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Special Update: Turning Dirt Into Dollars. An exclusive interview with the directors of Maverick Drilling & Exploration

Dear Motley Fool Share Advisor Subscriber,

We’re pleased to present a second “fireside chat” with executive directors Don Henrich and Brad Simmons from the front lines of Maverick Drilling & Exploration (ASX: MAD) central.

Although Maverick is only a Share Advisor watchlist company, based on the number of emails we receive, it appears as if many Motley Fool readers want to find out even more about this high flying company.

The interview below is very comprehensive. We thank the Maverick directors for giving up their valuable time to bring this interview exclusively to you. Enjoy!

Dean Morel: You have had an exciting year so far, and since our last interview in March there have been several developments. We have just reviewed your Quarterly report. There is quite a bit of new information there. What are some of the key points you want shareholders to know?

Don Henrich and Brad Simmons: There is so much more going on here at Maverick than meets the eye, we felt it was time to show even more of the story. The strategic acquisitions made in the past few months could prove to be historic moments for our company. The technical evaluations have given us some very exciting preliminary results. Maverick is a potentially much larger and stronger company than we were only six months ago.

People can fall into the trap of thinking the company has had such a great run and that all companies have to stop somewhere. We didn’t get that memo here at Maverick. To build a truly great company, you have to attack your goals each and every day.

Our targets and vision is for where Maverick will be in the years to come. This is not the beginning of the end for Maverick — this is definitely the end of the beginning. Now we are about to shift into the next gear.

Morel: What is the primary message you wanted to convey in the Outlook and Future Plans section that was just released?

Henrich and Simmons: Any company with the kind of explosive growth and opportunities we now have must manage that growth and ultimately stop for a moment somewhere along the line, take a deep breath, look at the entire picture of expanded holdings, and evaluate your portfolio.
This is no different than the process your readers encounter when they move (if they are lucky) from managing $10,000 to all of a sudden having $1 million dollars to manage. Strategy and structure, along with assessing priorities and resetting goals is a mandatory step. This is where we are at the moment.

We never envisioned obtaining this tremendous amount of holdings on these fields. Nineteen months ago when we listed we had 850 acres in one field. Now we have almost 14,000 acres across three fields.

Morel: One of the areas we have seen some changes has been doubling your holdings in Blue Ridge and Nash Domes. What do you foresee ahead from these expansions?

Henrich and Simmons: Dean, in the oil patch if you don’t have the dirt, you don’t have a ticket to the game! We have the land. It has taken months (sometimes years) to negotiate, acquire and close transactions on acreage that oil companies only dream of.

Our technical team extensively evaluates (seismic, previous well histories, etc.) our target leases long before we begin the acquisition process. The potential impact of the new holdings on Nash and the “Ridge” will unfold over the next year as technical evaluations are completed. Then we begin the process of turning the “dirt into dollars” by drilling and testing. It is simpler to say than to implement, but that sums up the oil business.

Morel: What production rates are you estimating by June 30 and December 31?

Henrich and Simmons: This depends upon what type of drilling we are conducting and the potential associated with each location — well by well. This is akin to projecting what grades your kids are going to get this term and next term in school. Each one is different and unique.

We can say that Maverick is re-evaluating our expanded holdings and as technical assessments continue, the recommendation of drilling potentially high impact wells (higher production rates and larger reserves) looms on the horizon for us in the same fields we now control.

Morel: Your current drilling strike rate is around 90%. What success rate do you expect going forward?

Henrich and Simmons: That depends upon what type of drilling we are conducting. Here are examples:

  • Developmental is in-field or in between previously existing successful wells and should continue to hold percentage success rates comparable to current.
  • Exploitation and “step out” drilling from the known trend means they are more speculative. These have greater potential chance for upside returns if successful.
  • Exploratory or “Wildcat” drilling is the highest risk and should hold the highest potential returns. One in every ten wildcats on average is successful. With the formidable team of oil finders in Maverick, we hope our percentages run a bit higher even though there are no guarantees.
  • Natural progression of our industry is simple:
    • Wildcat well is drilled and makes a find — or discovery.
    • Exploitation drilling occurs to delineate where the edges of the oil or gas fields exist. You are then able to quantify your resources and focus on magnitude. In doing this, you know you are going to drill some dry holes.
    • Developmental drilling comes behind and “harvests” the known resources. We have tremendous resources in our existing three fields, and the oil isn’t going anywhere.

Your readers can probably relate to this format in comparison to their stock portfolios. This works the same in drilling. Depending upon the blend of the above types Maverick elects to pursue, the projected percentage of hits and results will vary. One important edge Maverick has, especially in exploratory, is by owning our own rig fleet wildcats are cheaper to drill and therefore we can drill more of them (up to 3-6 more) for the same dollars our competitors and peers spend to drill for one well.

Morel: You currently have six drilling and eight service rigs, with three drilling rigs in service now. How are you going outfitting the new drilling rigs and finding crews for them?

Henrich and Simmons: Yes, the rig plan is still on track for bringing on all rigs in 2012. The two newly acquired rigs have arrived at Maverick’s fabrication division and are beginning the outfitting process.

It’s important to understand that a rig is only one component in the drilling process. There are also pumps required to carry drilling mud down the hole and circulate out cuttings. There are electrical components such as generators to power the entire site while drilling 24/7 until the hole is completed. There is drill pipe and collars. And on and on. All these must be integrated and fine tuned in the “Maverick way” we have developed over decades.

Then we build the crews that will stay with that rig for years ahead. It’s not a case of “instant mashed potatoes”. Rushing this process gets people hurt and can cost millions of extra dollars. That is not our way. Our older rigs have been drilling for 20+ years. The new rig acquisitions are being prepared to do the same thing.

One humorous comment since the quarterly report came in from a major shareholder saying “you guys are building an elephant gun” in terms of the heavy duty exploratory rig. They are correct. “Elephant gun” relates to the type of drilling one pursues in the “patch”. Simple in-field development of smaller wells are referred to as “rabbits”. Rank wildcat drilling for huge targets is often referred to as “elephant hunting”. Both have their place.

To date we have mistakenly been perceived by some as having a “herd of rabbits” and no “blue sky” massive upside at Maverick. We now hold what may very well turn out to be a herd of elephants! We have worked for quite some time to make these acquisitions. We still have further acquisitions in motion on our three fields.

Morel: When the new rigs come on line you’re capable of drilling 150 wells per year. Is that right? Capabilities aside, how many wells are you actually planning on drilling in the next year?

Henrich and Simmons: This is exactly what we are determining by the end of May with all the new information and assessment of an expanded portfolio of targets.

The number of tests depends upon depth and location of the holes we decide to drill. A typical Blue Ridge 4,000 foot test takes around 10 days to drill [well then needs to be completed with service rig, or plugged]. The depth and predictability of drilling conditions dictates the time required. For example, an 8,000 foot test is not merely twice the time and cost of a 4,000 footer. It is more in the range of three to four times the days and cost (if all goes well) due to potentially tougher drilling conditions the deeper you go. On the other end of the spectrum, 2,500 footers can take proportionately much less time than 4,000 footers.

Our drilling planning is based upon the information we have regarding where to place the rigs and the nature and depth of each test. Bottom line — four Maverick rigs will begin drilling across all three fields starting in June.

Morel: From my research 12,000 wells have already been drilled in Boling Dome and 40 million barrels of oil equivalent have been produced. That’s around 3,300 barrels per well. Is it still economical to extract oil? What flow rates and life of wells do you expect? Can you get more than 3,300 barrels per well? Also, Texas State Historical Association says Boling Dome encompasses 5,500 acres. You have 7,500 gross acres and 4,500 net and are looking to expand acreage. Different boundaries?

Henrich and Simmons: The number of wells is incorrect, as most of the wells generally referred to on Boling Dome are sulphur mining tests and sulphur producers and not related to oil and gas. There are less than 2,000 known true oil producers we have identified on Boling Dome. We have spent years and hundreds of thousands of dollars building libraries and databases on every known oil & gas producer in the field. This data came from the original owners and operators in the field since the 1920’s. Of special interests here — a great number of the many thousands of sulphur mining wells encountered oil shows which were not their objective and bypassed.

Field boundaries on salt domes are a moving target subject to whether outer bands of oil and gas (both deep and shallow) may exist. We believe the potential for undiscovered outer bands of production exists on all three of our fields.

Morel: Is the acreage not on the domes as productive?

Henrich and Simmons: We will not know until we drill it. We have very encouraging indicators from the reprocessing of old seismic lines we have acquired in Blue Ridge as well as old drilling data from tests drilled in the 1920’s indicating oil shows.

Let’s address salt dome field sizes and acreage for the benefit of your readers. They have never been exposed to the significant reserves that can exist with small land areas such as those in the Gulf Coast salt domes. There are many examples should your readers want to research this topic. Here are a few examples:

  • Hastings field, a deep seated sale dome approximately 12 miles from Blue Ridge, encompasses approximately 4,500 acres. Around 600 wells in that field, discovered in 1934, have thus far produced over 600 million barrels. It was producing around 1,500 BOPD a few years ago.
  • Spindletop Dome, one of the original salt domes east of our fields, has produced over 150 million barrels from only the 500 acre centre of the field. It is still producing.
  • Salt Dome overhangs are along the edges and beneath existing salt dome in many instances. When these features are found to be productive, the production rates and reserves can be exceptional. On two of Maverick’s salt domes these features are confirmed to exist and have yet to be tested or exploited. That process begins in the fall (Sept – Nov) of this year and will be an exciting time for our company.

Maverick’s holdings are a blend of solid oil reserves in place (“rabbits”), step out oil bands we have identified which requires further drilling to confirm (“kangaroos”), and significant prospective reservoirs never drilled yet with massive upside impacts (“elephants”). Our job is blending these into a diversified plan which makes economic sense. We may have just developed a new oil field term, kangaroo! After all a kangaroo is somewhere between a rabbit and an elephant.

Morel: The company has stated the two wells on Boling Dome have production rates comparable to Blue Ridge Dome. Does that mean 20 barrels per day?

Henrich and Simmons: We will be filing initial test data of public record soon and we will make that available when reports to the state have been disclosed. As some MAD followers have now realised, premature release of positive information creates the prospect of “shooting yourself in the foot” in terms of acquiring the offset acreage in the vicinity. We are pleased with the results of those wells, and for now we leave it at that.

Morel: Your reserves and acreage are now top flight among Australian Oil E&P companies. Can you give any ballpark guidance on possible production rates for the years ahead? Say if you look out three to five years, what would you like to see Maverick doing?

Henrich and Simmons: This is one of the key questions for Maverick. We look out three to five years when planning how to best exploit a tremendous and growing resource base.

We hear facetious comments about Maverick’s “two hundred years of drilling” ahead at the pace we are drilling now. We don’t think Exxon or BHP loses any sleep worrying about having decades or more of drilling ahead. The ones who should be losing sleep are those who do not have decades or more of drilling ahead.

Development plans for our proven fairways are flexible, while finding new potential reservoirs of the magnitude possibly ahead for Maverick are few and far between. We now appear to have several of these large candidates. Which would you spend the next year developing? The right answer for Maverick is BOTH the developmental and exploratory!

Morel: Finally, what drives you and how do you make important decisions.

Henrich and Simmons: We make decisions here at Maverick on the basis of what makes the best sense for the long-term for our “Maverick family”. Our shareholder base has risen from 500 to almost 4,000. We still refer to this as the growing “Maverick family”. Our goal is to have every family in Australia holding some MAD in their investment cupboard — kind of like Vegemite but tastes better! If we keep doing our part right, our “Maverick family” is quite likely to grow some more.

Yours Foolishly,

Bruce Jackson and Dean Morel

Motley Fool Share Advisor

Disclosure: Bruce Jackson and Dean Morel both hold shares in Maverick Drilling & Exploration. Click here to view The Motley Fool’s disclosure policy.

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