SMALL CAP IDEA: What Einstein can tell us about changes in NTOG’s oil portfolio

Albert Einstein described compound interest as the eighth wonder of the world.

For the German physicist, the ability to grow something small into something substantial through reinvestment was nothing short of a minor miracle.

Keep this in mind as we discuss Nostra Terra Oil & Gas, or NTOG for short.

Under the leadership of Paul Welch, the Texas-focused group plans to make incremental improvements to its portfolio that will quickly begin to reveal an economic impact that could make a mockery of its “micro” market cap.

So where to start? NTOG The pre-Welch administration had a well-known checkered history, but it left an unwanted legacy: $4.2 million in debt.

While this is in keeping with the bigger picture, the new administration has been able to cut expenses to repay this line of credit and still generate modest cash.

The next stage is growth, funded by £462,000 of new investment (although this amount was raised at a deep discount).

Laser focused

The focus now will be on Pine Mills in East Texas, an area that has been in production since 1949 and targets the relatively shallow Woodbine horizon.

Currently, its operations produce an average of 75 barrels per day (BOPD) from nine wells with four injectors, which are known as long-life, low-decline wells.

The £462,000 raised will initially enable it to put an additional 50 barrels per day into operation by carrying out some basic clean-up work on the site that was previously unavailable.

Specifically, the first six of the eleven inactive wells that require reconditioning will be reactivated.

‘Some of them are simple, like when a pump or gearbox breaks down and we have to replace it. That’s the low end.

‘And then at the top end we have a well that has a bad casing,’ Welch explains.

Small changes and big benefits?

At the same time, the company is targeting a waterflood operation “which is essentially combining extractions with injections,” Welch says.

This basic work could add another 30 barrels per day or more to production.

“We’re solving problems at very low incremental costs by simply moving the water where it should go,” says NTOG’s CEO.

Back to our topic: There is a cumulative aspect to doing very basic work that starts to add up to financial gains.

Analysts estimate that NTOG’s netback (net effective margin on production) will be in the range of $39 per barrel (at an oil price of $75).

A rough calculation suggests that these seemingly small changes will likely have a large impact, raising the net operating, general and administrative cash flow from the lease from around US$200,000 per year to around US$1.2 million (assuming additional daily production of around 80-85 barrels per day).

Fouke’s chance

The next step in the process will be the introduction of production from the Fouke-3 well, in which NTOG has a 33% operating interest.

If, as expected, this opportunity occurs at the permitted rate of around 124 barrels per day, then annualized cash flow increases to around an additional $1 million.

Following an agreement reached with its partner Cyprus Production, NTOG is planning an infill drilling program based on modern 3D data mapping of the area.

It is focusing on so-called “uphole” pay zones with an eye toward a horizon called “Subclarksville.”

That said, all four identified fields have oil potential.

By drilling directly against the fault that traps the oil, it hopes to tap several new wells with initial flow rates exceeding 100 barrels per day.

Filling plans

The company’s June presentation (LINK) talks about potentially three “fill-in” opportunities that could add up to more than 300 barrels per day, potentially leading to another major shift in the business’ cash flows.

Always remember, of course, that these wells will go into decline, so at some point the emphasis will be on further development.

The focus on Pine Mills, Fouke and Fouke-like opportunities has driven a cleanup of NTOG’s portfolio.

It has sold two assets in West Texas and the remaining property is subject to an auction process.

At the same time, it is negotiating with a private buyer to complete its divestment of a property in South Texas.

Taking stock

So how do we evaluate this opportunity from the perspective of a potential investor?

Well, it’s worth remembering that the plan laid out by Welch and his team is a blueprint for success (and profitability), not a guarantee of it.

In other words, this is a risk-reward scenario, not a risk-free bet.

However, Welch and the NTOG team have done a lot to minimize potential drawbacks.

The advantage, of course, is that the marginal gains described above translate into a financially significant payback.

The strategy has gained backing from outsiders, including small-cap guru Gervaise Williams, director of Premier Miton, who was persuaded to follow their money in the latest funding round.

Williams, as we all know, has a good eye for deals.

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