On 14th May Sefton Resources announced that they had successfully completed a £2 million placing, which was oversubscribed, and a £10 million Equity Financing Facility. Chairman Jim Ellerton commented at the time that this "will allow acceleration of the our investment in the on-going development of our oil and gas and pipelines assets in Kansas that are expected to generate a new revenue stream for the Company."

In view of the significance of this news, we took the opportunity to put some investor focused questions to the company in this exclusive Q&A session. We trust readers will find it informative.

MM: Can you summarise for new readers the Sefton Resources business model including current operations, key strategic objectives and how the flexible financing, through the recently announced Henderson-backed £10million Equity Financing Facility (EFF), will help the company to service operations and achieve strategic objectives?

JE: Sefton is an AIM-listed US oil and gas production company with interests in California and Kansas.

In California, the Company owns 100% of two oil fields, Tapia Canyon (heavy gravity oil) and Eureka Canyon (medium gravity oil). Proved reserves stood at 3.8 million barrels at the end of 2011. The current focus is on Tapia Canyon where Sefton continues to drill and cyclic steam wells to increase production; and is awaiting results of the Dr Ali report to determine optimum way to fully develop the field.

In East Kansas, Sefton has leases over 45,000 acres in the Forest City Basin where coal bed methane, as well as conventional oil and gas deposits, are targets. The Company has acquired three gas pipelines and already two have been refurbished and are in the process of being certified and connected to the Southern Star Interstate Pipeline system. The gas pipelines will transport the Company’s expected future gas production in East Kansas as well as generating gas transmission fees from third parties.  The gas pipelines are expected to flow first gas and generate revenues for the Company from the summer of 2012.

One part of the plan is to establish a “basket” of financial instruments to utilise in asset development and future acquisitions in addition to debt, industry joint-ventures etc, the £10 million EEF and any of the aforementioned can be used in the most cost-effective effective and least dilutionary way.

MM: In addition to the EFF above you have also announced Sefton Resources has raised £2million specifically for the expansion of leasing and re-completion programmes in Kansas.  Can you explain to readers what this work entails and why this investment should create value for shareholders?

JE: Sefton is looking to increase its acreage of leases close its pipeline system in Kansas and the funds raised will allow the Company to probably double its leased area. These leases have both oil and gas wells which are not currently producing. The whole region is overlain by a series of coal seams and so each well comes with coalbed methane (CBM) potential. The new money will finance the acceleration of the leasing and recompletion program which will allow the Company to gain new leases and working over existing oil, gas and CBM wells to bring them back into production; and allow for a faster build-up of oil and gas production in Kansas. In addition,  to strengthen the shareholder base by bringing in more institutional holders.

MM: How significant could Kansas be, when considering the magnitude of the company as a whole and also when comparing against Californian operations?

JE: The potential in Kansas is vast and the leased area that the Company has in its sights could support a significant number of wells. On this kind of basis, Sefton could easily become a significant oil and gas producer in Kansas.

MM: Recognising the size and potential of Kansas operations, how will the company ensure assets are developed in a manageable fashion, limiting dilution particularly during periods of market difficulty, as we are experiencing at the moment?

JE: The strategic objectives are to acquire long-life, controlling interests, partially-developed reserves and add value in order to maximise shareholder value through asset development. Initially the Company uses its own funds and then looks to accelerate the development of these assets and maximise the potential using third party capital, farm-out or merger. See my answer to question 1.

MM: With regard to California, what is the significance of Dr Farouq Ali's report on full steam flood?

JE: Tapia Canyon is a heavy oil field and to date the majority of oil production has come from using primary production techniques. Over recent years, Sefton has been investigating the application of steam in its secondary recovery programme to heat up the reservoir and reduce the viscosity to allow the oil to flow more freely. The goal is to further improve the Tapia field’s recovery factor and increase reserves. The Company has also engaged Dr Farouq Ali, a recognized world-expert in this area, to advise on an application of a full-field steam-flood development of the Tapia field. If a full-field steam flood is recommended by that report, then its application would be expected to have a material impact on the Tapia field’s overall recovery factor, reserves and the optimum way of developing the field.

MM: Recognising the issue of resource boundaries and license areas, how practical, commercial and acceptable could full steam flooding really be?

JE: The Company owns a 100% interest in the leases that cover the entire Tapia Canyon oil field. This field is bisected by a series of faults which serve to compartmentalise the reservoir into a number of discrete blocks. As far as the permitting of a full steam flood is concerned, the work that the Company has already undertaken is estimated by the management to cover 70%  of the permits that may be required.

The work  by Dr Farouq Ali will determine the ultimate recovery factor that could be achieved using a full steam flood of the Tapia Canyon oil field and the amounts of steam necessary plus the field design concerning injection wells and producing well necessary to take production to 1,000 barrels a day and beyond. With this vital data we will be able to get our consultants to provide the detailed engineering for such a project and the budgets.

To get an idea of the potential, we would drew investors attention to what we see as the template for Tapia which is the Berry field which lies nearby. It has to be pointed out that California has significant heavy oil deposits that have been and currently are being “steamed” – so it is an acceptable development technology, thus enabling “permits” to be obtained.

MM: Sefton Resources is a profitable scaleable business, but still in development phase and thus consuming more cash than it generates. What are the strategic and operational steps to make the company self-financing, thus bringing an end to dilution for day-to-day business development?

JE: The Company has tremendous scope for growth purely based on two projects which are already 100% owned. Both these projects will require significant investment over the coming years to fund their development. Sefton is looking to assemble a basket of financial instruments to provide future funding flexibility to develop its assets; and the Directors are in the process of negotiating enlarged debt funding facilities. The recently announced Letter of Intent in relation to a three-year £10 million EFF with Henderson’s subsidiary Darwin Strategic Limited is seen as just one element in this basket.

As well as industry-related financings using joint venture financing or farm out deals to add further to the future financing alternatives available to the Company. Sefton owns all its project 100% which is a real bonus when it comes to future financing of capital expenditure for growth as it gives the management team access to industry-style financing deals such as asset development using third party capital with funds coming from farm-outs or merger. The Directors believe that these measures  will put Sefton in a sound position to support our on-going strategic expansion.

The Directors are all shareholder and are mindful of dilution but believe that the equity placings undertaken has allowed value to be created. The value added is evidenced by the reports published by Reed W. Ferrill & Associates and the Competent Persons Report published by Dr Nafi Onat which have calculated that at the end of 2011, the potential value of the Company’s  projects stood at $278 million (£173 million) as at 31 December 2011. The Board are seeking to turning this created value into revenue, cash flow and profits for investors.

ENDS

Sefton Resources (LON:SER) Following the release of their half year results on 2^nd September the company provided the market with an operational update on 7^th September which included details of progress in its most recent activities at the East Ventura Basin of California and the Forest City Basin of Eastern Kansas. We took the opportunity to put some investor focused questions to Chairman Jim Ellerton and we hope you will find his answers informative.

We recently published an in-depth Q&A session with Sefton Resources (LON: SER), which gave investors a good overview of the business. We  also highlighted the fact that this profitable oil & gas company was capped at just around £10million at the time. 

The company held their Annual General Meeting in London on 29^th June and released an AGM statement to the market  reviewing “a year if solid progress” during 2010 and promising an active programme of development for the Company’s oil interests in California and Kansas in the current year.