Golden Gate Petroleum's big-talking American chief Steve Graves isn't surprised that his company's stock has doubled in the past six months.
Trading at 2.3 cents before today, the oil and gas minnow has a market cap of just $44 million. And yet it has captivated many investors' interest after drilling four wells in less than two months in the giant Permian Basin in southern Texas.
These four wells sit in the middle of about 400 to 500 similar wells, which all use the hydraulic fracturing or “fracking” process to extract oil and gas from shale rock.
The company has been burning through the cash - last year it made a loss of almost $10 million. It has been raising equity by the bucket load to pay for it, and has a whopping 1.8 billion shares on issue as a result. It's currently raising $7 million at 1.7 cents a share.
Possibly prematurely, Graves now says that the days of raising capital are at an end, forecasting that in the next nine months Golden Gate (ASX code GGP) will produce close to 1000 barrels of oil a day.
Before you extrapolate, you have to remember that these wells typically decline at 75 per cent in the first year, so the well life is extremely short. Investors like the whole fracking business because it can take a lot of the exploration uncertainty out of mining. Graves taps into this, when he talks to Radar about the group's prospects:
“This area has a success rate of 99 per cent, and with the oil price at $US100 a barrel, it's not hard to get payback in less than nine months. You have to remember, this is not exploration, this is development.”
One analyst in the sector begged to differ, saying that payback on these types of wells typically takes between 12 and 18 months.
Graves was previously an executive with Mobil Corp for 23 years. These days he's been converted to the world of fracking and talks of the big improvements in the technology, led by the likes of Halliburton, as well as the regulatory change.
Both these factors lead to dramatically increased flow rates over the past three years, he says.
Improvements or not, this story seems almost too good to be true.
GGP Price at posting:
2.3¢ Sentiment: None Disclosure: Not Held
