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American dream: Caza Oil & Gas, Inc.

Friday, August 15, 2008

When it comes to getting his own way John McGoldrick hasn’t shied away from a spot of controversy during his time in the oil and gas industry. These days the jovial Scot, who spent most of his formative years in Glasgow’s infamous Red Road flats, takes a lower-profile approach to company building, but his determination to succeed is still very much in evidence.

A key figure since the early days of Enterprise Oil plc, McGoldrick has worked in the North Sea and Ireland but was in the US when the group was bought by Shell in 2002. But rather than catching a flight back home, he went on to begin building a new US operation. The result was exploration and production company Caza Oil & Gas Inc, which joined AIM in December 2007.

With a string of production wells already bringing in cash, Caza is now eyeing bigger plays with a view to ramping up value at a blistering pace. With McGoldrick’s networking abilities written in industry folklore, the golf courses and bars around Houston, Texas, have seen nothing like this before.

False start

The thinking behind Caza is based on access to cheap seismic data. While at Enterprise, McGoldrick had joined forces with Mike Ford at Falcon Bay – now Caza’s CEO – along with Ocean Energy and Marathon Oil. Together they were scouting for deep, material features across southern US states. With 3D seismic costing in the region of $4m for 100 square miles, Ford had struck a clever deal with the specialist seismic contractors to get cheaper access to the data.

Shell’s takeover of Enterprise triggered a break-up of the exploration activities, but that didn’t put off McGoldrick and Ford. The new team reinvented itself and did deals to acquire 8,000 square miles of seismic data, giving it what McGoldrick reckons is probably the biggest database of seismic of just about any independent.

“The wheels came off the wagon of the original grand plan,” McGoldrick says. “The three big companies were convinced that the material prospects were in this region, and they still are. And most of those prospects still haven’t been drilled.

“I’ve been out there since 2000. It’s a great place because you can get returns very, very quickly. Oil and gas is the lifeblood of Texas and Louisiana so it’s relatively easy to drill because everybody knows what’s involved and knows what happens, there’s lots of infrastructure.”

The new operation did various deals as a partnership and drilled several wells. At the time McGoldrick says the company was getting about $2 per MCF (1,000 cubic feet) for gas but in the space of less than five years the price of gas has risen and Caza is now getting $10 per MCF.

He points to one of the company’s existing wells which sits just off Highway 59, half an hour from Houston. “This wellhead is doing about 4m cubic feet per day. This one cost us between $10m and $12m to put down but typically we can drill wells in this area for about $8m. So you can get really fast payback. This well came on at 5 MCF per day and we choked it back to 4 MCF per day, and it’ll probably stay at that level for about 18 months and then it will start a decline, but it will last about 10 or 12 years.

“We’re currently drilling a well behind it too. The thing that’s important is that when we drilled this well we set ourselves up with a collection of development locations. It’s the same sand close by so you know there are reservoirs between the two, so we put a well in between. Here there are four development well locations based on one exploration well. So that’s how we do things.”

This year Caza has drilled six wells of which five are discoveries. Those five discoveries have set up a number of development well locations, which McGoldrick says de-risks the entire operation.

“That’s one of the keys for us – de-risking,” he says. “We take on exploration risk but only if we can then de-risk by getting other development locations. The other great thing versus offshore is that as soon as we do that we can quickly tie it in to the main trunk line that takes that gas away to market. The biggest hassle for us is paperwork”

Big deep targets

With the 3D seismic data on hand and the infrastructure easily accessible, McGoldrick says Caza is now pushing hard on leasing up and drilling many more wells underneath the Louisiana dataset.

“We’re looking for big deep targets but often we’ll see shallow targets. Now if you lease the land for the deep stuff you’ll get the shallow stuff as well normally. So if we see these things we’ll drill them because they’re very, very cash generative but you can’t really build a company on them because they’re not that big scale-wise, but they’re great little earners.

“We’ve got a tremendous advantage over others,” he says. “For instance underneath the Louisiana dataset there are over 600 producing fields and less than half of them have seen any drilling since the 3D was shot, so there is just enormous potential. 3D seismic is very, very powerful here; I can show you examples where you can see things that have just been sitting there. Less than 2% of the wells in Louisiana have gone deeper than 15,000 feet.

“There are thousands of wells in Louisiana and Texas but the majority were drilled using no seismic, back in the 30s, 40s and 50s. 2D seismic came along but it will only shine a light down to around 12,000 feet and below that you can see things but not that well. 3D seismic is like moving the aerial on the TV set – suddenly you get the picture.”

In the US, seismic data is held on non-exclusive licences from the seismic contractors, who can sell the data time and time again. Caza typically takes on a 30 year licence from a contractor, works up the data and begins land negotiations.

As opposed to the UK, the majority of the land is held by private individuals or companies, who may or may not own the mineral rights. Typically the holder of the mineral rights will get between an eighth and a quarter royalty on oil and gas production. McGoldrick concedes that this can get very complicated and has put in place a strong land team to deal with the technicalities.

Company makers

“What we’re trying to do is get a nice portfolio of projects, some oil some gas,” McGoldrick says. “Most seismic things tend to be gas and the reason for that is that gas shows up very well with 3D seismic so it reduces the risk. But we do have oil as well.

“So if you look at what we’ve got, I’d say we are starting to expose ourselves to what I’d call the “company makers”. These are what will really drive the share price and the other, smaller prospects are really for cash generation.

One of these company makers could be what McGoldrick describes as Caza’s “big, big ticket” prospect at Las Animas in Duval County, Texas.

Located around seven miles away from Shell’s Rosita field, which will produce about 400 billion cubic feet (BCF) of gas, Las Animas actually has the edge size-wise.

“The structure of the sands and the quality of the seismic is about the same,” he says. “We know Las Animas is very similar in character because that’s how we found it - we used seismic attribution techniques where we look at fields and tell our dataset to go and find the same thing. It’ll come back with a bunch of candidates but some of them will be really nice – and this one was a really nice one, we reckon about 400 BCF.

“We control anything between 25% and 100% of the prospect – at 5,000 acres it’s a massive structure and there is a lot of land and different leases to deal with, but I think our weighted average on this is about 35%. That works out about $360 - £400 million net to the company.

“We’re fine tuning some of the lease positions but the big debate is whether we drill a straight hole or whether we come round the back of the fault. It’s a typical oil business debate but we should start drilling at the beginning of December.”

Caza’s ability to hold bigger positions on the likes of the Las Animas prospect come from a near doubling of its production from smaller sites during the last year. “The overall affect of this is that you can get really quick increases in production flow and cash flow,” McGoldrick says.

“Our initial IPO was failed in a sense that we didn’t raise the amount of money that we needed or wanted because the market was so awful in December. The last fundraising was almost like IPO part two, and I would say now we’re starting to accelerate. To date we have raised around $57 million.

“Like any small business when we started off we were cash constrained so we took smaller positions. What we’re doing now is taking bigger and bigger positions and we are looking for things that are more and more material. I’m looking at ways to scale up the company and do it fast.”

Ben Hobson, SmallCapNews.co.uk