View from the top: US Oil and Gas

After a c. 70% fall in US Oil and Gas's share price following an update on the company's Eblana-1 well, chief executive Brian McDonnell explains why the share price fall was exacerbated and the investment case for the company.

*Thank you to all the Interactive Investor users who submitted questions for this interview. Due to the large number received, the most common and relevant queries were put to Brian McDonnell*

Current situation

The share price of the company has suffered badly since the announcement of interim results from Eblana 1. Has this company got any future now?

The fundamentals of this company are better than they have ever been. From having "potential" oil bearing zones, we have proven productive zones, including a very large one.

We are in the middle of the work-over programme. We have every confidence that we will be able to flow this well.

I won't predict a flow rate, but the signs are very good indeed.

We have a confirmed discovery, and it looks large. We just want to get on with the next part of the programme.

So then why has the share price collapsed?

Whether people are selling or buying - that is their decision.

This is an exploration programme and we are in this for the long term. This is our first well and we have only begun to understand its potential. There will also be further wells.

I believe that investors will come to see that the fundamentals are actually stronger than they were before.

Eblana#1

Earlier news releases stated possible pay zones of 1,100 feet but [Thursday's] announcement quotes a much lower figure. How do you account for that?

"Potential" pay zones found in a drill are exactly that - potential - as indicated by the data coming up as you drill.

The work-over allows you to perforate directly into the zones. It gives much greater certainty. That is why we can now talk about "productive zones".

How much potential pay do you believe to be in the shallower zones?

That remains to be seen.

The worry now is that the 67 million stock tank barrels (mmstb) figure will now be reduced given that only two of the 11/30 zones flowed. Do you have any comment on this? Have these testing results affected the overall size of the anomaly according the companies pre drill expectations?

Flow and oil in place are not closely related. We are confident about the estimated oil volume numbers.

It has been said that Eblana #1 was the lesser target, shouldn't you have gone for the better Eblana #2 location?

Eblana#2 looked better in terms of the IPDS numbers, but Eblana#1 was the safer bet as all the different survey results, geochemical, etc came together and agreed most closely.

It was therefore the safer target, but possibly not the biggest.

The company has installed a production well head - why do this on incomplete data and is production from this well still likely?

The work-over is not finished and we have big producing zones to work with.

Is the wax and kerogene from shale?

No. The oil is not shale oil.

The wax is an obstruction forming at the well because of formation clogging up. Local opening of the pores close to the perforations is all that's required.

What techniques do you propose to use to remove the paraffin wax? Why were none of the zones fracced or acidized? Is the volume of oil in the producing zones significant enough to warrant extended stimulation techniques for production and what are the maximum expectations?

We believe advanced techniques offer a very high chance of success, but they need thinking through and require some specialist equipment and personnel. The potential of the productive zones is very large.

Why were the zones in the 3,000-4,500 feet not tested, taking into account this is the light sweet crude zone, and is the producing area's rail road valley?

The order of testing was in terms of efficiency. We simply ran out of time. That is why we have paused the operation.

What is the oil composition of the two zones which were confirmed as oil-bearing zones (i.e. light, medium, heavy)?

Medium.

What depths are the two gross oil zones which flowed?

Between 5,000 and 8,000 feet.

IPDS

When asked at the annual general meeting about the IPDS reading for EB1 well, exploration director Karim Akrawi said that EB1 was not 0.96 but EB2 was. If 0.96 isn't the IPDS reading for this well, then what is?

The IPDS is data is performing well. It led us, along with all the other data sets, to a discovery. We hit the oil.

Is the oil mixed in with the water is giving false IPDS readings? The IPDS technology indicates how much water content is in the ground and the quality of oil present - did IPDS testing indicate that there may be water content present?

We know there is a water drive system here, and that was one of the important plus factors in this area.

Water is only a problem if there is no oil. We have lots of oil.

Eblana#2 and upcoming drilling

Please could you explain your statement: "Further analysis of the Eblana#1 data may result in the company adjusting the drilling priority of Eblana#2 and Eblana#3. The market will be updated when a decision is reached."

The relative order of targets may change. We may drill Eblana#3 before #2 or we may adjust targets slightly.

You have to take new data into account at every stage.

Do you not think it would be more pertinent to move to Eblana#2, which was the declared larger target, instead of potentially wasting funds on Eblana#1 that could still provide a negative result?

No. We have producer zones. That is what a drill is trying to find.

If Eblana #1 does not flow, what is the point going ahead with Eblana#2?

This was always going to be a multi-well campaign. We have done remarkably well to confirm large oil-producing zones on our first drill. This is the first discovery in Nevada for decades. But no matter what the results from Eblana #1, one well was never going to be enough.

So, yes, there will be a second drill.

At the AGM, a potential production revenue figure of between $1 million and $2 million (£0.63 and £1.26 million) was mentioned. Where did that figure come from and doesn't it look impossible now?

These figures are perfectly possible given the potential reserves. They did not refer to a single first well. But we still believe it could be produced by several wells producing at the same time. And we intend to drill several wells.

CPR

What is the time frame for the CPR?

That is determined by the consultants, not by us, but they have the data already and are working on it.

Will the proposed CPR by Forest and Garb be released to shareholders this time in full as opposed to a cover letter?

We will make that decision at the time.

Financial/cash/funding

Does the company have enough money to drill Eblana#2 or #3 - especially given that the production test has gone on longer than planned and is still to be concluded?

We remain committed to drilling at least two wells and are still funded for those and the work-over programme. We have controlled expenditure extremely well and had contingencies built into our budgets. We will obviously keep the situation under continuous review.

Some investors may worry that directors may have sold shares immediately before the last RNS in a "pump and dump". Can you comment on that?

Under normal circumstances, I would be offended at the question, but at this point I believe we owe it to shareholders to satisfy as many concerns they may have as possible.

The answer is absolutely not. That would be totally illegal. The directors still hold the same numbers of shares. Nor do we believe that there was any leakage of information by the company or its directors before the press release.

What about friends or relatives?

The law applies to them too. I can add that, rather than selling, my relatives had been buying right up to the RNS.

Communications

Why did the company report that progress was "satisfactory" during the work-over when it is now clear there had been no flow up to then and there had been problems?

Problems are to be expected in these types of operations. Progress was satisfactory because we were solving the problems, and the programme was progressing.

Why was there a delay of a week after the rig had left the site before news of the result was released?

Because the data has to be checked and rechecked; especially the calculations about the size of productive zones. These are complex analyses and have to be done correctly.

The site was demobilised only on the Friday and key personnel faced two days' travel to their home bases. Then the data can be processed.

It was made clear at the AGM that results would be announced after the work-over was complete. I might add that the work-over is still not complete, and what we have announced is an interim report.

Why did the company upload the US news video clip onto its website, despite knowing that the info was not accurate, as proven in Thursday's RNS that gives the timescales of the testing process?

The broadcast talks about possible large oil accumulations in Nevada. Our results are confirming that. So we don't see a problem there. We would have preferred to have no coverage at all though.

In fact it was shareholders, against the wishes of the company, who stoked the broadcaster's interest in what we were doing in Hot Creek Valley. We believed it was far too early. We had no editorial control over the news broadcast that was aired. There was a news team camped outside the drill site and we took what we considered to be the best course of action to invite them in and conduct a brief interview.

It should be noted that the interview took place three weeks before it was aired and no new information was given. While there were a lot of "ifs" and "maybes", the broadcast overall was well crafted. The broadcast was aired in the United States and it was recognized that while some people were aware of the broadcast, most investors were not aware of it, so according to best practice, the decision was made to place it on the website.

ADRs

Why have the ADRs been delayed and when do you expect them to be online?

The priority at the time was to focus on drilling and testing. Now that we have this pause in testing, we can get back to pushing the ADRs.

I don't want to be held to timelines but we will now be prioritising this.