21 May 2018 07:00
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21 May 2018
Highlands Natural Resources plc ('Highlands' or 'the Company')
Strategy Update
Highlands, the London-listed natural resources company, is pleased to update shareholders regarding its corporate strategy.
Highlands is now ideally placed to review its strategy thanks to the recent funding agreement at its East Denver oil and gas project ("East Denver"), which is set to significantly increase the revenues already being delivered to the Company when the six new wells are completed in the coming months.
Highlights
· Highlands will accelerate the development of existing projects plus invest in at least one new shale development project to follow East Denver due to:
o Increased cash reserves;
o Reduced capital, overhead and operating expenditure requirements;
o Long term revenue generation through a 7.5% carried interest in a least eight and up to 24 horizontal wells and;
o Provides additional time and resources to be used to develop new and existing projects.
· Testing to be recommenced at Helios Two in the near term in tandem with evaluating potential opportunities to enhance the economics of DT Ultravert ("DTU"), and in turn, its customer base
· Evaluating and acquiring oil and gas leases in new Colorado-based shale opportunities, with similarities to East Denver in terms of development process and value creation pathway.
· Rapid payback credential of the oil and gas development strategy have been proven.
Robert Price, Highlands' Chairman and CEO, said: "We are in a strong position to build value in our existing project portfolio, and to build on our existing revenues via new oil and gas projects thanks to the rapid progress made over the past three years. The Company has grown from a £1 million entity, listed in 2015 by a lean team with a vision of delivering opportunistic oil asset acquisitions, to an established business with growing cash flow.
"Where we once had initial entrepreneurial concepts, today we benefit from an ongoing drilling programme and revenue generation as well as a portfolio of exciting growth opportunities including revolutionary technology (DTU) and exploration assets with significant upside potential (Helios Two)."
Strategy Overview
Broadly, Highlands will accelerate the development of existing projects such as DTU and Helios Two, and will seek to add at least one new shale development project to follow East Denver. The Company is actively examining and leasing new Colorado-based shale opportunities with similarities to East Denver in terms of development process and value creation pathway.
Below is a summary of priorities and objectives for the Company's ongoing projects:
DT Ultravert: The Company's priority is to advance the commercialisation of DTU through licensing agreements and direct service revenue. As recent court cases have shown, well-bashing is becoming a more litigious issue in the US shale industry. With this in mind, the Directors believe that the market for, and the recognition of, Highlands' DTU technology will continue to strengthen. The Company's priority is to ensure it is ready to meet the needs of customers efficiently and cost effectively. In line with this effort, Highlands may acquire strategically aligned resources or assets that directly benefit DTU commercialisation, for example, low cost naturally occurring nitrogen gas reserves for use in DTU injections and/or related service equipment. Whilst the costs of these purchases are unlikely to be material, their effect will be to accelerate the benefits of DTU to both Highlands' customers and shareholders.
Helios Two: Highlands has discovered natural gas and helium in two wells. Thus far, Highlands has not yet achieved commercial production rates but early results from its exploration activities have confirmed to Highlands' management the enormous potential within this project. On the basis of these discovery wells, Highlands has acquired more than 220,000 acres inexpensively in southeast Montana, where Highlands continues to employ innovative drilling and completion techniques that may unlock commercial gas production.
The Company's next step is to drill out the bridge plug currently sealing Stage #1 in Helios 5-52 16-22. This operation is targeted for Q3 2018. In Stage #1, Highlands deployed a fresh water clay hydration completion aimed to create swelling-related cracks and permeability over a multi-month process. If this test is successful, this will go some way to validating the project but Highlands asks investors to note that the scale of the project is such that the success or otherwise of one drilling operation will not in itself be determinative of commerciality.
East Denver: Thanks to the revenues and US$5.4 million cash payment received following the recent transaction at East Denver, Highlands has now generated a cash return from East Denver. As previously announced, with six new wells already spudded by Highlands' partners, Highlands' target of completing the next phase of drilling by the end of June is very much on track. Going forward, Highlands enjoys a 7.5% free carried interest in 8 (and potentially up to 24) horizontal wells, representing a gross investment programme by its partners in the range of US$50 million to US$160 million.
The East Denver project helped Highlands establish valuable financial and industry relationships, and importantly validate a cornerstone of its business plan, which may accelerate the Company's development of subsequent shale projects going forward.
New Shale Projects: Highlands is actively examining and acquiring oil and gas leases in new shale-related development projects in Colorado and elsewhere in the United States as the Company seeks to capitalise on its East Denver success. Any new projects would benefit from the Company's deepened operational, regulatory and transactional expertise, as well as established industry relationships. The Directors reiterate their overall strategy of acquiring acreage using minimal up-front capital, then adding value for shareholders through development activity. Based on its three successive East Denver funding transactions, Highlands has now proven its ability to source non-dilutive third-party capital for such projects.
Portfolio Approach
Highlands has traditionally employed a portfolio approach to natural resource project development, which the Directors reaffirm as the ongoing strategy. Natural resource development entails risk, and a portfolio approach allows Highlands to distribute risk across multiple projects and categories, thereby moderating the risk of exploratory projects with more predictable development projects. Highlands will also decrease its payroll and overhead expenses and deploy the capital directly into projects.
As previously stated at IPO and in the Company's 2017 prospectus, the Directors are aiming for a portfolio weighted approximately 80% towards stable cash-flowing assets. East Denver now fits firmly into this 80% category. Complimentary to these mature projects, the Company generates upside potential through a portfolio allocation of approximately 20% to riskier exploratory projects where value creation potential may be substantial. Helios Two, for example, resides in this category of risk and upside potential.
DTU, in the Directors' view, currently sits between the two categories. Once a high-risk project, the Company has increasingly de-risked the technology with approved patents and successful field demonstrations. Looking ahead, the Directors will endeavour to manoeuvre the technology into the stable cash-flowing category through the ongoing commercialisation programme.
***ENDS***
For further information:
Highlands Natural Resources plc
Robert Price +1 (0) 303 322 1066
Cantor Fitzgerald Europe
Nick Tulloch +44 (0) 20 7894 7000
David Porter
Redleaf Communications
Elisabeth Cowell
Fiona Norman +44 (0) 20 3757 6880
Notes to Editors
Highlands (LSE: HNR.L) is a London-listed natural resources company with a portfolio of high-potential oil, gas and helium assets and technologies. The Company's core projects include:
· East Denver Niobrara: a horizontal oil and gas project targeting the Niobrara shale formation in a well-studied area of the Denver Julesburg Basin. The Company has two wells drilled and producing revenue and is now developing at least six additional wells, which are fully funded by its partners. It has a 7.5% carried interest in existing and future wells.
· DT Ultravert: a re-fracking and parent well protection technology with four patents allowed and additional patents pending in the United States and internationally. Highlands is advancing commercial conversations with a range of oil and gas operators and service providers to commercialize DT Ultravert technology.
· Helios Two: a 220,000+ acre helium and natural gas prospect in SE Montana with drilling and assessment operations ongoing.