Much of the talk over the past year about the revolution in North American production of oil and natural gas arrives in the context of the huge reserves slumbering underground at the Bakken formation beneath parts of Montana and North Dakota, or the Uticah and Marcellus shale formations in Ohio, Pennsylvania and New York.
But as the United States embarks on its journey to become the world’s largest oil producer by 2020, according to the Energy & Commerce Committee, and even earlier than that according to the International Energy Agency, much less attention gets paid to smaller oil and gas plays throughout the country, and the smaller companies involved in exploring and drilling them.
With its impressive work in Southern and Central Oklahoma, Homeland Resources (HMLA) is a perfect example of one such company. The Smoky Hill Project, initiated in 2010, has yielded three producing wells for Homeland thus far drawing on Smokey Hills 750,000 barrels of expected oil reserves and 0.15 billion cubic feet of natural gas.
The company has been able to channel the returns from the Smoky Hill Project into a far larger and more fertile area of Southern Oklahoma at the 130-square mile Liberty Ridge Project. Harnessing recent advances in exploration and drilling technology, Homeland Resources believes that the Liberty Ridge lease could end up providing over 50 economically viable wells.
As the company has just outlined the first phase of its new drilling project, which foresees its participation in the drilling of eight prospect wells in 2013, Equities.com spoke with Paul Maniscalco, Chief Financial Officer and Chief Operating Officer of Homeland Resources, about the company’s current operations, management team, growth prospects for the future, and their methodical business model that has proven successful thus far.
EQ: Can you provide us with a brief overview of Homeland Resources and its operations?
Maniscalco: Homeland Resources was originally a mining company that has turned its sights in the last few years to the exploration and production of onshore oil and gas in the United States. We participated in a drilling program out in Oklahoma back in 2010-2011, the Smoky Hill Project, where the operator shot four wells. One was dry and three went into operation pretty quickly—within 90 days, I think.
Since then, we started participating in the seismic program, the Liberty Ridge Project, which has been in gesticulation since 2010. We have been waiting for the project to convert to a drilling program, and we’re on the verge of that right now.
EQ: Homeland Resources is focused primarily on exploration and drilling projects in Central and South-Central Oklahoma, leading with the three wells you just briefly alluded to at the Smoky Hill development. What else do you have planned for Smoky Hill?
Maniscalco: We continue to participate in the success of our Smoky Hill program, and if the opportunity exists to potentially maximize production levels, I think the operator would certainly go ahead and do that, and we would gladly participate in those efforts.
The operator may choose to do deepen or re-work existing wells, but quite frankly, I think that it will stay pretty status quo. What I do see the operator doing is potentially trying to maximize the existing production streams by doing work on the existing holes. I do not necessarily see any additional holes going in on that project.
EQ: You have said that the Smoky Hill project allowed Homeland Resources to assert its interests in the Liberty Ridge project, which is now well underway. Can you discuss how that has helped position the company for growth?
Maniscalco: The drilling program we’ve participated in was successful. We’ve essentially got one line of credit. We simply haven’t spent any money beyond minimum general and administrative expenses. We’ve essentially organically funded the company since the initial drawdowns on our credit facility. The Smoky Hill drilling program allowed us to be self-sustaining, and we’ve just waited for the seismic program at Liberty Ridge to gesticulate. During that time, the scope of the seismic program has grown.
Without boring you with the details, we’ve got attorneys, auditors, and a small budget for investor relations; we don’t spend any money beyond that. We’ve got very low overhead and very low general and administrative expenses (G&A). That bodes well for Homeland Resources. I’ve been doing audit work in the SEC arena since the ‘90s, and I’ve been doing financial reporting since 2006. In my experience, most microcap companies have a money-spending disease. We don’t have that; we’re very conservative.
We don’t churn stock. Investors familiar with the micro-cap space know what most companies do. There are warrants and options and things like that flying around. What we’ve done, on the other hand, is to accumulate cash in the treasury when possible. Based on the track record of our operator, Ranken Energy Corp., we believe in the science, and we believe that this may be a successful endeavor.
So we have taken a very slow and methodical approach, and we haven’t borrowed any additional money beyond the initial draws on our facility which were used for our drilling and early stage seismic programs. We’ve got the same four or five vendors we pay every month. It’s a slow trajectory, but rather than thin ourselves out, we’re waiting to see what happens.
EQ: Could you outline your current focus and expectations for Liberty Ridge?
Maniscalco: Our core focus for the time being is on the eight holes we will be participating in during the first phase of drilling. When we initially started accumulating seismic data, we were looking at a 10-well program. That has now grown, so that while the operator has identified eight prospects for Phase-1, we’ve got the ability to participate in up to 34 wells, and the program could even grow beyond that.
So we will focus on that, and hope for the best from the first phase of drilling.
While there is no accounting for what the future might bring, I think the science has been good, and the operator’s track record in the area has been very strong. So we feel confident that this may be a successful endeavor for us.
EQ: Tell us about your background, as well as other key members of the management.
Maniscalco: I’ve been working with Homeland since July of 2010 informally, as a consultant before I came on board. I started off as a financial statement auditor, and somewhat by default, stepped in to the patch, if you will, in early 2000.
My firm is SJM Accounting and Financial, we provide CFO-level services, including accounting and business advisory services, to small-cap companies. It’s not actually cost effective for Homeland Resources to go out there and hire a CFO at $150,000 to $200,000 per year. With the experience we have between us—and believe me, all of us have at least a few grey hairs—it seems to be a very good fit for Homeland. Furthermore, I’ve found the company’s conservative nature to be a good fit for me personally.
While financial reporting is my forte, Armando Garcia, our President, has his forte, which is his ability to identify prospects based on his 22 years of experience. Armando was instrumental in forging the relationship with our operator Ranken.
But we needed someone on board who could do detailed analysis of a reserve report beyond the PV-10, so Brian Ault will assume the role of our Senior Technical Advisor. He brings more than 25 years of extensive oil and gas experience to Homeland Resources. Throughout his career, he has held senior technical and high-level operational management positions with numerous public and private exploration and production companies, such as Kodiak Oil & Gas Corp. and Ultra Petroleum Corp.
We’re forming a management team, and one of the things we’ve continued to do on a cost-effective basis is bolster our skill set.
EQ: Homeland Resources said in February that it could review potential additional projects for involvement. Is there anything you can tell us about this?
Maniscalco: I think the reality of the situation is that we’re always looking. I’ve looked at two or three different prospects on behalf of the company over the last four or five months, and while nothing has actually met our criterion, we are consistently looking for other projects to “put in the bucket,” as it were.
As I have already mentioned, Homeland Resources is a conservative company in nature, and we’ve got some pretty stringent criterion for evaluating potential reserves before buying a production package. I would say we consistently review other projects. However, there’s a strong tendency by companies in the oil and gas industry to jump into any project without reservation, in order to try and put reserves on the books, and grow the balance sheet and associated revenue streams.
Homeland Resources, on the other hand, works with a pretty stringent set of criteria. Just drawing inference from the one project we’ve participated in at Smoky Hill, we’ve got a 75-percent success rate there, so we’re continuing to look. We do spend a lot of time and intellectual capital, but we just haven’t arrived at anything that actually meets our criterion at this point.
The one thing that is interesting to think about is the operator’s success rate of 72 percent. Even if you haircut that to 50 percent, if you start looking at the metrics, that could be a very significant increase in revenue over the next 12 to 18-month period should the prospect wells in which we intend to participate achieve the same level of success.
EQ: Any additional closing comments?
Maniscalco: Here is the takeaway on Homeland Resources: Yes, we are very conservative. But conversely, if things go well with this seismic program in the Liberty Ridge, as it converts to a drilling program, the remainder of this calendar year and the forthcoming fiscal year could be a break-out one for us.
I am, due to my background, very conservative in nature, but even if you haircut the previous success rate of Ranken, we could see a multiple increase in the revenue stream. Without any significant increases in debt service beyond those potentially incurred in connection with our participation in the drilling program we are discussing here, holding us back, the overhead or general and administrative expense of the company doesn’t increase, which could potentially increase our net income here.
