Lakes this week announced a package of deals with unlisted Brisbane-based Armour Energy over Lake's permits in the onshore Gippsland and Otway basins.

Armour is run by ex-Arrow Energy executives, with a keen eye for unconventional gas opportunities and its initial focus has been unconventional oil and gas in the Northern Territory.

It is the latest in a series of spin-offs by ASX-listed D'Aguliar Gold, which is planning an initial public offering for Armour in 2012.

The deal between Lakes and Armour coincides with the long-awaited start this month of fracture stimulation and testing by Beach Energy of Boundary Creek-2 and Wombat-4 in Lakes Oil's PRL2 in the onshore Gippsland.

The activity is part of a farm-out of PRL2 to Beach, announced in August 2010, before Beach was making headlines for its expertise in identifying and developing unconventional gas.

Beach's subsequent success in the Cooper Basin and now Armour Energy's willingness to spend tens of millions on a new farm-in, should tell investors the upstream industry has re-rated Lakes.

It's a sudden turnaround for Lakes, which underwhelmed investors and its peers with its pursuit of tight gas in the onshore Gippsland Basin over most of the past decade.

Managing director Robert Annells told EnergyNewsPremium the company's tight gas journey had been a long one.

"It's taken a long time and about $50 million, which is a lot of money for a company of our size," he said.

"There have been a lot of deaf ears along the way but the results in the next month or so will wake up many people.

"It couldn't come at a better time, with gas prices expected to rise two or three times in the eastern states."

Annells said the company knew it had made a number of significant discoveries in the onshore Gippsland over the past decade but it did not have the funds to prove commerciality in any one location.

"We drilled as many wells as we could afford over the widest possible area so we didn't have to relinquish large parts of our permits after 10 years," he said.

"We got a lot of acreage but the penalty for that was we couldn't say we had fracced and proved commerciality.

"The best we had was Wombat-4, where we had got a sustained flow of 800,000 cubic feet per day from one zone.

"Others looked at that and said it wasn't commercial but I couldn't make them understand that these test results were from only one zone.

"I guess we were a bit like the boy who cried wolf.

"After so many years slogging away, we just couldn't get others to understand that we had found something."

Annells said Beach had up to 20 prospective zones to choose from at Wombat-4, which would be fracced after Boundary Creek-2.

He said he expected Beach would probably choose the best four zones at Wombat-4 and fracture them all at the same time.

Annells said the company might finally do something about its unwieldy capital structure, which had helped make Lakes unappealing to some investors.

Lakes is Australia's oldest oil and gas explorer and has a capital structure to match, with 6022 million shares on issue at June 30, 2011.

In the absence of convincing results from its tight gas campaign, the company's share price has languished below one cent since 2009 and has not been higher than a few cents at any time in the past decade.

Annells said success at Boundary Creek-2 and/or Wombat-4 could pave the way for a long-anticipated share consolidation.

"I'm an old stockbroker. Over many years, I've seen consolidations always lose value for shareholders," he said.

"For example, if a company consolidated 100 shares into one, the share price doesn't rise by 100 times.

"I'm not prepared to take that slaughter for shareholders.

"But if, for example, we had some good flows from Beach's fracturing and testing and we got some excitement in the share price, then a consolidation might be fair for shareholders."

In the short term, the number of shares on issue is set to increase further.

Armour will receive a placement of 900 million shares, representing about 13% of Lakes' expanded capital.

The placement at 25c per share will raise $2.25 million.

Armour is also being given two seats on the Lakes board, with Nick Mather and Phil McNamara expected to fill the non-executive positions.

On the ground, the deal between Armour and Lakes begins over in the Otway Basin in PEP 169.

Armour will fund a well on the Morey prospect to earn 51% of the permit.

Morey is a conventional gas target just north of the old Iona gas field.

A 3D seismic survey by Lakes suggests Morey is a lookalike of Iona.

While small in size, the probability of success at Morey (and a reliable cash flow) is considered to be high.

In the Gippsland Basin, Armour has an opportunity to earn a 51% interest in PEP 166 by spending up to $9 million.

Armour is required to spend at least $4.25 million to drill Holgate-1 on the Yallourn-Morwell anticline, with the option to spend a further $4.75 million to drill and fracture stimulate an additional well.

The final part of the agreement is a three-year option to acquire some of Lakes' remaining interests in PRL2, where Beach is set to begin fracture stimulation as part of its earlier joint venture with Lakes.

Armour can spend up to $30 million on the PRL2 interests, while Beach is spending up to $50 million.

To many Lakes shareholders, it must all seem like a dream after so many years in the wilderness.