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Sefton Resources – Californian Oil Producer with CBM and Pipeline Assets. Speculative Buy with 5p Target Price

Small in size but big on promise, Sefton Resources owns outright oil production assets in California which have proven reserves with a Present Value of GBP50 million, as well as gas and infrastructure assets in Kansas. The company has been listed on AIM for more than a decade and now is not only cash generative but profitable and looking to increase its profile. This year the board have three key objectives: to increase oil production in California, activate the Kansas gas assets and increase reserves. All these moves will allow further value to be added.

Production is set to increase from Sefton’s primary producing asset in California at Tapia Canyon which currently produces 140 barrels of oil per day (bopd) thanks to the implementation of a cyclic steam pilot implemented in 2009 as an enhanced recovery technology. The company has now transitioned to the next phase of testing a continuous steam flood pilot, as a way of further increasing recoveries and production. This pilot project currently running at Tapia is providing vital data for the study by consultant Dr Farouq Ali and implementing these findings is expected to lead to increased production.

The Kansas gas assets are planned to be activated this year. These represent Sefton’s more recent acquisitions where conventional gas, Coal Bed Methane (CBM) and gas infrastructure assets have been aggregated as a contrarian play in a low price natural gas environment. In acquiring such assets Sefton has gained a strangle hold over a substantial area in NE Kansas as these pipelines provide the root to market for gas reserve and wells that are currently shut in. Sefton plan to unite the LAGGS and Vanguard pipelines eventually to serve both its own production and that of others.

Reserves are expected to rise in 2011. At Tapia Canyon, this should be achieved through Dr Farouq Ali’s study and the continuous steam pilot which are expected to demonstrate that oil recovery can be improved by heating the oilfield with steam. With a higher recovery, proven reserves will increase. Also activating the Kansas pipeline should allow some of the reserves in the possible and probable categories to become proven reserves.

At the year-end, the Present Value (PV10) of Sefton’s proved oil reserves at the year-end was $80.6 million (GBP50 million). In February 2011, the board announced this PV10 along with the updated reserves estimate for Tapia and Eureka oil fields which revealed, total proven reserves at year-end 2010 stood at 3.8 mmbbl, comprised of 1.6 mmbbl proven developed reserves and 2.2 mmbbl proven undeveloped reserves. Whereas in Kansas estimated possible gas reserves stood at 2.3 Bcf (billion cubic feet of gas).

Sefton recognises the need to improve its profile and has thus embarked on an aggressive broker and Investor Relations programme since the beginning of the year. These initiatives are being undertaken in the belief that Sefton’s assets are materially undervalued and that operational progress together with investor education will drive the share price to more appropriate levels. Recent placings have ensured that the company has the finance in place to fund its Tapia and Kansas activities through to the next stage of development.

Based on the company’s California assets alone, we initiate coverage of Sefton Resources with a 5p target price and speculative buy recommendation.

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