Work at Highlands’ East Denver Project is making solid progress with the initial production from the six new wells of the project scheduled to start before the end of December 2018. Fracking operations are now complete. As explained above, this represents arguably the most significant milestone in our history as, for the first time, our projected revenues are expected to cover our overheads for the coming year.
On 20 April 2018, we announced that we had entered into a new third-party financing agreement that effectively replaced the previous arrangements on the project. The Company received $5.4 million in cash and a 7.5% carried interest in all current and future wells. Our new partner, True Oil LLC (“True Oil”), assumed all capital costs and operational responsibilities.
This both strengthened the Company’s near term cash position significantly and established Highlands’ long-term financial stability. Additionally, we secured a meaningful interest in a project that is now becoming far larger than we could realistically have achieved on our own. The agreement is for our partners to fund six new wells for the project and with further upside potential for an additional 16 wells.
With the operations of the project passed to True Oil, Highlands has been able to reduce its own overheads and operational expenditure costs. Just as importantly, and as described below, we have been able to dedicate additional time and resources to acquire and develop new projects which, in time, may deliver further upside to our shareholders.
True Oil has been quick to deliver on its responsibilities. The start of drilling operations for the second phase of the project was announced on 27 April 2018 with the spud of the third well of the project and, on 11 May 2018, we announced that the spudding of all new six wells was completed.
Drilling completed in July, although the fracking operations for the new wells, which started in mid-August, were unfortunately interrupted due to local water shortages. However, these have since re-started and flowback from all six new wells is expected this month. With this in mind we anticipate producing from a total of eight wells by the end of December 2018.
We hope this represents just the beginning of the value creation for our shareholders. The project’s full development potential is 24 wells in total, all of which, if our partners elect to proceed with them, would be developed at no cost to Highlands. The cash flows that could be received by the Company through our 7.5% revenue share could be significant in the future.
Furthermore, we continue to explore avenues to expand the project further. We have maintained strong relationships with prominent oil & gas companies in the area and we periodically assess suitable farm-in opportunities in nearby locations. This needs to be set in context – there is no guarantee that we will secure such opportunities or that they can be delivered on terms that we consider to be acceptable. However, our expectation would be that any expansion of our East Denver Project will fall within the terms of the existing Acquisition and Development Agreement. In other words, development would be funded by our current partners and we would maintain a 7.5% share.