oil barrel article

September 20, 2011

"Texon Petroleum � With Small And Tight Reservoirs, Acreage And Well Numbers Are The Key In Texas.

ASX listed Texon Petroleum has had a busy 12 months in Texas, as drilling continues to add production and reserves to the company�s bottom line and burgeoning portfolio. The Eagle Ford Shale (EFS) licences are leading the charge with a third production well added, and a fourth soon to begin contributing to the company�s output. An independent reserve estimate was produced as at June 30 2011 and while showing a healthy net position for a junior producer, it is already out of date given the two new EFS wells.
As mentioned in Oilbarrel�s July article on Texon, established production from the first two wells at EFS - Tyler Ranch EFS #1H (EFS #1) and Teal EFS #1H (EFS #2) - has been mixed with EFS #1 showing a production and decline rate not dissimilar to the company�s pre-drill modelling, and thus the life of well production estimate of 450,000 boe remains achievable. EFS#2 on the other hand has been more of a challenge and required the installation of gas lift and production tubing to increase production to a more reasonable level. Ineffective fraccing has also been blamed for the poor performance of EFS #2 and contributed to the company lowering its life of mine production expectations from 475,000 boe to 425,000 boe.
Eagle Ford�s third producing well Tyler Ranch EFS #2H (EFS #3), is an 82 per cent WI and 61.6per cent NRI Texon owned well, where testing has showed higher flow rates than the Company�s nearby EFS #1 well. Initial tests have seen 1,488 bopd and 700 mcfpd for a combined 1,605 boepd produced through a 16/64� choke and pressurised at 3,000 psi. EFS #1 produced at an initial rate of 1,202 bopd and 780 mcfpd through the same size choke but at the lower pressure of 2,610 psi thus, with a higher pressure and initial flow rate, EFS #3 is expected to perform better over time. EFS #1 and EFS #3 share an identical ownership structure and close proximity, affording EFS #3 a rapid connection for oil and gas production through the EFS#1 production facilities.
The fourth well drilled at Eagle Ford is Hoskins EFS #1H (EFS #4), where Texon holds a 100 per cent WI in the cost of the well and a 71.25 per cent NRI in the production. Total depth of 16,400 feet was reached on August 24 after the drilling of a 4,800 foot horizontal section. The horizontal section provided good oil and gas shows throughout, with casing having now been run, and the well suspended ahead of a planned fracture stimulation programme beginning in October.
Independent consultants Netherland Sewell & Associates assessed the first 2 EFS wells as at June 30 2011 and attributed 1P reserves of 899 mboe, 2P reserves of 3,439 mboe and 3P reserves of 8,423 mobe to Texon. Significant improvements to these figures are expected now that the third EFS well is in production and the forth is not too far away. The value of Eagle Ford to Texon is perhaps best evidenced when total reserves are observed. As at June 30 2011 Netherland Sewell & Associates estimated Texon�s total attributable 1P reserves at 1.9 mmboe, 2P reserves at 5.0 mmboe and 3P reserves at 10.0 mmobe, meaning EFS comprises 47 per cent of total 1P, 69% of total 2P and 84 per cent of total 3P reserves.
The Olmos reservoir overlies Texon�s Eagle Ford reservoir in McMullen County, Texas by a height of about 520 metres, and the company currently has 11 producing wells in the field. The most recent Olmos well brought on production in August is Peeler #3 which had an initial flow rate of 325 bopd and 268 mcfpd (370 boepd) gross. Production will decline as has been experienced from the other wells drilled so far, but Peeler #3 is the northern most well drilled in the Leighton field and thus extends the field�s halo of confidence and de-risks 24 undrilled Olmos drill targets.
Texon has a number of other Texas prospects at Coolangatta, Scarborough, Wilcox and Yegua, however it is the latter two which are showing the most progress. The Scherer #1 well at Yegua completed on the 25th of August and showed 38 feet of gas pay across 2 reservoirs � 24 foot in the upper and 14 foot in the lower. Scherer #1 has been tested and connected to the sales pipeline alongside the 3 existing wells. Even more recently, the first well on Wilcox was spudded on the 7th of September, and is located in close proximity to EFS#4. With 3rd party production from the Wilcox close by, Texon�s well will assess whether there is commercially producible oil in its own portion of the Wilcox.
At a corporate level, net production in the 6 months to 30th June 2011 increased by 57 per cent when compared to the 6 months to June 30 2010. Based on its respective NRI share, Texon�s total boe increased from 76.5 to 120.3, thanks to a major uplift in oil production from 28.1 mbbl to 71.9 mbbl. Gas production remained flat at 290.2 mmcf. Unsurprisingly it was the first two Eagle Ford wells, particularly EFS #2 which came on steam during the period, which pushed production higher, with the two contributing 54 per cent of total production. New production from EFS #3 and shortly from EFS #4 will only increase both total output and EFS�s share of total production.
In its report dated September 1 2011, Australian research house RBS Morgans reiterated its buy recommendation and A$1.33 target price - a 150 per cent premium to the closing price as at September 14 2011 - on the stock. Analyst Chris Brown compares Texon favourably to Aurora Oil and Gas (ASX: AUT) and sees Texon�s sizeable cash position (A$33.1 million at 30th June 2011) and upcoming exploration / drilling activities at EFS and Olmos as important factors in shaping the company�s future."

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