J W McLean
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Cladhan (Block 210/29a, UK Northern North Sea): A letter of agreement has been signed by the co-venturers with ADTI for the drilling of the Cladhan appraisal well using the J W McLean semisubmersible rig. Drilling is expected to commence within the period from late May to early July 2010. This well will appraise the potential extension of the original discovery of a stratigraphically trapped, 110ft light oil column made in November 2008. EnCore's current estimate of potential oil volumes ranges from sub commercial through to very significant volumes. The main purpose of the well is to refine this range of volumes by gaining a better understanding of the distribution and thickness of the Upper Jurassic reservoir sands. In the event that the well encounters hydrocarbon bearing reservoirs of reasonable thickness and quality, it is likely that a well testing program and/or sidetrack appraisal drilling will be undertaken. EnCore holds a 16.6 percent interest in the discovery, which is operated by Sterling Resources Ltd. The expected cost of drilling to EnCore is £1.9 million on an untested, non sidetracked basis.
Catcher (Blocks 28/9 and 28/10c, UK Central North Sea): A seabed survey has been completed and this confirmed that the Catcher well can be drilled using a heavy duty jackup rig. Negotiations for the tender of a suitable drilling unit are underway in conjunction with ADTI. Subject to continuing availability and any pre existing operational matters, it is hoped that a drill date of late Q1 / early Q2 2010 can be achieved. Should the Catcher structure be hydrocarbon bearing it is expected that either well testing and/or sidetracking into the immediately adjacent "Dark Roast" (formerly E1) Eocene Tay sand prospect will be undertaken. EnCore holds a 15 percent interest in the Blocks and is Operator. EnCore's share of costs of the well is being carried by Premier Oil (uncapped to cost exposure) and Wintershall (capped).
Premier Oil's interest in Catcher is the subject of a proposed assignment to a potential UK subsidiary of Velo Energy Inc ("Velo"), a company quoted on the TSX Venture Exchange. Completion of this acquisition is, amongst other things, subject to a successful fundraising exercise by Velo. The latest prospectus filed by Velo on December 14, 2009 notes that if the fundraising achieves only the minimum targeted level, then they will not have sufficient funds immediately available for their share of drilling the Catcher well. Any assignments will of course be subject to the necessary Department of Energy and Climate Change ("DECC") regulatory consent and demonstration of adequate financial capacity by the assignee to the existing co-venturers.
Gas Storage (Esmond, Southern Gas Basin): Following the completion of the Helix/RDS third party study of the revised development scheme, we are now close to completing the Senergy Reservoir Simulation study which is expected to confirm the reservoir's suitability for gas injection and withdrawal in both reservoirs. Additionally, the Company has commenced the application to the Crown Estates for a lease and to DECC for one of the newly established Gas Storage licenses. It is expected that the project will be marketed to any interested parties in the first quarter of 2010. Unless and until the project is sold or a third party investor is attracted into the project, the value of this asset remains 'uncertain'. It is EnCore's hope that the asset value will become more certain following a sales process. EnCore will only release further information on the gas storage asset on a material change to the status of the project or following conclusion of the proposed sales process.
Ceres Gas Field and UK and French Onshore Portfolio: These assets formed the basis of the proposed transaction with Egdon Resources plc which was announced on September 23, 2009. This transaction is in progress, with necessary regulatory and independent evaluations taking place and the agreements being finalized. First gas from the Ceres field is now expected at the end of January 2010. Completion of the transaction is expected to occur in early 2010. The transaction will see EnCore as a significant shareholder in Egdon with a maximum 29.9 percent stake in the enlarged Egdon. As was announced at the time, the deal should give greater transparency to the value of these assets and exposes EnCore to a material onshore portfolio within an experienced onshore player. A further announcement with the finalized terms of the transaction will be made upon the signing of the relevant agreements
Ireland (PEL 4/05 and PEL 5/05, Celtic Sea): EnCore has agreed to enter into a collaboration agreement with Valhalla Oil & Gas Limited (“Valhalla”), our joint venture partner in the Schull (EnCore 12.5 percent) and Old Head (EnCore 15 percent) fields. Given the current uncertainty surrounding the operator and the future development plans of our Celtic Sea assets, we believe there is significant merit in closer collaboration between ourselves and Valhalla in ensuring we extract the maximum value for our shareholders from our Celtic Sea assets.
Other Exploration and Appraisal licenses: Work is on-going to attract interested parties in our other UK licenses, either individually or as a whole package. We believe we have a reasonably balanced portfolio containing already discovered hydrocarbons (Tudor Rose, Spaniards, Cobra and an option on a recently awarded Central North Sea license which previously tested hydrocarbons), together with a number of higher risk higher reward wildcat exploration targets.
The Company received the proceeds from the completion of the sale of Breagh during the period since year end, aside from 20 per cent which is being held in an interest bearing escrow account until August 2010. It is expected that our cash reserves at the half year, inclusive of the escrow amount, will be around £42 million. We remain debt free and our commitments going forward (drilling on Cladhan, Catcher and gas storage studies) amount to £2 - 3 million.
Commenting on recent activity, Alan Booth, EnCore’s Chief Executive Officer said, "At our recent AGM presentation we outlined our strategy of focusing our future capital only on those assets that, if successful, should make a material difference to our asset values in the near term. We are also seeking to give greater transparency to the value of the remaining asset base, and our proposed transaction with Egdon is being used as a model for further asset rationalizations. Whilst we are all too aware that the market refuses to give any value for our asset base, we are confident that our strategy to make that value easier to assess over the next 6-8 months should stand us in good stead to return this value to shareholders following the Catcher and Cladhan drilling program and the marketing of our Gas Storage project. Unusually for a company in the small cap E&P sector, we remain cash rich, debt free and with minimal drilling commitments. Our future activity levels are, on the whole, discretionary.
"The recent period of capital constraint and sharp reduction in activity levels in the UKCS has, to a certain extent, masked the lack of capital in the small cap sector. Only now it is becoming apparent, as activity levels start to recover driven by better capitalzed companies and the need to fulfil outstanding drilling obligations, that there is a significant shortage of capital for many smaller UK E&P players.
"Although our strategy remains unchanged, it would be remiss of us not to continue to carefully evaluate and review numerous investment and acquisition opportunities where we can see that our uncommitted capital resources and/or our asset base may be leveraged in a sector where outstanding obligations and commitments often exceed the owners’ ability to fund or develop them further."
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