Sun has secured a 100% working interest in its Normangee oil project, which represents a 2500 gross acre package on an emerging corner of Texas' celebrated Eagle Ford region.
This development puts Sun in total control of its flagship asset as it prepares to begin fraccing at the project's Jack Howe well, which lies only about 6km from a neighbouring project averaging a 30-day initial production rate of 500-600 barrels of oil per day.
"Assuming our initial production rate is close to EOG Resources' rate, we would expect $US4 million of revenue in the first year of flowback, and that would pay out the frac costs in the first year," Sun managing director and CEO Matthew Battrick told affiliate publication RESOURCESTOCKS.
"We know it's oil-saturated and oil productive all around us, and Jack Howe is 250-feet-thick (about 76m), so the in-place oil volumes are sufficient to get profitable, commercial production reserves from that well in the right price environment."
Sun began targeting unconventional oil plays in Texas in 2011, seeking to secure an early, strong acreage position in underdeveloped areas along the Eagle Ford trend. This strategy was pursued with a view that the best unconventional plays in the area produced liquids in greater quantities than gas.
The company's ground in the eastern extension of Eagle Ford known as the Woodbine area boasts black oil producing wells at depths of 8000f (2438m), compared to Eagle Ford sweet spots which offer gas and condensate from 10,000-12,000f (3048-3657m).
In this context, Sun's move to take full ownership of the Woodbine leases represents a vote of confidence ahead of an exciting frac program to begin in June.
"This deal will allow Sun greater leverage to bring in new investment capital to continue to develop the oil potential of the lower Woodbine formation," Battrick said.
"The management team of Sun looks forward to delivering profitable oil production from its land potion, even in this challenging oil price environment."
Consideration for the transaction included a $2 million tender to Sun's second largest shareholder, Amerril, as a deferred settlement in the event a new partner joins Sun in the leases via a farm-in arrangement.
Sun's plans to make margins at Normangee despite the low oil price are part of a growing trend in the US towards lower-cost operating models. US markets are now expecting a 25% reduction in costs for the oil sector, which would put Sun operating models in the black.
According to Sun's modelling, a 25% reduction of costs at Jack Howe would be profitable at $50/bbl. Pay-back on the frac cost is expected to be achieved within 12-18 months.
"Our peer group is already seeing that reduction on the drilling side, and we're hoping to see that very quickly in the fraccing side," Battrick said.
"It's not unreasonable for us to see a reduction in costs in parallel with the reduction in oil price, and we're starting to see that already. It will happen around the world, and it will happen most quickly in the US. North America is the Middle Earth of capitalism, particularly in the basic fundamentals of supply and demand in the US."
Jurisdiction is unsurprisingly a major part of Sun's strategy, considering south Texas is often toasted as nothing less than the energy capital of the world. Sun remains the only Australia-listed company in the Woodbine play, and operates within a two-hour drive of both Dallas and Houston.
"We're only about three to eight hours trucking time away from a refinery," Battrick said.
"More importantly, we have competition from trucking companies to buy our oil and facilitate that transfer on bitumen roads to the customer."
Battrick continued to describe a jurisdiction which offered an operating costs about two-thirds cheaper than the Australian energy sector, with more competition in the provision of infrastructure as well as more readily available labour and equipment.
"Texans have been doing it [unconventional development] for the better part of 10 years now, and profitably for eight years," he said.
"They were testing unconventional drilling, horizontal drilling and fraccing of unconventional reservoirs anything up to 20 years ago."
More specifically, Sun's jurisdictional advantages stem from Jack Howe's proximity to the successful Zeus well drilled by EOG, one of the region's top operators. Zeus has delivered flows at rates of between 200-600 barrels of oil per day over its first few weeks and is occupies the exact same horizon with the exact same characteristics as Jack Howe's location.
Another regional company, Texas Presco, has successfully drilled and cased its first horizontal well targeting the area's Buda formation. This well is midway between Normangee and Sun's 50%-owned Leona oil project.
The impressive initial flowbacks from Zeus and the advances at Buda bode well for Sun's nearby properties, which have potential to expand further at depth. Below the lower Woodbine interval lies the Buda-Georgetown limestone formation, which has already been drilled and tapped by neighbouring companies.
"We're extremely excited about adding another layer of reserves in the same lease," Battrick said.
"We actually have the potential to double our reserves in the fullness of time by drilling that lower interval."
*A version of this report, first published in the May-June 2015 edition of RESOURCESTOCKS magazine, was commissioned by Sun Resources.