**updated with CEO and Executive Director comments from Monday conference call
New Zealand Energy Corp. (NZEC) (CVE:NZ) on Monday said that it is delaying the remaining two wells in its Eltham/Alton drill program in the Taranaki Basin to focus on the assets it is acquiring from Origin Energy Resources, as it works to increase near-term production and cash flow while reducing exploration expenses.
Though it still views its Eltham and Alton permits as prospective, NZEC said it intends to focus in the near-term on lower-cost opportunities that are close to infrastructure.
Indeed, the acquisition from Origin includes new petroleum licenses that it says are "central" to a network of oil and gas gathering pipelines and the full-cycle Waihapa Production Station.
The deal, originally announced in May this past year, is expected close in the second quarter of fiscal 2013.
“NZEC believes the assets that the company plans to acquire from Origin bring multiple opportunities to grow near-term oil and gas production and cash flow, with longer-term upside from the company's substantial exploration portfolio,” said director and CEO John Proust.
To date, the company has drilled 10 wells on its Eltham Permit in the Taranaki Basin, with five oil discoveries and results pending from two Mt. Messenger wells. NZEC is currently producing around 335 barrels of oil per day (bbl/d) from three wells on its Copper Moki site and one well on the Waitapu site.
“While pending wells could result in additional production and cash flow, the company's assessment is that flow rates from the new wells will not be adequate to achieve anticipated targets and NZEC's previous production guidance is therefore withdrawn,” said Proust.
Before cutting the program short, the company had previously expected to produce 3,000 barrels of oil equivalent (boe) per day once its eight well exploration campaign in the Taranaki Basin was complete.
"We withdrew our guidance after on Friday we received results from our Arakamu well - one that we had very strong hopes for - and it was clear that we weren’t going to get to our 3,000 boe guidance."
Proust said that near-term catalysts for the company include releasing the results of its two Mt. Messenger wells.
"Completion activities are ongoing currently, and we are optimistic that those will be successful very soon."
Next on the company's priority list is the Origin deal, where upon closing NZEC will re-activate, or "turn on" six wells in the Tikorangi formation using an established gas lift system.
"Once those six wells have been turned on and have flowed for a period of time, then we'll look at putting in electric submersible pumps (ESPs) high volume pumps in the holes to create a greater flow rate," Proust said.
“Recompletion of these wells would be significantly less expensive and faster than drilling new wells, and successful discoveries could be quickly tied in to the Waihapa Production Station using existing oil and gas gathering pipelines.
“Both the reactivations and uphole completions could bring near-term, low-cost production and cash flow to the company.”
Proust added that the wells have historically produced over 20 million boe and the company is confident that flush production is likely before the wells achieve stabilized production rates.
Bruce McIntyre, NZEC's executive director, noted that the company has done "extensive engineering work" on the six wells.
"The engineering studies are very encouraging and we feel there is a very good opportunity here."
The company said it has also identified five “high-priority” Mt. Messenger targets in the southwest corner of the Origin petroleum licenses. Permitting for a new site called Waipapa has been completed, and construction of the drill pad will begin soon to ensure access to these targets once the acquisition deal is completed.
Longer-term exploration plans on the licenses include accessing Mt. Messenger targets from existing drill pads, many of which have gathering pipelines in place.
"In terms of prospectivity, we have identified 25 leads and prospects using 3D seismic on the new assets," Proust said, adding that this brings the total number of leads and prospects on the company's new and existing assets to 85.
"We feel like we're just getting started in this business."
The company said it is advancing “a number of new commercial opportunities” to use the Waihapa Production Station to its full potential and maximize facility revenues, while ensuring that its gas and associated natural gas liquids production can be efficiently delivered to market.
Although the oil shale formations have yet to be proven with an exploration well, NZEC said the “considerable hydrocarbon potential” and scale of the East Coast will be tested this year.
"It has been our view that a partner would be the right way to go in the East Coast and we are pursuing that alternative," noted Proust.
Six exploration wells are planned for 2013, of which two will be drilled by NZEC at Ranui and Castlepoint in November.
The company’s current net working capital position is estimated at C$16.8 million. Ongoing overhead, operations and acquisitions may be funded by a combination of cash flow generated through production, credit facilities, joint ventures, commercial arrangements or other financing alternatives, it said.
While Proust didn't provide exact numbers as to capital spending in 2013, he did say the company would be "very judicious" about it spend its dollars.
“With a backdrop of decreasing netbacks for North American oil companies, NZEC's ability to sell its oil at Brent pricing should continue to differentiate the company from its peers,” Proust concluded.
The company holds the largest onshore exploration land package on New Zealand's North Island, with conventional opportunities in the country's main Taranaki Basin production fairway and both conventional and unconventional potential in the untapped, East Coast "new frontier" of the nation’s oil shales.
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