American Patriot makes game changing acquisition

US focused oil and gas group, American Patriot Oil and Gas (ASX: AOW) has executed a Letter of Intent (LOI) to acquire assets owned by US private oil companies, including producing wells, in a deal which will see the company transform to a cash flow positive operation by the end of 2016.

The transaction will include circa 22,300 net acres in Utah in Grand and San Juan Counties and 356 net acres in Texas in Gaines County. The latter is located in the middle of the Permian Basin and adjacent to recent transactions of QEP Resources, Inc. (US$600 million purchase of 9400 net acres in Martin County at a price of US$65,000 per net acre) and SM Energy (US$980 million purchase of Permian acreage at a price of US$39,000 per net acre).

Given the realisation for the assets, which includes gas plant and pipelines with a sunk value of more than $250 million, the realisation price of circa $10 million (based on and around par value of stock issued) suggests AOW has been a beneficiary of the depressed oil and gas industry environment.

However, it is encouraging that the vendors have agreed to a 100% scrip transaction, as this suggests they have confidence in the long-term future of the assets under AOW’s management.

Stock issued to the selling entities will be escrowed for 18 months and they will control 40% of the combined entity. Furthermore, the selling entities will be granted two board seats on AOW.

The acquisition is a game changer for the group as it includes approximately 23 wellbores, a 25 mile pipeline and 90 barrels of oil equivalent per day (boepd) of existing conventional production with the ability to grow production to over 800 boepd by mid-2017. It is also significant that minimal capital expenditure will be required in restarting production.

The midstream assets were part of US$250 million spent by the original operator within the prospect.

This is also a substantial coup for AOW in terms of boosting its resources as it delivers minimum reserves of 3.2 million barrels of oil and 6700 million cubic feet of gas 1P reserves supported by a fully independent reserve report.

The transaction is subject to due diligence and AOW is able to obtain its own independent reserve report from a third-party engineer.

Investors should note that this acquisition is yet to be signed off. So, if considering AOW for your portfolio seek professional financial advice for further information.

The group said it expects the transaction to close in less than 60 days and AOW will seek to list on the US OTC market in the near term with the prospect of also considering a dual listing on a significant US stock exchange in the next 12 months.

This would provide improved access to capital, increased shareholder diversification and a stronger retail following.

Highlighting the significance of these developments, AOW Chief Executive Alexis Clark said, “This is a landmark transaction for American Patriot to acquire Paradox and Permian Basin oil and gas assets fundamentally transforms the company, putting it on the path to becoming a significant US oil production company with substantial midstream strategic assets”.

Regarding the latter, AOW will potentially have the ability to charge third-party providers, enabling it to generate tolling revenue, a form of recurring income that helps to provide earnings stability.

Summing up the financial impact of the transaction, Clark said, “The production will generate immediate cash flow when the transaction is closed and the cash flow from these assets will put AOW on the path to being cash flow positive by the end of 2016”.

He believes management’s reputation will be strengthened by its ability to originate and execute deals such as this, paving the way for further transactions, some of which are already in the pipeline.

On this note, Clark’s goal is to aggressively target other acquisitions that will assist in building a significant producing conventional oil business with production of well over 5000 barrels of oil per day.

While many market pundits are circumspect about entering the oil and gas sector at a time when prices are depressed and volatility remains an issue it is worth noting that even at current oil prices these assets will generate significant cash flow and revenue for AOW, more than covering existing costs.

Fleshing this out, Clark said a large number of wells on the acreage were shut in due to the low oil price, and at minimal cost he expects to be able to bring production back online. There are still over 19 wellbores on the acreage to put back online at low cost.

Providing further appeal is the fact that production is long life with an expected 15 to 20 years production per well remaining. Clark said operating costs in this region are approximately $20 per barrel, providing strong margins at existing prices, with some cushioning should the oil price experience renewed weakness.

As a guide, at current prices, production growth estimates should generate revenues of US$12.6 million per annum. The gas plant and pipeline is currently moving third-party natural gas, providing incremental income of US$80,000 per annum.

However, should there be an uptick in activity in this region, income from tolling would grow substantially.American Patriot Oil and Gas (ASX: AOW) has executed a Letter of Intent (LOI) to acquire assets owned by US private oil companies, including producing wells