Late last month Tri-Valley Corporation (NYSE AMEX: TIV) announced they had received a “favorable settlement of lease termination litigation” that had been brought in 2009 by the lessors of its Lenox Ranch oil and gas leases located in their Pleasant Valley oil sands project near Oxnard, California and while the terms of the settlement agreement certainly appear to be advantageous for TIV it still leaves the oil and natural gas exploration company with a lot of work to be done before they ever realize a profit.
In the settlement TIV was granted an extension that requires them to drill a new exploration well below a depth of 6,000 feet. That will now have to occur by May 1, 2013 and as part of the settlement TIV will not have to relinquish the oil and gas rights below 6,000 feet if they have not established commercial production by that date. TIV also saw their surface rentals and minimum royalty payments for 2009 and 2010 waived by the lessors and the primary term of the leases extended until May 1, 2014.
This is good news for TIV and as Maston N. Cunningham, President and CEO of TIV, stated following the announced settlement “The favorable litigation settlement on the Lenox property preserves an important opportunity for Tri-Valley and its partners in the Pleasant Valley oil sands project where over $7 million has been invested in the property, including a new horizontal well that was drilled in late 2008.”
As favorable as the settlement is being made out to be it does little to put money in the pockets of shareholders as the work still needs to be done to actually get production out of the new well and find additional opportunities for production. Most of 2009 was washed out at their Pleasant Valley oil sands project because of the litigation as well as the required installation of an improved electric distribution system ordered by a local regulatory body to address air emissions standards.
That setback hammered TIV’s oil and gas revenues for the year as fell from $3.7 million in revenue in 2008 to $1.0 million in 2009, a 71.6% fall. According to their year-end report the company managed to make some gains in their oil and gas revenues during 2010 but the roughly $1.8 million is still a far cry from two years earlier. Of course the issues with Pleasant Valley were still ongoing which meant TIV had to rely more heavily on their Claflin project in Edison Oil Field, located near Bakersfield, California.
This is where TIV is really banking on their success as they have put together a plan for the drilling of five new vertical wells by June 2011. In a release issued by TIV on February 10, 2011 they acknowledged they currently have four reactivated wells in production at Claflin which are “averaging approximately 30 barrels of oil per day.” That same release states that the company’s net share of the total proved reserves is estimated at 1.7 million barrels. Obviously this means they have a long way to go if they are currently averaging 30 barrels of oil per day which means there will need to be a considerable investment in developing the program. For their part TIV has insisted this is the course they are willing to take and have outlined a plan to “further develop and enhance this producing asset,” the initial phase of this plan is “estimated to require $2 million in new capital including expenditures for upgrades to facilities and infrastructure to reduce operating costs associated with current and future oil production.”
Cunningham has said the company can “use proceeds from our ATM (at the market) financing to fund these projects,” something that if done could give shareholders a break from seeing their position diluted due to offerings. The goal outlined by TIV, according to their plan, would include 13 vertical and nine horizontal wells which, over 15 years, would return that 1.7 million barrels of oil.
Now if oil continues to move above $100 per barrel that translates into a nice chunk of change from this property but TIV won’t be making any money if they can’t get the oil out of the ground. Cunningham has said “The Claflin program will be important to significantly increasing our oil production in 2011 and 2012” which should mean many investors will be looking forward to first quarter figures and comparing them to the fourth quarter oil and gas revenues that TIV generated $388,000 with net production of 5,109 barrels of oil.
If TIV is able to stay on track with what Cunningham has outlined for 2011, “to increase daily gross production from 300 barrels of oil on average to 1,000 by year-end. We expect increased production at both Pleasant Valley and Claflin. The first SAGD oil sands production in the U.S. will be initiated at Pleasant Valley this year, and we are optimistic that we will be able to recover significantly more oil from the site. We intend to drill up to 22 new wells at Claflin. We also believe we can drive production costs lower – up to 20% per barrel at Pleasant Valley and up to 50% per barrel at Claflin through increased volumes and other cost reductions,” then investors should be very happy.
That is if the current price of oil remains where it stands but as TIV noted in their fourth quarter and year-end results “Prices for crude oil tend to be influenced by large, foreign state-owned oil companies based upon global supply and demand, while natural gas prices seem to be more dependent on national and local conditions. We expect that natural gas prices will continue at current levels over the next two years. If, however, oil and gas prices should fall, due to new regulatory measures or the discovery of new and easily producible reserves, our revenue from crude oil and natural gas sales would also fall.”
This could be of some concern for some investors who might not feel comfortable having to rely on those “large, foreign state-owned oil companies” to see their shares climb. Ultimately TIV still needs to up their production and assuming Cunningham is going to keep the company on track that production should be coming. The company has shed some weight by getting rid of unneeded assets and appear to be focused on advancing their oil and gas properties. As it stands shares are trading around the 0.58 – 0.61 range, above their 50-day moving average of 0.47 but trailing their 200-day moving average of 0.66 yet their trading volume remains strong, making them a popular stock among many investors who see significant potential in the company.