The transaction

New Standard’s Board is repositioning the company so that it:

  • moves towards becoming self-sustaining from a capital perspective, and therefore avoids a cycle of continued shareholder dilution; and
  • reduces large share price volatility on the results from a single well.

The Company’s aim is to broaden New Standard’s range and maturity of assets to include assets from current production through short/mid-term development to high-risk high reward frontier assets. This transaction sets the Company on the path towards that model.

It will completely reposition New Standard, preparing the Company for growth opportunities and enhance the profile of the existing asset base.

The transaction was forensically assessed before a final investment decision was made. The New Standard Board believes that it is in the best interests of its shareholders and will be of long-term benefit to the company, so has unanimously endorsed the transaction.

There are essentially three parts to the transaction:

  • The acquisition of prime production and development acreage in the volatile oil and oil windows of the Eagle Ford shale in Atascosa County, Texas.
  • A significant operated equity in exploration acreage in the large and productive Cooper Basin in South Australia with short to medium term exposure to eastern states domestic and export markets.
  • The formation of a strategic alliance with listed US energy exploration and production company Magnum Hunter Resources Corporation (Magnum Hunter) to provide technical support and operating capabilities to both acquisitions in conjunction with Magnum Hunter becoming a significant shareholder in New Standard.

This fits neatly with our frontier exploration acreage in the Canning and Carnarvon Basins.

The full detail of the transaction was in the Notice of Meeting sent to all shareholders in December.

There are a few important points in relation to this question and they include:

  • New Standard has a healthy cash balance and part of the transaction will be funded from this cash.
  • A revolving reserves-based lending facility is being negotiated by New Standard to assist funding of the acquisition and the 2014 Eagle Ford drilling program. This facility will include significant additional future capacity (potentially up to at least US$50 million) that would be linked to a growing reserves base and could be used to accelerate additional growth in the Eagle Ford through further drilling and/or acquisitions.
  • Plus, we will be generating revenue from the five existing wells from December 2013 and expect the two new wells to be generating revenue within a relatively short time period as well.
  • We expect, with the lending facility in place, to still be in a strong cash position in the middle of 2014.

This transaction will transform the company. It marks a massive, positive change to our asset base and the Board is confident that it can finalise the transaction and meet its commitments, or it wouldn’t have undertaken the transaction.

We have absolute confidence in both the technical capabilities within New Standard Energy and in our partnership with Magnum Hunter to be able to manage the company’s projects.

Magnum Hunter’s knowledge of the Eagle Ford asset is second to none, which is why New Standard negotiated continued operatorship of the Eagle Ford assets with Magnum Hunter as part of the transaction.

As a future major NSE shareholder, subject to existing shareholder approval, Magnum Hunter will have every incentive to operate this asset as effectively and efficiently as possible.

Similarly, Magnum Hunter has conducted a significant evaluation of the Cooper Basin asset which, when combined with New Standard’s own remote exploration experience will ensure that operations will be disciplined and technically robust.

The Eagle Ford

The US Eagle Ford acreage is an outstanding opportunity in a proven and producing oil province, with substantial resources already in place and the potential to deliver significant immediate cashflow to the Company.

We will be generating revenue (currently around $400,000 per month) from the five existing wells immediately, backdated to 1 December 2013 following shareholder approval, and expect the two new wells will also be generating revenue relatively quickly.

Unfortunately New Standard does not have reserve figures that are compliant with the ASX’s new Petroleum Resources Management System (PRMS) for resources reporting. To be able to provide further clarity around these figures, New Standard is currently working to update its SEC-compliant reserves so they are PRMS compliant and can be reported to shareholders. This is expected to be released within the next week.

It should be noted that the landholder system in the United States is significantly different to the Australian system. In Australia, the Crown owns the mineral rights, with onshore permits being administered by the various States. In the US landowners can own the rights and are paid a royalty for all production.

Peeler Ranch commitments

There is a commitment to drill a well every six months to keep the lease current. The next well in the Peeler Range Prospect is due by early February 2014.

At this stage, New Standard is planning to drill two wells in Q1 and is considering a further one two wells in Q3 2014. The initial wells are being planned as pad wells to be drilled from the same pad. Both wells will be fracced together (zipper frac) and flowed back and tied in simultaneously. This drilling is expected to provide cost efficiencies over and above stand-alone wells and provide access to the benefits of zipper fracs which Magnum Hunter has indicated can be in the order of 15%-20% more stimulated rock volume per well and therefore is expected to provide high productivity.

Eppright lease commitments

A further four wells are required to gain lease wide bottom hole rights, and small lease parcels in the Alright lease might enable New Standard to hold the permit rights with one unit well.

New Standard has no current work commitments in these leases until the primary lease term expires in March 2015. Exploration and development planning and budgeting will be undertaken in 2014.

Magnum Hunter is an independent oil and gas company listed on the New York Stock Exchange. It is engaged in the exploration for and the exploitation, acquisition, development and production of crude oil, natural gas and NGLs resources in the United States and Canada.

Magnum Hunter has a diversified asset base and is presently active in three of the most prolific unconventional shale resource plays in North America, specifically, the Marcellus Shale in West Virginia and Ohio, the Utica Shale in south eastern Ohio and western West Virginia, and the Williston Basin/Bakken Shale in North Dakota and Saskatchewan, Canada. Magnum Hunter is also engaged in midstream and oilfield services operations, primarily in West Virginia, Ohio and Texas.

Subject to NSE shareholder approval, the strategic alliance with Magnum Hunter will provide New Standard with:

  • technical expertise, operating knowledge and personnel, to assist in the exploration and development of PEL 570;
  • relationships with service providers (such as Halliburton) to assist with exploration activities in the Cooper Basin; and
  • resources, including Pathfinder’s resources, to identify and source additional growth opportunities and new business ventures in Australia and the United States.

Magnum Hunter has for some time been interested in the emerging potential of the Cooper Basin and has been working alongside Pathfinder/Outback Energy Hunter (OEH) to secure an appropriate opportunity. The alliance will cement the ongoing involvement of Magnum Hunter in the development of both PEL 570 and the US Assets and is seen by the Company as a substantial additional benefit of the Proposed Transaction and as offering the possibility for significant value creation for Shareholders.

The consideration is:

New Standard has option to acquire the Eagle Ford acreage for US$15 million cash and A$9.5 million in NSE stock (65.65 million shares at 15.4c/share) to Magnum Hunter, subject to shareholder approval.

The acreage can be valued on a per acre basis, based on comparative deals, and based on the headline purchase price it equates to US$5,300 per acre (including production) or US$1,500 – $2,000 per acre (undeveloped equivalent).

This compares very favourably with previous Eagle Ford transactions, including several very recent transactions very close by at much higher rates.

Upon closing, New Standard will also make a payment of A$3 million cash spread over 10 months to the Vendors (Pathfinder/OEH) who held an option over the acreage, plus up to 45 million performance shares (at 16/c/share) dependent on the performance of four wells in 2014.

The Success Shares will be 100% at risk and will only be awarded upon achievement of performance hurdles based on average Estimated Ultimate Recovery (EUR) over four wells to be drilled in 2014, with the review to take place after six months of production from the fourth well drilled.

The wells’ performance will be a once off measurement and will be assessed by an independent reserves certifier approved and appointed by New Standard with the hurdles tied to the EURs that should provide attractive IRRs for New Standard.

As a consequence of the relationship between the Pathfinder/OEH founding shareholders and Magnum Hunter, Pathfinder Onshore Energy secured an option agreement with the Magnum Hunter Entities (US Assets Option Agreement) in 2014 to acquire the Eagle Ford assets.

New Standard is buying the option from the Outback Energy Hunter vendors and the acreage from Magnum Hunter. Once completion under the POE Share Sale Deed occurs, Pathfinder Onshore Energy will become a wholly-owned subsidiary of New Standard Energy. This opportunity would not have been available to NSE without the Vendors’ involvement.

The Cooper Basin

The Cooper Basin assets are strategically located and will provide New Standard with a large footprint in a mature and developed oil and gas field.

The southern part of the licence area lies within the Patchawarra trough and contains a thick Permian coaly sequence – the main source of Cooper Basin hydrocarbons. The southern parts of the permit are surrounded by oil and gas fields and have good access to infrastructure for oil and gas production and transmission.

Importantly, a path to market exists for discovered oil and gas through existing infrastructure.

New Standard has looked at a number of opportunities in the Cooper to diversify our asset base and risk. Good acreage is almost impossible to find and it is widely expected that further consolidation and corporate action will occur in the Cooper over the next 12-18 months, so we considered it important to be in there now. The deal with regard to PEL570 had already been done by Pathfinder/OEH. Again we would not have gained access to this opportunity without their involvement.

The below table outlines the work commitments for PEL 570, which New Standard anticipates it will be able to capably manage.

Year of term of licenseMinimum work requirements
One500km2 3D full fold seismic
TwoDrill two wells
ThreeDrill one well
FourGeological and geophysical studies
FiveGeological and geophysical studies

New Standard will operate the Cooper Basin acreage, supported by Magnum Hunter as part of the strategic alliance between the two companies.

  • The payment on the Completion Date of $3,000,000:
    • $1,400,000 payable to PFE Holdings Pty Ltd to repay outstanding loans owed by OEH to that entity; and
    • $1,600,000 payable to the OEH Shareholders;
  • 15,000,000 Shares at a deemed issue price of 16c/share, to be issued to the OEH Shareholders on the Completion Date; and
  • the payment of a further $1,000,000 to the OEH Shareholders in 10 equal consecutive monthly payments of $100,000 each, starting on the date that is one month after the Completion Date.

Existing assets

Absolutely not. New Standard is committed to its current Western Australian projects and still considers these to be a core focus of our future operations. The company places significant importance on our acreage in Western Australia and is committed to continuing its drilling operations in these areas alongside our joint venture partners.

New Standard has a strong bank balance, but there was a need to use that cash to best effect by sequencing our drilling so that wells with near term ability to generate revenue are given priority in the first half of 2014 before the high risk high reward frontier wells are drilled in 2014 and 2015.

It has been a mutually agreed decision with our drilling contractor, Enerdrill, to defer Condon-1 until second half 2014, by which time Enerdrill will have up to three rigs operating in Western Australia.

The Board considered that deferral of this expenditure, while investing US$13 million into two Eagle Ford development wells that can be tied into production within 1-2 months, the best use of capital at this point in time.