Elk Petroleum (ASX: ELK) has reached an agreement to sell its Grieve oil export pipeline in Wyoming to Natrona Pipeline LLC for US$9 million, or up to US$5.325 million after it acquires a 35% stake in the pipeline operator.
Natrona will operate the pipeline, which will transport oil from the Grieve CO2 enhanced oil recovery project to Casper for sale.
Elk has committed to enter a transportation agreement, whereby its share of oil from the Grieve EOR project will be transported through the pipeline for a tariff of US$2.60 per barrel
"Elk believes the arrangement with NPL will prove attractive to both US investors as well as Elk," chief executive officer Dr Scott Hornafius said.
"We expect a strong response to NPL's PPM offering. Elk will take up a 35% interest in NPL to protect its own position should the Grieve EOR Project yield upside oil production or face tariff increases.
"Sale of the Pipeline will be another milestone for Elk and reflects the strength of Elk's asset base and Elk's growing profile in local U.S. markets as well as the Australian market as the Grieve CO2 EOR project moves towards first oil in mid-to-late 2014. The sale will provide cash to support Elk's forward funding needs."
To fund the purchase of the Grieve oil pipeline, Natrona, which was created to acquire and operate the pipeline, plans to raise US$10.5 million through the issue of units.
US$6.825 million is to be raised from private investors for the issue of 6,500 units while the remaining US$3.675 million will be raised from the sale of 3,500 Class B Units (35%) to Elk.
The Class A units provide an overall guaranteed annual interest payment of 8% to investors for 5 years plus the opportunity for possible distributions from tariff income that exceeds the expenses and guaranteed interest payments.
This is expected to attract strong support from U.S. investors looking to source interest income at rates above those typical of the current and medium outlook for the USA interest market.
Natrona has set a minimum required Class A Units subscription level of US$3.675 million for the offering to proceed.
Above that level any shortfall against the maximum level of Class A Units will be covered by a mortgage to Elk until additional subscriptions are received for any outstanding Class A Units.
Elk will receive US$2.715 million once the minimum subscription level has been reached and up to a further US$2.61 million for additional subscriptions up to the maximum level (for a total of US$5.325 million).
In addition to the tariff, Elk has committed to make further contributions to Natrona or to arrange loan monies to cover any capital shortfalls during the first 5 years.
Elk will provide the pipeline to NPL in ready-to-use order and is required undertake some modest repairs and install some additional crude inlet and outlet tie-ins at its cost. This work will be completed in time for transportation of first oil through the pipeline.
Grieve EOR Project
Elk has been progressing its Grieve enhanced oil recovery project with operator Denbury Resources (NYSE: DNR) starting water injection in mid-May to accelerate re-pressurising of the Grieve Muddy oil reservoir.
The Grieve project is fully funded and is expected to produce up to 1,000 barrels of oil per day net within three years, and possibly up to 5,000 barrels of oil per day by five years.
It has estimated proved and probable reserves of 18.6 million barrels of oil in the target Muddy reservoir.
Elk has a 35% interest in Grieve.
Elk had $2.25 million in cash as of 31 March 2013 but is fully funded to first oil for the Grieve EOR Project.
The sale of the Grieve oil export pipeline to Natrona allows Elk to realise some of the value it has created from its work on restoring it to full operation while maintaining a substantial stake to protect its own interests.
In current markets, cash is king as on top of the cash of $2.25 million at March quarter end, the sale will take Elk's cash levels to about $7.57 million. This is against a current market cap. of $26.87 million.
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