Until around four years ago, ASX-listed Otto Energy’s portfolio was centred around its oil and gas assets in Philippines. During this first focus of the company, had been on maximising the value of the core production asset in Philippines, and this culminated in 2013 with the successful completion of the Galoc Phase 2 development. However, by late 2014 Otto had completed the sale of the Galoc field, giving the company balance sheet strength at a crucial moment when oil prices were in freefall and the sector was retracting from some of the more high-risk regions that were invested in at the height of the boom.
Otto’s managing director and CEO Matthew Allen explains how the lower oil price environment of 2014 opened up a market of higher quality assets that previously had not been accessible for a company of Otto’s size.
“When we exited our assets in Philippines, we spent a lot of time looking for the right opportunity in a low oil price environment. The sector had very dramatically cut capital expenditure and investment all around the globe.
“We observed a number of operators, particularly in the Gulf of Mexico, in balance sheet distress and a lot of them had exploration commitments ahead of them that they couldn’t fund.
“As a result, capital was being diverted into production related enhancements and plug and abandon obligations with the government, and very little was going into exploration expenditure.”
Upon seeing this trend in the sector, Otto went about positioning itself as a well-capitalised non-operator for exploration projects with high quality partners in prolific hydrocarbon basins, such as the Gulf of Mexico.
“That’s what we’ve been doing for the last three years, building our exposure in the Gulf of Mexico play and very quickly accelerating into production, which we think is the key to capture the opportunities that wouldn’t normally be available in a higher price environment.”
An exploration renaissance
The Gulf of Mexico is a mature oil basin that is undergoing a period of renaissance in terms of new discoveries and increased operator activity. For Allen, the basin has all the ingredients that Otto is looking for: A working petroleum system, relatively low sovereign risk, excellent margins and short cycle times from drilling to cash flow.
“The advent of 3D seismic surveying back in the 1990s really transformed what people thought was a mature area and finds like the South Marsh Island 71 (SM 71) have proved that new technology is helping to uncover more discoveries. It’s a well-proven basin that, if you have good ideas and good technology, is one of the best places to look for oil.”
Production commenced at SM 71 in March 2018, just two years after it was first discovered. Now, the project delivers over US$3 million a month in free cash flow, net of royalties and operating costs, and with a significant field life, SM 71 is set to be the critical mass on which Otto will grow its business.
“Our aspiration is to deliver in the first phase of our business growth in the Gulf a net production target of about 5,000 barrels per day (bpd) and we are well on the way to delivering on that target in the next three years.
“It has been a very significant discovery for us as a company, and we are looking to build on that initial success in the drilling programme that we now have ahead of us for the next two years.”
Evaluating his company’s work at the SM 71 project, Allen stresses that timing is perhaps the most important element in the oil and gas industry, and this has been validated by the successful fast-tracking of the project into production.
Timing is key
“To be able to sell near the peak in 2014, then invest during the low points of 2015-17 and then have production come on stream right in the recovery phase, for us we have had a very fortunate last four years with timing working well for us. We have a significant long reserve life ahead of us in SM 71, it ranks now as one of the top Gulf of Mexico shelf oil producers.”
In 2015, Otto partnered with fellow ASX-listed oil and gas producer Byron Energy at SM 71 in a deal which saw Otto take a 50% working interest in the project and Byron retain responsibility as operator.
The joint venture (JV) has been mutually beneficial for both parties according to Allen, who acknowledges Byron’s depth of experience in the Gulf of Mexico and their proven capability in delivering and executing projects in the region.
“We have assembled an excellent team ourselves here in Houston and are building out our capability in the area. I rate very highly the team that we have here and look forward to building our own capability to operate and develop projects in the future,” he says.
However, for the foreseeable future Otto will continue to focus on working with good quality operators like Byron and Hilcorp Energy. The company recently secured an eight-well Gulf Coast package with tier 1 operator Hilcorp, one of the largest privately held oil and gas companies in North America.
Hilcorp is a highly experienced Gulf Coast operator and the deal, over 12 months in the making, represents a significant coup for Otto. “To have put together eight high quality drilling opportunities like we have with Hilcorp, that provides some very significant activity and upside in our portfolio.”
At the time of writing, Otto was in the middle of drilling the first well within the Hilcorp package, with the company expecting to have that well down to target before the end of October. The Hilcorp package provides the bulk of Otto’s 10 well exploration pipeline.
Of the two remaining wells, Otto partnered with Byron once again at Bivouac Peak in the Gulf of Mexico, but after a disappointing drilling campaign the company labelled the Bivouac Peak East prospect non-commercial.
Nonetheless, Otto’s chairman John Jetter said the news was only a short-term setback with a further eight wells to be drilled in the Gulf of Mexico and attention is now turning towards the company’s upcoming drilling programme in the Alaska North Slope. Otto’s technical team has been active in this emerging play since late 2017, maturing the large-scale Nanushuk prospect.
“It’s a really exciting well and a large target, as most targets in Alaska are. Its elephant hunting territory, or so it’s called, and the other end of the spectrum to the Gulf where a few million barrels can be very economic.
“But in the North Slope its very much about aggregating large volumes, large capital investments and infrastructure. We’d like to have a balance of portfolio depth and exposure so it’s a good opportunity for us to participate in and put a little bit of capital towards.”
Allen believes that it has been known for quite some time that the Nanushuk sequence contains oil, but it has been overlooked as a development region because of its stratigraphic nature, until recently.
“The Nanushuk sequence is a strong testament to new thinking that’s evolving new discoveries. Previously, it was much too complicated to resolve on seismic and even more complicated to develop, but with the likes of Conoco-Phillips, Oil Search and Repsol-Armstrong making big discoveries there in recent years, it has certainly got a lot more attention now.
“For the JV consortium that we are involved in with relatively small companies [88 Energy, Red Emperor and Great Bear Petroleum], we’re operating right in the heartland of some of the largest oil companies in the world.
Overall, the Nanushuk oil play is an exciting prospect for Otto, with drilling of the first well planned for the first quarter of 2019, once the winter season opens up in Alaska.
To conclude, with several exploration wells in the pipeline across the Gulf of Mexico and Alaska, there is a growing belief that Otto is close to achieving its core goal of developing into a premier mid-tier independent oil and gas company, as it executes its current drilling programmes and continues to grow incrementally.