Caza Oil & Gas Suffers As Its Wolfcamp Wells Under-Perform

The newsflow from Caza Oil & Gas took a turn for the worst last week as the dual TSX and AIM-quoted company reported worse-than-expected production rates from the first two wells in its drilling campaign in New Mexico. This is disappointing as there were high hopes for the Wolfcamp oil play, where the company believed horizontal drilling would deliver high flow rates and where it recently increased its acreage position by 135 per cent to more than 19,000 gross acres. Shares in the company slumped almost 19 per cent on the news to trade at 7.5 pence per share in London.
The disappointment was more keenly felt because those early high hopes seemed justified when the first two wells, Moore Bailout 11 State -1 and Lucky Penny 10 State-1, were quickly declared discoveries, then fracced and placed on production. The wells are still cleaning up after the fraccing operation but output does seem to have stabilized at around 20 barrels per day per well, far short of the 150 bpd seen shortly after being put into production.

Neither well was an easy drill and the horizontal sections 2,100 feet at Moore Bailout and 1,800 feet at Lucky Penny are much shorter than the planned lateral of 4,000 feet. Talks are now underway among the joint venture partners (Caza has a 12.5 per cent working interest and 9.375 per cent net revenue interest alongside partners Endeavour International and Wise Oil & Gas) about how best to increase production rates: one option is to re-enter the wells and drill additional laterals that would then be stimulated using a multi-stage packer isolation system. Its a question, however, of how much the partners are prepared to invest in wells that have are massively under-performing.

In fact, current production rate is actually worse than the typical 30 bpd that can be achieved from the Wolfcamp using conventional and much cheaper - vertical wells. The hope was that lateral wells and new fracturing techniques would deliver much higher rates: speaking at an oilbarrel.com event in June, company chairman John McGoldrick highlighted a horizontal well drilled by a nearby operator which flowed 1,755 bpd and 1 million cubic feet per day of gas from this trend.

This proves horizontal drilling in the Wolfcamp can deliver strong flow rates Caza just now has to prove this is possible on its lands. There is certainly still much to play for, with the third and fourth wells in the campaign underway. The Bada Bing 23 State-1 horizontal well will be fracture stimulated within the next 20 to 30 days and completion operations on the Moore Cowbell 27 State-1 well are expected early in the new year. The company takes heart from the fact that the Bada Bing well successfully drilled its full lateral length of 4,000 feet. Investors will be keen for a positive result from this well to regain some strength in the share price following the recent disappointing production numbers.

We are still very optimistic about this play and gained valuable information while drilling and completing the first two wells, said CEI Mike Ford. We are hopeful that the results of the next wells drilled will be in line with expectations and set up future development opportunities."

The disappointing production figures show that even low-risk business models can throw up unpleasant surprises: there are no guarantees in the oil business. Caza was founded in 2006 to target untapped opportunities in the prolific oil and gas producing regions of New Mexico, Texas and Louisiana. This is a low cost, low risk business, with the company targeting multiple pay horizons in well-established areas, close to existing infrastructure and well out of the way of hurricane activity.

Caza has modest production, around 200 boepd (mainly gas, which isnt great news in the current price climate), and was cash flow positive in Q3. The economics are helped by an April 2009 farm-in deal with Houston-based Endeavour International, which has given the AIM company the financial firepower to accelerate the drilling of its prospect inventory.

Under the terms of the deal, Endeavour will pay 100 per cent of the costs through to first production to earn 75 per cent of Cazas interest in a range of projects. New York- and London-listed Endeavour will also pay a programme fee of US$3 million per annum, which will be paid in monthly installments. This agreement helps Caza conserve its cash, reduce risk and accelerate the drilling of up to nine wells in 2009 and early 2010. The big risk is whether that drilling plan will deliver the resultsthe early months of 2010 should provide some indication as news from the Bada Bing and Moore Cowbell wells comes in.

Caza, as operator, is pleased to announce that the Caza Elkins 3401 well in Midland County, Texas, reached a total depth of 11,854 feet on June 21, 2011. Electric logs indicate multiple potential pay sands for both oil and gas in the Clearfork, Spraberry, Wolfcamp, Strawn, Atoka and Devonian formations. Caza is currently running production casing and preparing the Caza Elkins 3401 well for further completion operations. The completion procedure will include a fracture stimulation program.