Yesterday the company announced a series of low-cost options over three low-risk oil fields in California, which Damiano described as a smart, well-structured deal that has perfectly positioned the junior to take advantage of any expected upswing in the oil price, and should start generating some cash to help pursue its new strategy of low-risk conventional production.

Sunset Exploration is a private Californian group comprising of the technical team Damiano previously worked with when he ran private Swiss commodity house Mercuria Energy Group's operations in the region.

Together with Sunset Damiano has put together the assets that will be the foundation for the new Xstate plan, and which will hopefully come to dominate the company's tiny production levels today.

"I've been looking at these assets for some time, and we've already done some extensive due diligence to date, and obviously we now have this exclusive period to complete that work and raise our funds to close out the transaction," he said.

If it proceeds with the deal by mid-May, the minnow will have just 60 days to raise the capital to start a phased, 18-month earn-in program, with the targets mostly at Xstate's discretion, commencing with the initial restoration of production from existing wells and followed with further development and appraisal drilling.

The company will work towards securing a 50% to 87.5% working interest in the three fields, and will take over operatorship.

The prize is a potential for a gross 10 million barrels of oil.

Secret Weapon

Damiano said Sunset was prepared to take its option fee in shares rather than cash, so the JV partners would be aligned.

Sunset will be paid $US50,000 ($A196,000) in Xstate shares post successful due diligence with a further $50,000 worth of shares once oil hits 20 barrels of oil per day over a 30 day period and again when production doubles to 40bopd over a month.

"What we have done here is pay Sunset for this option in Xstate shares, so they will become one of our bigger shareholders, so we have aligned our interest. This is really unlike a lot of deals in Australia where the promoter has come in, and where you have mutually exclusive parties with different interests," he said.

"We haven't just agreed to carry 100% of the costs and the other guy really doesn't care what happens, so we are all motivated to get this done, and done properly. And if we don't like what we see, because this is a series of options we can walk away."

Xstate's point of difference is that it will have a technical team on the ground in California that has worked the rocks for decades, he said.

"A lot of companies have gone to the US, and they've worked the technical teams out of Perth, but what do they know about doing business in the US? What do they know about the geology?" he pondered.

"They have all worked offshore WA or Indonesia, but while the rocks are the same they are different too.

"Our competitive advantage is we are using my former team who have produced in California, and we have been accessing these people over 4-5 months, for free, and we have been able to buy all that work for nothing, and tap into that local knowledge and expertise."

Strategy

Damiano, who joined Xstate last year after helping negotiate Otto Energy's blue sky move into the Alaskan North Slope, told Energy News that the company now feels that exploration is something that should be ‘long-dated', especially for smaller companies, so the time is right to start picking up cash-making production at ‘bottom of the cycle prices'.

It means the large Dempsey and Alvarez gas targets that Xstate shares with Sacgasco, are less attractive to drill, despite California's tight gas market, because the farm-out market is so dry.

"We are basically trying to ensure we are not a one-well wonder," he said.

For the past two years much of Xstate's focus has been on promoting the gas prospects.

Dempsey is a 3D-defined one trillion cubic feet turbidite marine structure with reservoir risk, which will cost around $US5 million to drill to a depth of 3200m, while Alvares is redrill of a 1982 gas discovery that intersected 1500m of gas shows, and for which pipeline quality gas was recovered to surface from the Stoney Creek Formation below from 2500m.

Alvares has flow risks but significant upside of 2.4-10Tcf.

Gas has been unloved and overlooked in California over the years, but Xstate sees significant potential in the local gas market, however given the significant exploration risk the company has moved towards locking in cash flow, with the hopes it can develop a sustainable business that can fund its blue sky potential.

"It is always the case you are in a stronger negotiating position if you have the cash to drill it yourself, so we are shoring up the balance sheet with low risk production that really gives us the ability to fund what we want to do internally without sourcing shareholder funds," he said.

Production base

The junior is looking to spend the next two years building a production asset base with substantial behind pipe reserves and will then drill undeveloped reserves that can be bought to production quickly, achieving economies of scale and increasing field profitability per barrel, and drill more wells has the oil price recovers.

The Monroe Swell field has been dormant since its former operator went bust 18 months ago, and will be picked up from the Bankruptcy Court.

Monroe Swell sits in the Salinas Basin, some 50km northwest of the giant San Ardo field, and produces from the Doud/Burnett and Doud A Miocene sands, similar to those productive at San Ardo.

The Doud pool was discovered in 1949, while the Doud A was discovered in 1987.

"It was a producing field, a long-life asset that really has had no investment over the last 10 years or so, and we believe there is unswept oil and we have 3D to hit the sweetspots after we restore production, which is relatively straightforward," Damiano said.

The field has produced some 830,000 bbl at average depths above 900m, and when production was shut-in in August 2014 it flowed about 40 barrels of oil per day.

The initial acquisition and workover commitment of $US400,000 comprises the purchase of the leases, remediating field facilities and re-working four shut-in wells to bring them back into production.

"Phase two is for us to do some infill drilling and enhanced production, so we think we can grow this to multiples of 20-40bopd over the course of 2016," Damiano said.

Two optional wells are being considered.

The Brentwood Complex story is a little different. It covers two areas, Brentwood and Brentwood West. The western leases have surface facilities, however the main production sits in the eastern leases.

After production was shut down in the late 1990s due to the low oil prices houses were built over Brentwood, and while it is not unknown in California to have nodding donkeys and houses cheek by jowl, it's a more complicated development scenario, requiring more complex permitting and directional drilling.

As biggest opportunity is beneath the housing estate it makes sense to tackle the cheaper, smaller pools, upgrade the production facility and wait until the oil price rises again before drilling in east Brentwood.

The options for the Brentwood and West Brentwood fields will cost around $3 million all in, but would add another 1000 acres, giving Xstate more than 4000 acres.

The two Brentwood fields are the only known oil fields in the Sacramento Basin, and were discovered in the 1960s.

Brentwood has produced some 8MMbbl and 60 billion cubic feet to date, but the field was shut in in 1999 during low oil prices with six wells flowing 60bopd.

The West Brentwood field is located adjacent to the Brentwood field and has produced some 3MMbbl of oil and 9Bcf of gas.

Sacgasco drilled a well in 2013 into the West Brentwood leases, the unsuccessful Shea Dividend-1-8, but Xstate is looking at different targets using the 3D that has defined a prospect, now fully permitted, that needs to be drilled by the end of 2016 for Xstate to exercise its option.

The Brentwood Complex has up to 4.4MMbbl in unproduced oil, and wells can flow at up to 500bopd.

Xstate is entitled to receive 75% of cash flows until payback from Monroe Swell and West Brentwood.

The initial anticipated cost of the Monroe Swell program is $3 million.

Xstate was trading at $0.009 per share this morning.