Trap springs £10m deal for Kew North Sea oil field

TRAP Oil, the North Sea-focused energy group, has struck a farm-out deal worth up to £10 million on part of the exploration portfolio it bought from an Aberdeenshire couple earlier this year.

Under the agreement, the Aim-quoted company will sell 80 per cent of its working interest in its Kew asset to Centrica’s North Sea Oil arm and Japanese group JX Nippon Exploration and Production.

The two companies will fund preliminary seismic work and look to drill an appraisal well expected to cost in the region of £40m to fully evaluate the Kew discovery.

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Trap Oil will receive a cash payment of £2.75m and could receive between £4.75m and £10m depending on whether the appraisal well is proceeded with.

Financial director David Kemp described it as a “great deal” for the company which demonstrated the value of the portfolio it acquired when it bought Reach Oil & Gas from Miles Newman and Isabel Davies for £30m in July.

“It is not just a good deal in financial terms but we are also bringing a very strong active operator onboard in Centrica and that’s where we get the real benefits from our interest,” said Kemp.

Reach had been founded by industry experts Newman and Davies who quit their jobs to work on building up interests in exploration licences.

At the time of the acquisition, Trap Oil estimated at least £17m of carried activity – where other companies effectively pay the drilling costs in return for a stake in an asset – and farm-in income would be gained from the deal.

Kemp said that the Kew agreement, which requires approval from the UK government, demonstrated the “considerable value” in the Reach assets. He said Trap Oil was actively looking at further trading of its portfolio which could see stakes in exploration interests farmed-out or increased.

As well as exploration work, the company is looking to secure a sizeable production asset which will provide cash flow and tax efficiencies to offset against its drilling programme.

The company is planning to drill seven wells next year which would make it among the most active of explorers in the North Sea.

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Trap Oil’s operating model means much of the capital expenditure involved in drilling work is carried by its partners on prospects which include much larger oil companies including Aberdeen-based Dana Petroleum and Valiant. Trap’s interests in the wells range from 10 per cent to 35 per cent and its investment in next year’s drilling programme is likely to total around £5m-£6m.

The company, which floated earlier this year, has a 15 per cent interest in the Orchid well in the North Sea which is expected to be drilled before the end of the year.

Thomas Martin, an analyst at Collins Stewart, said he viewed the Kew deal as “favourable” given that it provided a useful cash inflow whilst retaining a material 20 per cent stake in the prospect and full carry on costs.

The broker has a “buy” rating and a 50p price target on the shares. GMP Securities also said the deal demonstrated the “considerable value in the Reach Oil & Gas portfolio”. Shares in Trap Oil closed up 0.25p at 27.12p.