The Next Energy Leader in Mexico
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International Frontier Resources Corporation (TSXV:IFR,OTCQB:IFRTF) is a Canadian-based oil and gas company with a proven track record for advancing projects. Through its Mexican joint venture partnership, IFR is currently focused on the development of oil and gas assets in Mexico’s premier Tampico-Misantla Basin. The company is among the few opportunities to invest in a publicly-traded company in Mexico’s oil and gas sector.
Unprecedented Opportunity: Mexico’s Energy Reform and World Class Assets
Mexico’s Energy Reform and its world-class oil field assets represent one of the largest, unprecedented energy investment opportunities available today.
Mexico ranks as the third largest oil producer in the Western Hemisphere and holds the region’s fourth largest oil reserves. For nearly 80 years, state-owned PEMEX was the only player in the country’s oil and gas industry. In 2013, the Mexican government initiated energy reform legislation toward ending that monopoly and allow for foreign investment in the country’s oil and gas sector.
“Historical underinvestment in the sector has left Mexico’s rich oil fields largely unexplored and untapped. After investigating the opportunity, we quickly realized the quality of the assets in Mexico are on par with those in Texas or Alberta, with some fields exhibiting potential rarely found anymore,” said IFR President and CEO Steve Hanson.
Hanson continued saying that trends in global oil markets and pricing continue to demonstrate why Mexico is continuing to attract energy investment, citing:
- Mexican Crude Oil (Isthmus) has been receiving a premium to WTI.
- US refinery demand plus Brent pricing drives premium pricing for Mexican oil.
- Many analysts (Bank of America, Barclays, JPMorgan, Goldman Sachs, RBC, UBS and others), predict that crude oil pricing will rebound in 2019, as reported in a recent story by CNBC.
Securing First Mover Advantage with Mexican Partnership
IFR is leveraging its extensive operational experience and strategic partnerships to build a strong foundation in Mexico.
IFR has partnered with Grupo IDESA, one of the largest petrochemical companies in Mexico. In operation for more than 60 years, Grupo IDESA produces and sells petrochemicals into a range of Mexican and international industries. Together, the companies formed Tonalli Energia, a 50/50 joint venture which holds the Tecolutla block in the world class petroleum province of the Tampico-Misantla Basin. The concession was awarded to Tonalli Energia during onshore Bid Round 1.3 under Mexico’s oil and gas energy reform.
- First mover advantage in one of the largest energy investment opportunities in the world.
- Industry-leading joint venture, Tonalli Energia, combines IFR’s Canadian geoscience, engineering and finance with the in-country expertise of petrochemical leader Grupo IDESA, including the latter’s Mexican regulatory, engineering and logistics team.
- Operates the onshore Tecolutla block, a vastly underdeveloped mature field in the world-class Tampico-Misantla Basin.
- Development underway with near-term production and cash flow.
- Commenced shipping of crude oil to PEMEX in September 2018 from TEC-10 well.
- Producing TEC-10 well averaged 156 barrels of oil per day at the average crude oil prices of US$64.73 per barrel in October and November 2018.
- TEC -11, the first horizontal well, was drilled to a depth of 3,283 meters and oil shows were encountered during drilling.
- Testing at TEC-2 well suggests that the well could produce approximately 125 barrels of oil per day.
- Goal to continue expanding land package in Mexico’s onshore land claims.
- Large ownership position by board, management and key shareholders; approximately 32 percent of shares.
- Experienced management and technical team members with a proven track record of success; drilled over 100 horizontal multi-stage frack wells in Alberta.
- Joint bidding agreement signed for participation in PEMEX farmout round with partner Lifting MX.
Tecolutla Block in Mexico’s Tampico-Misantla Basin
IFR’s key asset is the 7.2-square-kilometer Tecolutla onshore oil and gas development block in the Tampico-Misantla Basin along the Gulf Coast of Mexico in the state of Veracruz, located 60 kilometers from the regional oil field services hub of Poza Rica. Veracruz is also home to IFR-partner Grupo IDESA’s port, petrochemical and trucking facilities.
IHS Markit analysts have identified the Tampico-Misantla Basin as one of the world’s 24 onshore “super basins” and suggests that it “may well mirror America’s model super basin — the ever-resilient Permian Basin.” The Tampico-Misantla Basin hosts the Ezequiel, Poza Rica and Chicontepec oil fields. The Ezequiel Ordóñez oil field had an average initial production rate of 8,100 barrels a day per from its first five wells. The Poza Rica oil field is estimated to hold 3.8 billion barrels of oil, while the Chicontepec oil field is thought to contain 81 billion barrels.
The Tecolutla block lies within the Golden Lane, a past-producing region in the basin with multi-zone potential. Tecolutla hosts the El Abra formation, a carbonate oil reservoir, at a depth of 2,340 meters. The Tecolutla oil field remains significantly underdeveloped with only seven vertical wells drilled by PEMEX between 1956 and 1972, with well performance ranging from 256 to 453 barrels per day. The Tecolutla block was awarded to Tonalli Energia in May 2016, as part of Bid Round 1.3 of Mexico’s oil and natural gas mature fields concessions. The 35-year license agreement with the National Hydrocarbons Commission (CNH) includes an incremental royalty of 31.22 percent. The average royalty for the 25 blocks signed for round 1.3 is 47.22 percent. The agreement requires Tonalli to execute a minimum work program that includes exploration studies, seismic, workovers, recompletion and drilling activities during a one to two-year appraisal period.
Partnership with Grupo IDESA
IFR has partnered with Grupo IDESA, one of the largest petrochemical companies in Mexico. In operation for more than 60 years, Grupo IDESA produces and sells petrochemicals to a range of Mexican and international industries. Together the companies have formed Tonalli Energia, a 50/50 venture which holds the Tecolutla block. The concession was awarded to Tonalli Energia during onshore Bid Round 1.3 under Mexico’s Energy Reform.
Subsequent to this agreement, IFR has entered into a share option agreement with Grupo IDESA where IFR can purchase all of the outstanding shares in the joint venture company, thus earning a 100 percent interest in Tonalli.
“The signing of this option agreement is a major milestone and solidifies IFR’s relationship with IDESA,” said Hanson. “This next step in our established partnership firmly aligns IFR’s and IDESA’s interests in the Mexican upstream business and significantly broadens IFR’s access to investors and capital markets in Mexico.”
IFR has established a footprint for growth in the Tampico-Misantla Basin and greatly advanced development of the Tecolutla block since 2016.
IFR’s technical team believes historical operations at Tecolutla were not sufficiently suited for optimal well performance. Using existing well control and the data from PEMEX’s 3D seismic survey, the company has re-evaluated the oil field and determined that horizontal drilling and workovers will lead to daily production yields that will significantly exceed the historical peak production of 900 barrels per day.
Having received the drilling authorization permit from the Mexican government via CNH in January 2018, Tonalli was given the right to operate, develop and produce hydrocarbons at Tecolutla. The company also received approval for its Industrial Safety Management System, Operational Safety and Environmental Protection (SASISOPA) permit.
Drilling operations launched last April with Tonalli targeting the TEC-10 well. The first well to be drilled with the benefit of 3D seismic visuals, TEC-10 is the first onshore well on the license to be drilled by a foreign company in 80 years. Tonalli drilled TEC-10 to a depth of 2,453 meters and was able to successfully install production casting.
Drilling was followed up with production testing on the TEC-2 and TEC-10 wells. Results from a workover of the TEC-2 legacy well recovered an average of 125 barrels of oil per day. The company subsequently decided to move forward with building an extension onto the existing pad as the drilling site for TEC-11 horizontal well.
To evaluate TEC-10, the IFR JV commenced initial testing of three intervals (A, B, C), targeting multiple zones in 138m of gross El Abra reef at Tecolutla Although there was limited inflow from Intervals A and B with the minor stimulations, Tonalli encountered oil at these lower depths which indicates potentially a lower oil water contact and a larger gross rock volume within Tecolutla that is charged with hydrocarbons. At interval C, production testing resulted in an average flow rate of 384 barrels of oil per day in the first three days. During the last 12 hours of testing reported up to July 23, 2018, the flow rate averaged at 480 barrels per day.
“The information obtained by drilling TEC-10 has provided the necessary information to develop the remaining resources of the Tecolutla field with additional wells and workovers,” said IFR VP of Exploration Curtis Hess. “Our understanding of the El Abra reservoir has greatly improved and Tonalli is in the process of developing a horizontal drilling development strategy based on this knowledge.”
Subsequent to these initial findings, Tonalli completed an 18-day flow test of the primary zone interval at TEC-10, with results for the extended testing operation reported on August 6, 2018. The data obtained during the extended well test was consistent with Tonalli’s technical model where the existing vertical wells have only partially depleted the El Abra reservoir at this interval depth in the South-Western portion of the Tecolutla block. This is evidenced by a graphical depiction of the test results since perforation.
After the test work for TEC-10, IFR started procurement planning for the TEC-11 well, the first horizontal well on the property. Subsequently, the TEC-11 horizontal well was drilled to a depth of 3,283 meters and oil shows were encountered during drilling. Tonalli began planning the perforation, stimulation and flow-testing program for TEC-11.
In September 2018, Tonalli commenced trucking of oil produced at Tecolutla for sale to PEMEX, per the crude oil commercialization agreement signed in July. Tonalli shipped oil produced during the well testing phase to PEMEX’s Ezequiel Ordóñez facility, an approximate 35 kilometers from Tecolutla.
“Achieving crude oil sales and first cash flow is a major milestone in the ongoing development at the Tecolutla field,” said Hanson. “The efforts of our team and partners have validated IFR’s investment at Tecolutla, and now we look forward to maximizing the returns from Tecolutla and demonstrating our ability to operate successfully in Mexico.”
The following month, IFR’s JV achieved commercial production at the TEC-10 vertical well. In December 2018, Tonalli received its first payment from PEMEX for the aforementioned oil shipped from production at Tecolutla in October and November. During this period, the producing TEC-10 well averaged 156 barrels of oil per day at the approximate average crude oil sales price of US$64.73 per barrel.
IFR Growth Strategy and Funding
Moving forward, IFR will be continuing to advance development at Tecolutla to maximize production and reserves, to acquire new assets, form additional partnership agreements with PEMEX and other industry partners and to increase their financial capacity.
To this aim, IFR is the first Canadian oil and gas company to be backed by Export Development Canada (EDC) in Mexico. In January 2017, the company qualified for an account performance security guarantee (APSG) facility of US$882,050 from EDC. As an approved EDC partner, IFR has access to further Government of Canada guarantees on loans for reserve based lending, facilities and development.
Looking to expand its role in Mexico, IFR plans to take part in upcoming onshore bid rounds for PEMEX land claims. IFR’s JV, Tonalli Energia, has entered into a joint bidding agreement with Lifting MX, a subsidiary of Cotemar, S.A. de C.V., a leading oil and gas services provider.
“This signing of this strategic agreement brings together two companies with demonstrated onshore Mexico experience,” said Hanson. “Tonalli has worked diligently in selecting a partner that has achieved significant commercial success in Mexico.”
With 2019 underway, the company remains focused on the following near-term milestones and developments:
- The completion of the TEC-11 horizontal well; flow testing on target for Q1 2019.
- The Tecolutla development plan and regulatory process, which is underway for potential future drilling, as well as construction of facilities.
- Further workover development of the TEC-7 legacy well.
- Farm-out opportunities with PEMEX, covering seven (7) onshore conventional exploration and production areas; auction (bid-round) scheduled for October 2019.
- Opportunities with PEMEX, as the state-owned energy corporation is expected to start announcing new service contracts (“CSIEE”) in Q1 2019.
IFR and Tonalli Energia continue to be well positioned to joint venture on existing blocks from Bid Round 1, Bid Round 2, and migrating service contracts.
Steve Hanson—President and CEO
Steve Hanson has over 25 years of finance and corporate development experience. He has been President of Discovery Management Services Ltd. since 2002, a venture capital consulting firm assisting early-stage companies in the development of short and long-term financing strategies. Hanson served as Chairman and Managing Director of Van Arbor Asset Management, an award-winning equity money management firm from 2004 until 2008, which he founded in 2003. Van Arbor Asset Management was subsequently bought by ZLC Private Investment Management in 2008. In 2009, he served as President and CEO of PanAsian Petroleum, an oil and gas company that during his tenure was acquired by Ivanhoe Energy. In 2011 and 2012, Hanson was a Director of Lion Petroleum Corp., a private oil and gas company focused on East Africa bought by Taipan Resources. He has served on numerous private and public company boards.
Tony Kinnon—Chairman & Vice President of Corporate Development
Tony Kinnon has 20 years of experience in the financial services industry focusing on valuation, structuring and raising capital for energy companies. Based in Calgary, Alberta his professional roles include Managing Director, Energy Banking at PI Financial, and Director of Public Venture Capital at both Macquarie Private Wealth and Richardson Partners.
Andy Fisher—Chief Operating Officer & Independent Director
Andy Fisher has over 25 years of intensive and varied experience in the oil and gas industry including acquisition and divestments, corporate finance, strategic and operational planning to joint venture management, contracts and negotiations. He was Founder and Executive Vice President of Arcan Resources Ltd and grew Arcan from zero BOE per day with no assets to approximately 4,000 BOE per day with a large future drilling inventory. Arcan was sold to Aspenleaf Energy Ltd., backed by ARC Financial Corp, a Canadian energy-focused private equity manager, and Ontario Teachers’ Pension Plan, in June 2015 in a transaction valued at approximately C$300 million.
Formerly, he was the Vice President of International Contracts and Negotiation for Pacalta Resources Ltd. Fisher was the third employee of Pacalta and experienced growth of Pacalta from a junior E&P Company with approximately 100 BOE per day of production to a company with approximately 45,000 BOE per day of production in Ecuador and hundreds of employees. Pacalta was sold to Alberta Energy Company (predecessor to EnCana) in 1999 in a transaction valued at approximately C$1 billion.
Margaret Souleles, CA – CFO
Margaret has provided financial consulting services to IFR from November 2004 to October 2009 when she was appointed as CFO. Prior to joining IFR, Souleles spent eight years in the audit department of Grant Thornton LLP. She is a Chartered Accountant and holds a Bachelor of Commerce Degree from the University of Calgary.
Dr. Gary Lyons—Vice Chairman and Independent Director
Dr. Gary Lyons holds a MD degree from the University of Pittsburg and a PhD from the University of Minnesota. He was a founder and Director of Nugget Oil Corporation which was founded in Minneapolis in 1970 and moved its headquarters to Corpus Christi in 1980. He has been involved in the oil and gas industry for over 36 years.
R. Glenn Dawson— Independent Director
Glenn Dawson has 38 years of oil and gas exploration and management experience in the North American hydrocarbon basins. He is currently the President and CEO of CUDA Energy Inc. and is an independent board member a Technical Director of Lilis Energy Inc. With a strong geological, management and operating background and expertise in discovering and developing new opportunities, Dawson has founded several publicly traded oil and gas companies and has been responsible for E&P budgets in excess of $200 million annually, which includes multiple horizontal drilling resource plays as well as conventional oil operations.
Dawson served as President of Bakken Hunter LLC, a division of Magnum Hunter Resources Corp. (MHR), where he managed operations and development of assets in the U.S. and Canada, from 2011 to 2014. During his tenure, MHR significantly expanded its operations in the Bakken region. He has also served as the President of NuLoch Resources Inc. and as the Vice President of Exploration at several energy companies including TriLoch Resources Inc., PanAtlas Energy Inc. and Summit Resources where he held successive positions as a geologist and within exploration during his 13-year tenure.
Ignacio Quesada—Independent Director
Ignacio Quesada is a Managing Director with Alvarez & Marsal in Mexico City. He brings 20 years of experience in strategy, operations improvement and financial solutions. His primary areas of concentration are the energy and financial sectors, strategy development, supply chain management and financial evaluation. Quesada has worked with clients across a range of industries, including oil and gas, financial services, private equity and government institutions.
Prior to joining A&M, he was CFO of PEMEX where he contributed to the development of new business collaboration schemes including the performance contracts and JVs between PEMEX and private sector companies. Before PEMEX, he worked as Chief of Staff to the Minister at the Treasury and at the Social Development Ministers. During that time, he participated in the Anti-Money Laundering Initiative, United Nations high-level task force for financial instruments for climate change, the task force for the AH1N1 crisis, and the development of new payment schemes for the social programs.
Colin Mills—Independent Director
Collin Mills beings over 30 years of experience in strategic and tactical operations with an extensive and diverse background in power generation. He has established and led high-performance teams to achieve significant business goals in Mexico, Canada and Australia. Mills’ background includes a number of executive roles with TransAlta Corporation, one of Canada’s largest publicly traded power generators and marketers of electricity and renewable energy. During his tenure, he held key positions including Director General and Chairperson or the Board of TransAlta Mexico.
With TransAlta Mexico, his responsibilities included business development, equipment commissioning and operations of the corporation’s Chihuahua 260 megawatt and TransAlta Campeche 250 megawatt combined cycle power stations. Both facilities achieved ISO9001 certification and were awarded “Clean Industry Status” by the Mexican Federal Environmental Authority. He also led negotiations with the Mexican National Power Company (CFE) for the strategic divestiture of TransAlta’s Mexican assets to InterGen. Mills also held positions on the Mexico Energy Association Board and the Canadian Chamber of Commerce in Mexico. Most recently, he worked for Synergy Corporation as Manager, Thermal Generation in Western Australia, overseeing a workforce of more than 350 employees.
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