil’ zone, between 5,000 to 9,000 feet below surface.

The EFS trend has progressively moved north-east toward the East Texas Basin where the EFS transitions into the Woodbine Sands, the reservoir of the giant East Texas Field. The Texas Railroad Commission is now claiming the EFS is one of the top 10 largest oil and gas fields in the world, stretching over 150 miles long and 50 miles wide. The term ‘Eaglebine’ is an acronym for the area of East Texas where the Eagle Ford Shale (‘Eagle’) transitions into the Woodbine Sands (‘bine’). The target is the brittle sandy layers that, in places, produce naturally at low rates from old vertical wells but perform substantially better when the latest EFS horizontal drilling and completion techniques are employed. The oil is generated in the Eagle Ford Shale and the low permeability brittle sandy units interbedded with silts and shales, act as reservoirs when fracced in horizontal wells, in the same way as the low permeability brittle limestone units in the Eagle Ford Shale of other well-known producing areas.

The depth range of the Eaglebine interval in the Delta Oil Project area is 5,000 to 8,000 feet and will target ‘black oil’ production. The major reservoir zone of interest is a 450 feet thick interval of Eaglebine, which includes the Woodbine ‘A’ sand, which now produces from horizontal wells located within 35 miles of the Delta Oil Project. In addition to the Eaglebine play, the Delta Oil Project has five secondary objectives that are known producing horizons in the area including:

  • Pecan Gap Play (4,000 feet);

  • Sub Clarksville Play (5,000 feet);

  • Travis Peak Sandstone Play (10,000 feet);

  • Cotton Valley Sandstone Play (12,000 feet); and

  • Bossier Sandstone Play (16,000 feet).

Recently there have been several major gas discoveries in the deep Bossier sands within close proximity to the Delta Oil Project, and it is possible that the deep Bossier sands are also prospective within the boundaries of the Delta Oil Project.

Acquisition Timing

At the time of writing this report, Sun Resources had secured the 6,053 acres of oil and gas leases in the Delta Oil Project, using loan funds from Sun Resources’ largest shareholder and founder, Dr Bradford Farrell, and part of its existing cash reserves. Sun Resources then secured a second tranche of 1,237 acres after completion of due diligence and a capital raising pursuant to Sun Resources’ ASX Listing Rule 7.1 15% capacity. At the date of publication, the total acres acquired was 1,922 acres.

The balance of up to 10,000 acres will be acquired in additional tranches, subject to due diligence. The conditions precedent, for the acquisition of the Delta Oil Project, are for the benefit of, and may only be waived by Sun Resources. The acquisition of the Delta Oil Project is expected to be completed by end-December 2011.

Acquisition Consideration Shares and Options

Sun Resources will, subject to shareholder approval, and all other regulatory approvals, including from the ASX where necessary, issue to the Vendor or its nominees, the following securities as consideration for Sun Resources’ purchase of the Vendor’s property rights to the Delta Oil Project:

  • up to 58.824 million ordinary shares;

  • up to 50 million options, each having an exercise price of $0.025 and expiry date of 31 March 2014; and

  • up to 320 million performance options in the event that certain successful performance is attained and these hurdles are detailed below:

Performance Options and Delta Oil Project Milestones

  1. up to 75 million convertible performance options in Sun Resources in the event that the Vendor secures a farm-out of the Delta Oil Project to a reputable third party operator (which farm-out will include drilling obligations and be on terms acceptable to Sun Resources, acting reasonably) within 12 months of the purchase of the Tranche 1 leases;

  2. up to 40 million performance options in Sun Resources in the event that the Vendor secures a farm-out of the leases below the 10,000 foot horizon (i.e. Travis Peak or Cotton Valley or Bossier horizon) of the Delta Oil Project to a reputable third party operator (which farm-out will include shooting 3D seismic and/or drilling obligations and be on terms acceptable to Sun Resources, acting reasonably) within 12 months of the purchase of the Tranche 1 leases;

  3. up to 65 million performance options in Sun Resources in the event that Sun Resources acquires at least 5,000 net acres of additional leases (which have been introduced to Sun Resources by the Vendor and which have purchase terms acceptable to Sun Resources, acting reasonably) within 18 months of the purchase of the Tranche 1 leases;

  4. up to 65 million performance options in Sun Resources in the event that Sun Resources attains 2P Reserves (net to Sun Resources) of 10,000,000 barrels of oil and average daily oil production (net to Sun Resources) of 500 barrels of oil per day (from assets introduced to Sun Resources by the Vendor) within 60 months of the purchase of the Tranche 1 leases; and

  5. up to 75 million performance options in Sun Resources in the event that Sun Resources attains 2P Reserves (net to Sun Resources) of 20,000,000 barrels of oil and average daily oil production (net to Sun Resources) of 1,000 barrels of oil per day (from assets introduced to Sun Resources by the Vendor) within 60 months of the purchase of the Tranche 1 leases.

The number of securities to be issued to the Vendor will reduce proportionately to the number of acres acquired by Sun Resources as part of the acquisition of the Delta Oil Project if less than 10,000 acres are acquired. All securities issued to Vendor pursuant to the acquisition of the Delta Oil Project will be escrowed for that period deemed mandatory by ASX. At a minimum, however, the securities will be subject to a voluntary escrow period expiring 12 months after receipt of Sun Resources shareholder approval for the issue of the securities to the Vendor. For a period of 24 months, the Vendor and its associates will grant Sun Resources a right of first refusal over any additional oil and gas projects acquired or sourced by those parties in certain areas within Texas and Louisiana. In addition, the Vendor and its associates will assist Sun Resources in the farm-out of the Delta Oil Project as well as any additional acreage that Sun Resources acquires. The performance shares will provide significant incentive for the Vendor to assist Sun Resources in the achievement of important project milestones, such as securing an appropriate operator and farminee for early drilling of the Delta Oil Project, developing reserves and production at the Delta Oil Project, and expanding Sun Resources’ holdings in the Delta Oil Project and in other areas in the Eagle Ford trend. In addition to the securities issued to the Vendor, a cash payment will be made to the Vendor in respect of each acre acquired from the proceeds of the Capital Raising.

Capital Raising

The Companyundertook a capital raising that secured $10.8 million pursuant to a placement and rights issue to fund the acquisition of the Delta Oil Project and early exploration activities. A maximum of approximately $8 million (from capital raising proceeds, existing cash reserves and the loan from Brad Farrell) will be applied to the settlement of the acquisition of the Delta Oil Project. Demonstrating their support for the transaction and the Delta Oil Project, the principal shareholders of the Vendor committed to subscribe for a minimum of $550,000 in the capital raising.

 

Delta

 

 

Projects