CEO Q&A with Stephen Williams at Reabold Resources PLC (LON:RBD)

Reabold Resources PLC (LON:RBD) Co Chief Executive Officer Stephen Williams caught up with DirectorsTalk for an exclusive interview to discuss their current operations at West Brentwood & Monroe Swell, the economics associated with California and the progress of their other projects.


Q1: Your RNS says that the VG-4 well is producing at a constrained rate, can you explain for us what’s meant by that?

A1: So, the wells at West Brentwood contain some gas associated with the oil, now predominantly oil wells there is gas associated with them as well and we saw that at VG-3 where we had what’s predominantly an oil well with some associated gas.

VG-3 was the first well we drilled last year on the asset and with VG-3, the gas was of a low enough quantity that we essentially ignore it, put it onto production as an oil well and flare the gas.
VG-4, when we tested it, was really a surprise to everybody in terms of just how well that tested and how high the flow rate was. Oil drilling is an uncertain business, you get surprises good and bad and we’re delighted that in this case it was very much a surprise at the highest end of expectations.

So, we’ve got this phenomenal flow rate out of VG-4, again predominantly oil but that high flowrate meant that there was enough gas that it became an issue in terms of just putting the oil on to production and flaring the gas from an environment and regulatory perspective.

Also, from an economic perspective, it’s simply too much gas for us to want to give away and there’s a significant amount of value in that gas. Gas is very valuable in California, much higher gas prices on the whole than the rest of the US so we want to put that gas into production.

So, that’s all very positive, the only issue is in terms of timeframe, it takes a little while to get the gas pipeline connections tied in and you have to deal with the pipeline owner, come up with an agreement and then you’ve got to physically connect it. It’s not a particularly big job, it just takes a little bit of time to get through all of the admin associated with that.

So, what we decided to do whilst we were waiting for that was to put the well onto production at a constrained rate and that means that the gas content is sufficiently low that we’re ok to do that and produce the oil and sell the oil. We’re deliberately producing it at a target range of about 150-250 barrels of oil per day and we’ve been doing that now for a couple of days, that’s looking very good and that’s been very successful.

That allows us to bring cash flow in more quickly, oil prices are very good at the moment so we want to be selling this oil into this market. That cash is what’s going to allow us to drill more wells in this California business so we wanted that cash flow to come in as quickly as possible.

So, that’s the decision that we’ve made, in the meantime we’re still getting the gas pipeline connection completed and at that point, we will be able to go on to full production.


Q2: So, what can we expect to see from VG-4 going forwards?

A2: We reported the test rates when we tested a little while ago. Very briefly, this did test at 1,000 barrels a day, we couldn’t keep flowing at that rate, the operators had to choke that back straight away. As I said, that was far higher volume than what was expected and what other wells have produced in this area but it’s in the more 500 barrels a day mark, was around about where it tested for 24 hours plus, as I say, a little bit of gas.

So, we’ll wait and see what the stabilised rate is but that’s more the sort of flow rate that we expect when we take the choke out so that’s what we’re aiming to get to as soon as possible once the gas is tied in.

The other thing that’s worth noting is that we’re also very pleased with the minimal amount of water coming out of this well so these wells in California we generally expect a mix of oil and water which is absolutely fine. Disposing of that water, there is the largest element of operating cost, now the operating cost is still extremely low with these wells, if you don’t produce any water with them it goes down even further.

So, we’re very pleased that so far VG-4 is producing as expected, given the choke back and the nature of the operation and we’re not seeing any water. So, we’re hoping to have a much higher rate than that once the gas is tied in, the additional gas sales as well and an extremely low operating cost.


Q3: Can you talk a little about the economics associated with production in California?

A3: Following on from what I’ve just said really, the reason why we like this business in large part is because when you look at the Reabold California business compared to other things investors might see in the market, the number of barrels doesn’t always look particularly high. You have to remember and put into context the value per barrel you get here and we don’t see much in the world that compares, in terms of economics, on a per barrel basis to what we can see in California.

That’s the combination of a good sales price, a very low OpEx as I touched on before, and low CapEx as well so low drilling costs and very low cost of completion and tying the infrastructure together where you need to do that. So, we can’t quantify the economics precisely until we’ve put the wells onto production and we can see exactly what the water cut is and exactly what the resulting netbacks are.

I’m confident that investors will be very impressed with the economics that we get out of these wells, again, particularly when you layer the low CapEx element on. What these wells do is pay back extremely quickly and that’s very important for the business going forward, as I say, the cash generated out of these assets can therefore fund additional drilling.


Q4: What next for Reabold California?

A4: We’ve achieved a lot in a relatively limited amount of time I think in California so Reabold Resources a whole has achieved a lot. We’ve drilled six wells in 6 months, four of those have been in the Reabold California business, all four have been successful and one of the great things about this business is the running room that we’ve got on the existing assets that we’ve picked up in California.

So, first order of business is to get all four of those wells onto production and, as I say, that will also allow us to communicate more accurately to the market what they’re actually worth to the company and we’re confident in that being a very impressive number then we’re going to drill additional wells. Particularly at Monroe Swell, the beauty of that field has always been the running room associated with that so when we picked up the package of assets in California, West Brentwood and Monroe Swell had slightly different characteristics.

Monroe Swell was always about the running room, ultimately a much bigger asset that was going to require a lot of wells to fully exploit it. West Brentwood we liked as we thought that was the best place to put the first well because we were confident that we’d get a very high performing well which we did in VG-3 and then again, even better in VG-4. There is running room associated with both assets, we have additional drilling locations but we’re confident that we will exploit additional drilling locations at West Brentwood and there are certainly many more drilling locations at Monroe Swell.

Another thing that’s really important here, I touched on it briefly before, because these are low CapEx. they’re very fast pay back. We can replicate the success that we’ve had so far in California by drilling the same number of wells again but this time funded by cash flow out of California, or at least in part with cash flow from California, as opposed to simply from the capital we raise from the equity market.

Crucial to thing about in terms of that capital to point as well, is that we have to pay 100% for our 50% share in these assets so far because that was the earning agreement, we had with the partner Sunset. Having drilled the four wells, we’re now fully earned in at West Brentwood and Monroe Swell so going forward, we’ll only be paying 50% of the capital towards these wells in the 50/50 share with Sunset. So, we can replicate what we’ve done at half the cost it’s taken us to get this far so.

We have limited capital requirements, lots of cash to be generated out of the wells so far, more wells to layer on to that, lots of running room so we’re really excited about the potential for cash flow generation out of Reabold California.

On top of all of that, we shouldn’t forget we’ve got Grizzly Island to drill as well. Grizzly Island is different, it is a slightly higher risk well, Grizzly Island is not an infill well into a previously produced field, it is an appraising discovery but it is not a previously produced field.

So, there’s more uncertainty around it but it’s a different kind of asset in that in the event of success, I think there’s more immediate big bang value creation out of that one. We can’t say this for certain but there’s reason to believe there would be good potential for early monetisation of Grizzly Island, it’s an asset that probably has pretty impressive strategic value in California.


Q5: What else is going on in Reabold Resources that investors should be aware of at the moment?

A5: As usual, we’re pretty busy. So, we’ve got the extremely exciting project in Yorkshire where we are invested in Rathlin Energy, which is appraising its west Newton discovery from 2014, that well will spud very shortly and we have an economic interest, essentially a 25% of that project.

It’s a low-risk gas appraisal which, assuming success, will be one of the largest onshore gas developments that we’ve seen in the country in an extremely important location, a strategic location for gas within the context of the UK. So, we’re extremely excited about drilling that one.

There’s also an oil exploration leg within that as well and that’s the real big bang asset, now that is a higher risk that exploration, maybe not something that falls in our model because it’s a higher risk well. It’s always fantastic to get the opportunity to test the exploration target with the same well that you’re drilling the appraisal well with anyway so for minimal additional cost we get to test something with absolutely incredible amount of upside. So, that’s an extremely important well, very excited about it and that will spud very shortly.

We’ve also got our well in Romania which is due to go down in June so from a sub-surface perspective, this is probably the lowest risk thing we ever invested in, it’s re-drilling a historic gas discovery that was never put into production so we’re confident about that. The gas market in Romania is very robust at the moment so the economics look really really good and there’s a lot of running room associated with the license we’ve got via our holding in Danube Petroleum in Romania.

So, this quarter, in addition to what’s going on in California, we have two different projects that we haven’t drilled yet, both drilling so we’ve got a lot of exciting activity coming up within the company.

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