Our strategy is to accumulate undervalued, high-quality unconventional upstream assets, manage those assets in a capital-disciplined fashion to demonstrate underlying value and then monetise based on the increased value of those assets on behalf of shareholders.
As the cornerstone of this strategy Australis set out to acquire, at an attractive entry cost, a foundational oil asset with Tier 1 economics and scale that provided a clear path of incremental production and reserve growth as oil & gas markets and commodity prices turned positive. Such a foundation asset required an existing production base that would remain profitable at lower oil prices to minimize downside risk. This foundation asset could be supplemented with earlier stage appraisal, development or exploration opportunities which combine significant upside exposure with low entry costs.
Strategy in action
Tuscaloosa Marine Shale – The Foundation Asset
Accumulate oil assets with Tier 1 productivity performance, clear path to growth and existing production….
Australis took advantage of market conditions that existed from 2015 to 2017 to acquire a large ownership position within the proven core of the Tuscaloosa Marine Shale (TMS), one of the last remaining emerging oil shale basins onshore in the USA. Proven oil productivity of wells in the TMS core is on par or better than other USA Tier 1 oil shale basins. Through acquisitions and additional leasing completed in 2016 and 2017 Australis accumulated ~95,000 net acres in the core of the TMS and, as at December 31, 2017, Australis’ independent reserve engineers allocated a mid-case resource recovery estimate of ~145 million barrels of oil to the acreage (including ~29 million barrels of proved reserves). As part of the early transactions, Australis acquired 32 operated wells in the TMS producing net ~1,300 barrels of oil per day at the end of 2017. In addition, through transactions and data sharing agreements, Australis acquired a significant body of TMS technical and operating data created through the collective expenditure of over US$1 billion in legacy operations in the play.
…at a low cost of entry
The average cost to Australis to acquire these initial TMS reserves and resources and existing production through the acquisitions and leasing was less than US$0.30 per barrel of recoverable resource. Additional leasing of undeveloped acreage in the TMS Core continues to add incremental recoverable oil resources allocated to our acreage at a cost of less than US$0.35 per barrel.
Manage assets to demonstrate underlying value
By the end of 2019 Australis had aggregated additional leased acreage in the TMS core, at low cost, and completed a six-well drilling program (IDP) aimed at replicating the top historical well performance in the TMS Core at today’s lower-cost environment, with a view to demonstrating the substantial underlying value of the Australis’s position. Through the IDP, Australis drilled and completed two of the most economic oil wells in the TMS, each having an IP 30 over 1,000 bbls of oil per day at an average cost to drill, complete and tie in of just over US$10.5 million. Following the IDP and associated leasing program, Australis holdings increased to over 115,000 net acres (with over 30% held by production) and, as at December 31, 2019, the independently assessed mid-case recoverable reserves and resources estimate increased to over 200 million barrels of recoverable oil resources, including ~49 million in proved reserves. Average 2019 production from the 38 Australis operated wells grew to ~2,300 barrels of oil per day.
Our strategy in the TMS in the current macroenvironment is focused on the management of our existing production to maximise field cashflows and the maintenance of our leasehold position within the TMS core to ensure retention of an inventory of Tier 1 well locations and the associated level of oil resources for future development. We are also exploring interest from potential industry partners to assist in the funding of activity necessary to demonstrate and realise on the value of the TMS assets, which might include continued development drilling in the right price environment.
The Australis position in the TMS core has a number of advantages that continue to make it increasingly unique and valuable in the US shale industry. It is a large, strategic operated position in a basin with proven Tier 1 oil productivity that can be realised economically at modest oil prices. Management believe it is perhaps the only remaining Tier 1 oil play that has been delineated, appraised but remains effectively undeveloped. The position, with its associated sizable reserves and resources was acquired at a low entry cost. By pursuing the above strategy, Australis believes it will be in the best position to achieve significant value creation for its shareholders as our foundation asset becomes more attractive to industry participants in an environment where the diminishing inventory of Tier 1 oil wells in the USA needs to be replaced.
Portugal – Supplemental upside
Accumulate supplemental assets at an earlier stage of development with significant upside potential:
In September 2015, the Australis group was awarded the exclusive rights to two onshore oil and gas exploration and development areas in Portugal (known as “Concessions”). The Concessions cover approximately 620,000 contiguous acres in the onshore Lusitanian Basin in Portugal and came with significant technical data obtained by prior exploration and development activity, including seismic information. Immediately following their award, the Concessions were independently allocated a mid case contingent resource of over 234 bcf of natural gas.
Manage assets to demonstrate underlying value:
Following a program of re-evaluation and re-processing of seismic and other data in 2016, the independently allocated mid case contingent resources for the Concessions increased by 93% to over 458 bcf of natural gas, as at 31 December 2016. As one of the preconditions to the drilling of an initial appraisal well in the Concessions to further demonstrate their underlying value, an Environmental Impact Assessment (EIA) work scope for each Concession area was established in Q2 2019. Currently all phases of the EIA are being progressed.
In managing our upstream assets, we aim to retain flexibility with respect to the financing, timing and extent of future development of each asset, making use of our:
• operator status - provides direct control over the timing and amount of capital expenditure to be committed;
• existing cash balances and expected cash flows from our existing oil production within the TMS; and
• ability to leverage our unique acreage positions to consider partnership and or financing opportunities at the appropriate time.