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New Guinea Energy Transitions To Revenue Earner, Rig Contract

New Guinea Energy (ASX: NGE) is set to receive additional revenue from its Western Drilling (WDL) joint venture, which has secured a contract for the use of its SL 7 Heli Rig and camp in Papua New Guinea.

WDL, an equal joint venture with Maps Tuna, has agreed terms for a single well that would see the Rig deployed for about 150 days.

The milestone contract includes an option for a second well that could extend the contract by another 150 days.

"In the current economic conditions, junior explorers are finding it difficult and expensive to access equity funding for their activities. The dividends that NGE will receive from WDL from this contract will be a welcome source of additional revenue in 2014," chief executive officer Grant Worner said.

"We are delighted that deployment of the drilling rig will provide employment opportunities for the people of PNG while supporting the growth of the oil and gas industry within the country."

Revenue from the drilling contract will support the company's exploration activities.

Western Drilling

New Guinea Energy had formed the Western Drilling joint venture with Maps Tuna in 2011 to take advantage of the expected drilling activity in the country.

Eight wells were drilled in 2011 in the Western Province alone.

WDL's OIME SL 7 1000 HP heli-portable drilling rig, which was acquired for US$7.1 million on March 2011, is suited to the challenging terrain of Papua New Guinea and is one of the only independent rigs available.

The rig is optimised for move with a medium-lift helicopter in loads of less than four tons.

It is a basic, mechanically powered (rather than electic) rig that is well suited for conditions in the country and when fitted with a topdrive, represents the best balance between portability and capability for drilling.

The rig will is able to drill to depths in excess of 4000 metres with 4 inch drill pipe.

Exploration Licences

New Guinea Energy is continuing is search for a farm-in partner to provide a free carry for the drilling of the Kaisy-1 oil well, which targets more than 20 million barrels (MMbbl) of recoverable oil in PPL 267.

The company is targeting to drilling Kaisy-1 in the second quarter of 2014.

A success at Kaisy-1 will de-risk many other leads in PPL 267 with the start-up of production allowing the company to build a sustainable business that can fund larger growth opportunities without the need to continually raise capital and dilute shareholders' equity.

To support this oil hunt, the company continues to pursue its strategy of early commercialisation of its gas assets.

This involves identifying drillable targets to replicate its successes in farming-out PPL 268 and 269 to Talisman Energy (TSE: TLM) and Mitsubishi as well as the sale of PPL 277 to ExxonMobil (NYSE: XON) and Oil Search (ASX: OSH) for $15 million upfront and another $20 million in potential ongoing royalty.

Analysis

We expect this to be value as well as revenue accretive for NGE. Besides the transition to revenue generation, the rig contract also validates New Guinea Energy's decision to acquire the rig and could lead to future contracts.

The contract will also help fund the company's exploration activities as it seeks early commercialisation of its gas assets that will in turn finance its oil development.

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