AWE, which still has a large frontier block in the frontier offshore basin, has clearly decided that the declining production from Cliff Head is better in the hands of a dedicated junior, and while AWE will lose the cash flow from the field, it will free up money and resources for its other interests, including the significant Waitsia Permian gas field in the onshore area.
Cliff Head production has declined from more than 12,000 barrels of oil per day when the field was sanctioned to around 1500bopd, potentially giving a net Elixir 862bopd, which is a hefty increase from no production today if the deal closes.
The declining field has a projected 10 year life, and while there's probably not a lot of obvious exploration upside in the WA-31-L production licence, there are numerous extension projects have potential to extend the economic field life beyond 2026.
Elixir will pay just $1 million upfront, and a capped series of payments over the next five years, based on net cash flow generation hurdles.
The additional funds are only payable in fiscal years where the field generates above a net $3 million to Elixir, and allows AWE to claim 25% of that excess, capped at $9 million in aggregate.
Based on Elixir's forecast oil prices, production profiles, operating and capital cost estimates, the cash flow generated from the remaining 2P reserves at Cliff Head is adequate to fund future abandonment of the field.
Any increase in oil price, lowering of production costs or implementation of field life extension projects materially improve the economics and will likely extend the field life beyond 2026.
In the event of an oil price recovery Elixir has enough equity to bring in a partner to help fund the work.
"This acquisition will be transformational to Elixir and catapults the Company into the ranks of only
a handful of Western Australian ASX listed oil producers, providing shareholders with significant leverage to oil prices in addition to infield drilling, enhanced oil recovery potential and near field exploration and appraisal opportunities," Elixir said in a statement this morning.
Elixir's management team was previously involved in Cliff Head in the heady days of the early 2000s, in the flush of success with the initial Cliff Head discoveries, and who have seen the numerous exploration disappointments.
The junior has been looking to lock in production over the past 6-9 months, with its early stage French asset paralysed and its Petra project in the US being troubled by low oil prices, although Elixir says any discovery would be commercial.
Since May 2006 Cliff Head has produced more than 14 million barrels of oil and continues to produce at above originally forecast rates.
The asset includes the only platform south of the Carnarvon Basin and an onshore processing facility at Arrowsmith, which could become a key asset in the eventual development of unconventional oil in the onshore Basin, and which has spare capacity for any offshore discoveries.
The field if operated by Fosun International, which now owns ROC Oil Company, the field's operator since before discovery in 2001.
ROC is not a core asset for Fosun, which primarily secured control of ROC for its Chinese interests, and is considered a possible seller.
Elixir has secured an option over the field until November 30 to conclude due diligence, which can be extended until December 24 with a 10% non-refundable deposit.
Elixir also needs to raise $3 million in funding, for which it can moved into a trading halt.
"Acquiring Cliff Head is a game-changer for Elixir and with appropriate risk management going forward, will provide the company with an excellent cash flow base for many years to come," Elixir managing director Dougal Ferguson said.
He expressed a hope that oil prices would remain sufficiently robust to fund drilling at the company's low cost but high impact Petra project in Colorado.
