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Highlands Natural Resources: Oil upstart that's monetising barrels as well as drilling technology

Publication Date: 20 Aug 2018 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav Sharma (Associate Editor ReachX)
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Equity Fundamental Equity Commodity USA UK Energy Metals and Mining

If you are looking for diversified natural resources stocks, London-listed Highlands Natural Resources (LON: HNR) offers some intriguing enticements in many ways. For starters, it is a gateway to the US state of Colorado's booming Denver-Julesburg (DJ) Basin that could hold up to 4.5-5 billion barrels of oil equivalent for viable extraction, according to industry estimates.

All the oil majors are exploring the basin, but it seems independents such as HNR are the ones proving deft at maximising their shale acreage potential. The company’s two main plays in the DJ Basin are in East and West Denver.

HNR's oil production site in East Denver, Colorado, USA (Photo © Gaurav Sharma, 2018) 

HNR's East Denver site in the Lowry Bombing Range, farmed out from oil major ConocoPhillips, is already producing oil with a potential target production rate of 5,000 barrels per day (bpd), with a well peaking forecast of around 7 years at par with industry averages on shale well declines.   

The company currently has a 7.5% carried interest in the first eight wells to produce at the project with additional upside potential to own 7.5% interest in up to 24 wells at no extra cost, and a strong partnership with majority holder True Oil.

In its latest exchange filing, HNR revealed it had received £2.9 million of income during four months up to 31 March 2018 from just two wells – Powell and Wildhorse – which sit in the top 3% of all horizontal DJ Basin (Niobrara) wells in Colorado. The company's Chairman and Chief Executive Officer Robert Price says he is bullish about its prospects.

"We are running an optimised data-driven operation in East Denver. Many of our neighbours are attempting 16 to 24 wells in the same well pad. However, based on the advice of our Head of Engineering Domingo Mata and Chief Geologist Paul Mendell, we have opted for eight wells, as our internal research and data suggests that fewer wells will provide a better yield."

So much so, that global oilfield services company Halliburton wanted to participate in HNR's project and agreed to fund 20% of the costs for potentially up to 24 wells.

Additionally, HNR’s West Denver operations have also emerged from early prospection stage and look promising. It owns a direct 100% working interest in leases covering 3,617 acres in the area, with a potential to drill at least 48 wells.

The standard investor caveat applies – investing in the oil and gas business has always been predicated on a high risk, high reward sentiment. But even by that argument, HNR’s prospects – in a mature, stable exploration zone like the United States – appear way more attractive than London-listed plays in emerging exploration zones where geopolitics and regimes could prove challenging, and first oil (or gas) production is yet to be achieved. 

For a company that's making money and is producing, HNR's current share price appears undervalued. Its 52-week range points to a price oscillation between 17.80p and 37.75p. The year-till-date share price benchmark currently conveys an implied decline of 21% from 23.75p at the start of the trading year (2 January) to 18.70p at the time of writing (20 August). That gives the company a market capitalisation of around £22m. But Price has put his own money where his mouth is by holding a 10% stake in the company, thereby adding a layer of confidence to the venture. 

And the CEO says HNR has a compelling story to tell for years to come. By some measures, investors might not have that long to wait for another positive development, as the company diversifies to Natural Gas, Helium and Nitrogen plays, and attempts to market and monetise its patented DT Ultravert (DTU) technology for enhanced oil recovery (EOR). 

In simple terms, DTU technology's objective is to maximise recovery and protect existing hydrocarbon production. HNR technologists claim it would help the wider shale industry increase production by as much as 15%, and tests have proven it prevents 'well bashing' in horizontal and vertical wells.

In summation, Price and his team are aiming for a portfolio where 80% of it would be made up of income accretive production assets with the remainder providing "significant potential upside, albeit at a higher risk, through oil and gas exploration". Concurrently, HNR would be continually working to build its reputation as an innovator in the EOR space.

Based on the above, we remain net long on HNR with a 12-month share price target of 40p. The target is a conservative one. If DTU appears to be taking off in terms of marketing and monetisation, the price target could be exceeded. Of course, usual notes of caution also apply – were there to be a sequence of unlikely reversals and the company fails to attractively market DTU, or there is massive upheaval in the crude market, then the stock price is likely to fall well short of the target. In more ways than one, HNR is heading for an exciting 12 months. 

Disclosure:

I have positions in the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma (Associate Editor ReachX)

 

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