creating a full cycle e & p company

September 14, 2009
www.oilbarrel.com

ASX’s Salinas Energy Turns Itself Into A Full Cycle E & P Company Through The Takeover of Unlisted Aussie Group Neon Energy.

John Begg, the CEO of ASX quoted Salinas Energy (SAE) marks his re-entry to corporate life in his native Australia from his operations in the US, with a reverse takeover of unlisted Aussie company Neon Energy by SAE.

In a mainly share based transaction with Neon’s shareholders, Salinas proposes to acquire approximately 40 per cent of Neon’s issued capital for A$1.5 million cash and the remaining Neon shareholders will receive three Salinas shares for each Neon share resulting in the issue of 44,763,000 shares for a total consideration of A$5.7 million.

Importantly, around 75 per cent of the shares will be escrowed for a period of 12 months. The deal will also include the issue of 9.4 million options to Neon option holders and 15 million options to the new SAE management group. Post transaction there will be 282 million shares on issue.

The deal, which is subject to SAE shareholder approval, which it is hoped will be forthcoming by mid –October 2009, will marry SAE’s production, development and appraisal assets in the US together with Neon’s possibly substantial exploration upside in Asia, thus creating a full cycle E & P company, with a more exciting long term potential than SAE has as it now stands.

John Begg will step down as CEO and from the Board upon completion of the deal, but will remain a shareholder in the enlarged group. Corporately the company will be strengthened by changes in the Boardroom. It is proposed that Dr Alan Stein and Mr John Lander who currently serve on the Neon Board will be appointed to the Board of Salinas. It is also proposed that Mr Ken Charsinsky will also be appointed as Managing Director of Salinas upon completion and upon him ceasing employment with Noble Energy Inc, Neon’s largest shareholder. Mr Charsinsky has over 30 years experience in international and domestic US oil industry with major oil operating oil companies.

Mr John Lander and Dr Alan Stein will be well known to readers of oilbarrel.com, and conference attendees. John Lander has over 37 years internationalise experience including directors in a number of successful oil and gas companies listed in the UK. Alan Stein was the founder of the successful Fusion Oil and Gas and Ophir Energy. Fusion was, of course a member of the partnership which made substantial discoveries offshore Mauretania. Ophir Energy is a substantial, private, unlisted company operating in Africa and which has made discoveries in Equatorial Guinea.

The hope is the takeover, together with the board changes, will mean the group will have a much wider investor appeal particularly to punters in London.

Salinas, like a number of Australian groups, and UK ones too, migrated to the US in the mid 2000’s (2006 in the case of SAE) because of the strong oil and gas prices, the availability of acreage not considered “material” to the majors that discovered it, safe political risk and good pipeline infrastructure. US gas prices climbed to US$10 a thousand cubic feet by 2007 some four times what they had been five years earlier.

Salinas assembled a gross acreage position of 60,000 acres on the US West Coast most notably in the North San Ardo Concession, but also on the McCool project (5 million barrels of oil in place) and the much larger Paris Valley project (100 million barrels plus oil in place). SAE after a programme of low cost, low risk wells was looking at output of 287,000 for all of 2008 with production looking like running at output of 786 bpd.

Then came the global oil price collapse, the payback time for wells lengthened from six months to two years .Many projects were put on hold. Production fell sharply. The share price which had been forecast to rise to A$0.57Cents (57 cents) fell sharply to bottom out at 10 cents. It has recently been 14 cents.

John Begg told oilbarrel.com, that the new proposed management is excited by California. He says they have accepted that production could be boosted reasonably easily with a number of small initiatives. This will include a trial of cyclic well steaming at a cost of US$150,000 and additional development drilling. This will be aimed at doubling production from the current 320 bpd. Also the first appraisal well at Paris Valley is targeted for the Dec Q4 at a cost of US$300,000.

As for the exploration upside, Neon’s main asset is a 100 per cent interest in Block 120 covering an area of 8,469 km2 off the coast of central Vietnam in water depth ranging 50 to 1100 m. The area was previously explored by BHP, including extensive 2D seismic and a single well which encountered a 6 m oil column. The well was never fully tested and this prospect (Oribea) will be the subject of initial investigations. Overall, 16 leads and prospects have been identified across the permit. The most prospective of these are the Oribea, Merida and Masi Prospects with unrisked prospective resources estimates of 50, 624, and 685 million barrels of recoverable oil, respectively. The acreage offshore Vietnam have been lightly explored but are attracting renewed interest by companies such as Origin Energy, Chevron, Santos, Premier and Gazprom. Neon has sought to farm out equity in the block and this will continue after the acquisition.

Neon also owns the rights to an extensive collection of oil and gas information (database) covering most of the oil and gas basins of Australasia and Southeast Asia. The database includes over 4,000 reports, maps, and well files plus 22,000 km2 of 3D seismic and 2 million line km of 2D seismic. The company claims that the database provides Neon with a competitive advantage in new ventures in the region but has already proved advantageous during the acquisition of the Vietnam asset.

Australian broker Patersons, in what it describes as a Company Revitalisation note, says the acquisition provides company changing growth prospects. Although Vietnam drilling is a number of years off, there could be considerable catalysts through the process and this adds substantial potential upside to SAE. Paterson’s own view is for a twelve month target price of a$A0.25 against A$0.14 now.