8 Sep 2010 07:00
Nighthawk Energy plc
("Nighthawk" or the "Company")
Operations Update
Nighthawk, the US focused hydrocarbon development and production company (Tickers: AIM: HAWK and OTCQX: NHEGY), is pleased to provide an operational update in respect of the Jolly Ranch and Revere projects.
Highlights
·; Gross production at record highs; in excess of 8,200 barrels of oil equivalent in August 2010 with oil comprising 65%
·; Nighthawk revenues increase from US$497,876 (year ended 30 June 2009) to in excess of US$2 million (2010)
·; Total Group assets increase from US$81.3 million (2009) to approximately US$114 million (2010)
Jolly Ranch
·; Core strategy continues to be to establish the optimum completion techniques to unlock the value in the project
·; Craig 16-32 currently producing in excess of 70 bopd
·; Craig 4-4 exhibiting favourable decline curve
·; Divestment process through Macquarie Tristone continues to attract interested parties
·; Potential for Niobrara shale being examined
Revere
·; Net 2P reserves (6,000 acres) at Xenia of 1.4 bcf with further upside
·; 167 wells in production as of 31 July 2010
·; A further 118 wells awaiting completion
JOLLY RANCH
The Company holds a 50% interest in the 410,000-acre project, located in Lincoln, Elbert and Washington Counties, Colorado. Running Foxes Petroleum Inc. ("Running Foxes"), the operator of the project, holds the remaining 50% interest.
Jolly Ranch lies within the south east flank of the Denver Basin where significant hydrocarbons are generated from Pennsylvanian sandstones and carbonates. The source of the produced hydrocarbons is the black organic shales that are generally interbedded with the carbonates. The shales at Jolly Ranch are within the oil generation window and considerable work has been executed, demonstrating the continuity of the reservoir and source rock throughout the project area currently being evaluated.
The Jolly Ranch project has established encouraging initial results and test production from both conventional and non-conventional oil formations.
Oil produced from the high TOC (Total Organic Carbon) source rocks and shales at Jolly Ranch is of high quality ranging from 34 API - 41 API.
The current work programme has focused on completing and bringing on to production the recently drilled Craig 16-32, Craig 6-4 and John Craig 7-2 wells and completing additional horizons on some of the previously drilled wells as our accumulated knowledge in respect of the Atoka and Cherokee shale horizons grows. The primary objective is to establish the optimum completion techniques to continue to increase the value in the project.
There are currently 19 wells of 7,500-8,000 feet on the project, comprising 16 production wells, two salt water disposal wells and one well acquired from the State. Fifteen of the production wells have been drilled on a core 50,000 acre area, all of which have encountered multiple pay horizons. The most recently drilled well, the John Craig 7-2, was a wildcat well drilled 17 kilometres to the north west of the core area which confirmed the presence of identical shale bodies to those in the Craig Ranch core area.
The current status of the wells is as follows
| John Craig 7-2 | Testing |
| Craig 4-4 | Test Production |
| Craig 4-33 | Test Production |
| Craig 6-4 | Testing |
| Craig 6-4 SWD | Waiting on completion |
| Craig 7-34 | Awaiting recompletion |
| Craig 8-1 | Awaiting recompletion |
| Craig 10-28 | Testing |
| Craig 12-28 | Testing |
| Craig 12-33 | Test Production |
| Craig 15-32H | Test Production |
| Craig 15-34 | Awaiting recompletion |
| Craig 16-32 | Test Production |
| Jolly Ranch 2-1 | Awaiting recompletion |
| Jolly Ranch 4-13 | Awaiting recompletion |
| Jolly Ranch 10-1 SWD | Salt water disposal |
| Jolly Ranch 10-5 | Test Production |
| Jolly Ranch 16-1 | Awaiting recompletion |
| Williams 10-27 | Awaiting recompletion |
As previously reported the latest three well programme comprising the Craig 16-32, Craig 6-4 and John Craig 7-2 has been completed and completion and production testing operations are ongoing. Further details are set out below.
Craig 16-32
The Craig 16-32 well was drilled to 6,947 feet Total Depth and to date has been acidised only in the Cherokee formation. Initial production from the zone in mid-August was approximately 87 bopd and the well is currently producing a consistent 70 barrels per day of high quality oil.
Craig 6-4
The Craig 6-4 well was drilled to 7,315 feet Total Depth and was an offset well to the previously drilled 6-4 salt water disposal well, which encountered excellent hydrocarbon horizons during drilling. The 6-4 well was sand fracced in the Cherokee and Atoka formations and was placed on pump in early August 2010. Production has fluctuated from 4 to 18 barrels per day to date due to the impact of sand ingress around the well bore. The plan is now to mitigate this commonly encountered issue and increase production rates.
John Craig 7-2
The third well, the John Craig 7-2, was drilled to 8,400 feet Total Depth targeting a structural closure defined by the recent 3-D seismic survey over the project area near Limon.
Target depth was reached and significant hydrocarbons were encountered during drilling, including in the Marmaton, Morrow, Cherokee and Atoka formations. Production casing has been run and the well has been acid fracced for initial test production from the co-mingled Atoka and Cherokee formations. The well will be placed on pump during September.
The lower Morrow formation was tested and flowed gas and whilst this provides additional upside revenue potential in the future, it is not the primary focus at this stage as the major value driver at the Jolly Ranch project is oil.
Williams 10-27
Recent activity has also focused on assessing and planning the recompletion of the Williams 10-27 well, which was acquired at the request of the State of Colorado in February 2009 at no cost to the Nighthawk/Running Foxes partnership.
This well, part of the Manassas oilfield which was discovered in 1976 by Petro Lewis, is located on the Jolly Ranch acreage approximately four miles south from the core area and was initially completed in a sandstone within the Atoka formation between 7,296 to 7,304 feet. The well produced oil and in excess of 25 million cubic feet of gas over a ten month period.
Evaluation of the Williams 10-27 well has been completed and the operator plans to test the Atoka, Cherokee and Marmaton formations. The Marmaton B horizon is 15 feet thick with fair/good permeability and excellent porosity of 22%.
In addition, substantial potential exists in the Morrow sands as a secondary objective. Several Morrow cut and fill channels have been interpreted from 3-D seismic.
West of the Williams 10-27 well area an extensive sinuous channel has been identified and a positive test here would expand substantially the Morrow play in the area.
Recent Well Logs
The following table summarises the results of the open hole log analysis undertaken on the latest wells of the primary Cherokee and Atoka shale objectives. The table shows the gross oil in place calculations, at reservoir conditions over a 160-acre area, as determined by the operator using JLog Petrophysical software.
| Well | Depth of Interval (sub-surface, feet) | Net Pay (feet) | Gross Oil In Place bbl/160 acre area | |||
| Cherokee | Atoka | Cherokee | Atoka | Cherokee | Atoka | |
| John Craig 7-2 | 7,298-7,476 | 7,476-7,812 | 34.5 | 86.0 | 6,677,992 | 7,935,304 |
| Craig 6-4 | 6,497-6,742 | 6,742-7,164 | 37 | 18 | 5,044,964 | 1,459,952 |
| Craig 16-32 | 6,516-6,766 | 6,766-6,900 | 5.5 | 5.5 | 529,984 | 730,884 |
| Williams 10-27 | 6,788-7,066 | 7,066-7,549 | 30.5 | 9.5 | 5,512,284 | 1,262,312 |
The log interpretation for the Craig 6-4 is interpolated from the log analysis of the Craig 6-4 SWD that was logged following drilling and which subsequently led to the twinning and drilling of the Craig 6-4.
The previously drilled wells that have all tested and produced oil but not been placed on extended test production are currently awaiting recompletion in other shale zones based on the findings made during the extensive completion work undertaken to date with a view to bringing as many as possible on to production.
Niobrara Shale
A recent oil productive shale target gaining recognition and focus within the Denver Basin is the Cretaceous age Niobrara formation. The Niobrara shales are extensive throughout the basin and extend across the Jolly Ranch project acreage.
Numerous operators have drilled horizontal wells with good results. Running Foxes is evaluating the potential of the Niobrara across the lease acreage with the goal of identifying viable prospects for drilling.
Jolly Ranch Production and Product Marketing
There are currently six wells on production. Of these wells, the Craig 4-4 continues to be the longest running producer having now produced over 18,000 barrels of oil since coming on stream in July 2009. The Craig 4-4 continues to produce in excess of 40 bopd gross, exhibiting a decline of approximately 50% per annum, which compares favorably with analogous vertical shale oil wells.
Since January 2010 Jolly Ranch has produced in excess of 20,000 barrels of oil from test production. Gross monthly production for Jolly Ranch in August 2010 was just over 3,000 bbls gross; production varies significantly on a day-by-day basis due to the limited number of wells currently on test production. This effect will dissipate as further wells are brought onstream.
Following guidance from the operator, in February 2010 Nighthawk announced a production target of 1,000 bopd gross to be achieved from the Jolly Ranch project by the end of 2010. The performance of some of the current Nighthawk wells, as well as the potential of wells to be brought onstream over the rest of the year, indicates that this target may still be achieved, particularly bearing in mind results from other wells in the region. However the Directors cannot be certain that the target will be achieved.
Oil is pumped into a series of production tanks across the acreage and is collected and trucked to market by Plains Marketing, a major US distributor. A new contract has recently been signed for 2010/2011 with that company for the sale of Jolly Ranch hydrocarbons.
In addition several wells drilled, including the John Craig 7-2, have produced high calorific value natural gas ranging from 1,598 to 2,000 BTU. Typical natural gas has a calorific value of 1,030 BTU. The natural gas from wellstream is predominantly methane in a mixture of other hydrocarbons, including ethane, propane and butane, collectively named Natural Gas Liquids or NGLs. Nighthawk and Running Foxes are concentrating on the proving of a shale play and gas production, whilst not the current focus, provides potential upside to the whole acreage.
Anadarko Land Option
As announced on 16 June 2010 Nighthawk and Running Foxes entered into a farmout option agreement with Anadarko Land Corporation ("Anadarko") to drill one well, with an option on a second, on 1,280 acres of land owned by Anadarko close to the John Craig 7-2 wildcat well.
Completion and testing of the 7-2 well is ongoing and therefore Running Foxes has successfully extended the period for exercise of the first option well by three months with Anadarko in order for the potential drilling to fit into the next drilling programme that is currently being planned.
Macquarie Tristone Working Interest Sale Programme
As reported on the 26 July 2010 the timetable for interested parties to visit the data room has been extended to allow as many companies as possible to evaluate the project as development of the Jolly Ranch project continues.
Indications of interest continue to come from industry participants and whilst no assurance that the process will result in the completion of a transaction can be given, the continued interest and the wider ongoing M&A activity in North American shale focused plays is encouraging.
The decision to engage Macquarie Tristone to market a working interest in Jolly Ranch was based on several aspects:
·; Analysis of drilling results and subsequent independent reports demonstrate the potential for Jolly Ranch to be a high value and significantly cash generative project.
·; Every well drilled to date by Running Foxes and Nighthawk has generated production and revenues from the Atoka and Chreokee shales where tested. In addition, BHP, Anshultz, SOHIO and Norske Hydro all historically produced economic conventional oil from the acreage now forming Jolly Ranch. There are over 2,000 potential well sites on 160 acre spacing.
·; Independently generated pro forma scoping economics on a 75% developed working interest demonstrate the financial robustness of the project.
Although Nighthawk and Running Foxes continue to progress the project, the Directors recognise that acceleration of the project is required in order to obtain maximum value. Macquarie Tristone has therefore been engaged on an exclusive basis to market the sale of a working interest and the operatorship. By way of clarification, the percentage interest to be divested will only be established during the process. The 75% figure used in the Macquarie Tristone marketing documentation is indicative only.
Project Status
Since mid-2007 Nighthawk and Running Foxes have spent in excess of US$80 million gross on the Jolly Ranch project achieving:
·; The elimination of exploration risk on the core area
·; Growth of project from 50,000 acres to in excess of 400,000 gross acres of hydrocarbon prospective acreage
·; De-risking in the form of drilling, testing, core and fluid compatibility and independent analysis
·; Proven oil production from interbedded organic rich shales and marine limestones from all wells drilled and tested to date
·; Independent Schlumberger review indicating gross P50 oil in place of 1.4 billion barrels over 266,000 acres of Jolly Ranch
·; Five high quality 3-D surveys
·; Extensive infrastructure and development in place
Schlumberger Data and Consulting Services ("Schlumberger") Review
As reported in July 2010, Schlumberger Data & Consulting Services completed a report confirming that the organic rich shales are laterally continuous between the Craig Ranch SWD well and the John Craig 7-2 well, which are approximately 30 miles apart.
The completion of the detailed reservoir simulation model is ongoing and it is currently anticipated that the Schlumberger work will conclude during Q4 2010 and that the model will be passed to a recognised independent reserves assessment firm to provide a reserves classification report for the first time.
Future Drilling and Field Work
The key to adding value at this early stage of development of the Cherokee and Atoka shale project is to continue to refine completion practices across the core and wider project acreage by drilling further wells in parallel with completing and recompleting the existing well portfolio.
A new drilling programme is planned comprising three wells in the core Craig Ranch area, one wildcat well in the Mustang Creek area, targeting the Cherokee and Atoka shales, but also the commercial potential for the Niobrara, and one well in the Manassas area. All wells have been permitted.
In addition, the operator plans to frac the Cherokee zones in the Craig 7-34 and Craig 15-34 wells.
REVERE
The Revere project covers approximately 60,000 acres and is the product of the consolidation of the Devon Oilfield, Buchanan and Worden, Xenia and the recently acquired Hammond projects, all located on and around the State Border of Kansas and Missouri.
Nighthawk holds an 80% interest in the Devon Oilfield and a 50% interest in the Buchanan and Worden, Hammond and Xenia sections of the Revere respectively. Running Foxes, the operator, holds the remaining interests.
Revere Production and Well Status
Gross production from Revere has grown steadily over the year as water injection wells are brought into commission and the project currently contributes approximately 50% of the production revenues of Nighthawk. Gross production from Revere, since January 2010, has been in excess of 16,000 barrels of oil and 166 million cubic feet of gas.
Gross production on Revere during August 2010 was in excess of 5,100 barrels of oil equivalent, approximately 165 barrels of oil equivalent per day. The current focus is on the recompletion of recently acquired wells as well as hooking up new wells.
For clarification, the Running Foxes production in respect of Revere as indicated on the Kansas Commission website is not representative of the actual production achieved. This fact has been acknowledged by the Kansas Commission, which has stated that they are comfortable with the current and past reporting of production from Running Foxes.
The Revere project straddles the Kansas and Missouri border and operations are based in both states, therefore no oil and gas production figures from Missouri are published. In addition, gas figures from Kansas are not recorded.
The status of the wells at Revere as of 31 July 2010 comprised:
·; 167 production wells
·; 61 injection wells
·; 118 wells awaiting completion
·; 96 wells currently permitted
Xenia
The Xenia project currently comprises eleven producing wells with an additional eleven currently being tied in on a 15,000 gross acreage land position. A further 22 wells have been permitted for future drilling.
Oilfield Production Consultants Limited ("OPC") has concluded a reserves evaluation to the Society of Petroleum Engineers' Petroleum Resources Management System. The OPC current reserve figures calculated for Xenia, on a 6,000 acre appraisal area, with the net reserves to the partnership taking account of a 20% royalty and severance tax and assuming 20% shrinkage due to gas handling, transportation and compression, are as follows:
| Reserve Category | Gross Reserves Mscf | Net Reserves Mscf | Net to Nighthawk Mscf
|
| 1P Reserves | 1,539,213 | 985,096 | 492,548 |
| 2P Reserves | 4,413,433 | 2,824,597 | 1,412,229 |
| 3P Reserves | 15,257,886 | 9,765,047 | 4,882,524 |
In addition to the proven gas reserves OPC has conducted a review of the oil in place figures at Xenia. OPC concluded that the most likely/P50 figure over the 3,708 acres evaluated was 6.85 million barrels.
Xenia gas is transported from the 26 kilometre Xenia pipeline into the Nighthawk operated Bourbon County pipeline. Nighthawk owns a 50% interest in both pipelines. Product from the Bourbon county pipeline is sold into the Southern Star trunk line, a subsidiary of General Electric.
The acquisition of an interest in the 39 kilometre Bourbon County pipeline has allowed Nighthawk to market its share of gas production from the Revere project with reduced transportation costs.
On 10 August 2010, Nighthawk and Running Foxes announced the purchase of 3,250 acres in Bourbon County, known as the Green Valley project, which will now form part of the Xenia project. The acreage has two wells that were drilled in 2008 by the previous operator. During drilling the wells flowed in excess of 100 Mcf per day, however due to the lack of a pipeline the wells could not be monetised.
The acreage is adjacent to the recently commissioned Xenia pipeline and Running Foxes plans to complete the well closest to the pipeline imminently and place on production.
The acquisition also included the Irish Valley field, which was developed and defined within an 80-acre area. The field limits were never defined, therefore it is planned to permit, drill and core a production well to the Mississippian formation and also drill four injection wells.
Devon and Buchanan Waterfloods
Devon is the smallest project by area in the Revere portfolio but is generating improving production results. Water injection is ongoing and studies are being undertaken to assess the addition of surfactants (a detergent to reduce the surface tension of the oil) to the injected water within the Bartlesville Sandstones to improve production levels further.
The Buchanan area is beginning to deliver the results from a number of recently commissioned injectors and oil production has improved following an initiative by the operator to introduce a small hydraulic fracture on each of the injector wells.
The Emerson lease, included in the Buchanan acreage, is seeing modest production despite there being no water injection in place at present. Five injector and ten production wells have been permitted and should give a significant increase in production. To date, the limits of the reservoir have yet to be fully defined.
A drilling rig owned by Nightfox Drilling LLC (50% owned by Nighthawk) will be used for this programme, which will lower drilling costs on the project.
OPC has also evaluated the oil in place for Devon and Buchanan over approximately 32,000 acres the results of which are highlighted below:
| Category | Gross STOOIP,MMstb Study Acreage (1,859 acres) | Gross STOOIP, MMstb Additional Acreage (30,385 acres) | STOOIP, MMstb Total Acreage (32,244 acres) |
| P10 | 34.59 | 30.25 | 64.84 |
| P50 | 48.52 | 161.99 | 210.51 |
| P90 | 64.26 | 412.5 | 476.75 |
Mashek 4-31B Well
The Mashek 4-31B well is located in Vernon County, Missouri on the southernmost lease on the project. Whilst drilling into the Mississippian the Chattanooga formation was encountered. Under test the well produced 385 Mcf per day (or 64 boepd) through a 1" choke.
Core and log analysis was undertaken by Weatherfield with favourable results and a four mile extension pipeline will now be constructed connecting the well to the existing pipeline in Missouri.
Hammond
Hammond, covering an area of 4,773 gross acres and held by production has recently been consolidated into Revere. The Hammond project is strategically located adjacent to the Buchanan and Worden leases in Missouri and was acquired with significant infrastructure including a combination of gas and oil production wells, oil tank storage batteries and pipelines forming part of the acquisition.
42 wells (29 gas/13 oil) are situated within the Hammond acreage and were classified by the previous operator as production wells, having produced from coal and shale formations. Whilst some gas wells are in production with a combined daily output in excess of 100 Mcf per day, a substantial increase from the production of 30 Mcf per day when purchased. A programme of re-evaluation and redevelopment of these wells is underway.
The current oil wells, following recompletion, will be brought online, together with additional production and water injection wells.
Within the Hammond acreage there is an existing 12 mile pipeline and gas-gathering network. The pipeline is located adjacent to the Buchanan and Worden leases situated in the Missouri section of Revere, allowing westward transportation of gas from that project area into the Bourbon County Pipeline.
David Bramhill, Managing Director of Nighthawk, stated "The Company continues to make demonstrable progress across the asset base. Progress at Jolly Ranch is especially encouraging as our knowledge of the shales improves and third party accreditation continues to reinforce the strategy we are taking. Increasing revenues and an exciting timeline of events over the next six to twelve months are all catalysts for further growth."
"In addition, with production increasing, Nighthawk intends to implement a policy of quarterly production updates commencing at the end of Q4 2010."
Tim Heeley B.Eng (Hons) a member of the Society of Petroleum Engineers, Fellow of the Geological Society of London and a Chartered Energy Engineer, who is Commercial Director of Nighthawk and has over 14 years of experience in the hydrocarbons industry, has approved the technical information contained in this announcement.
Enquiries:
| Nighthawk Energy plc David Bramhill, Managing Director Tim Heeley, Commercial Director |
07787 160682 07956 525433 020 7887 1454 |
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| Westhouse Securities Limited Tim Feather Matthew Johnson | 020 7601 6100 tim.feather@westhousesecurities.com matthew.johnson@westhousesecurities.com |
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| Matrix Corporate Capital LLP Louis Castro James Pope | 020 3206 7000 louis.castro@matrixgroup.co.uk james.pope@matrixgroup.co.uk |
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| Bishopsgate Communications Limited Nick Rome | 020 7562 3395 nick@bishopsgatecommunications.com |
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| Financial Dynamics Ben Brewerton Ed Westropp
| 020 7831 3113 ben.brewerton@fd.com edward.westropp@fd.com |