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Maverick gas wells come up dry in Woodruff County.

BRENDA BYERLY SAYS MAVERICK OIL & GAS Inc. of Addison, Texas, which was once a budding player in the Fayetteville Shale Play, packed up one spring day and left without a trace.

Maverick's departure from Woodruff County was so abrupt that nobody would have known it was gone had the fire and police departments in the town of Hunter not had a communications repeater unit attached to a radio tower outside the building Maverick bought as a headquarters for drilling in the area.

"One day they were just gone," said Byerly, who wears many hats at the Woodruff County Courthouse, including as the assistant to County Judge William Simmons. "They didn't let anyone know they were cutting off the power or heading out. We discovered it when the fire department's radios stopped working."

Maverick's departure left mineral rights owners in Woodruff and parts of St. Francis and Monroe counties--many of whom received prime $600-per-acre lease-signing bonuses--waiting and wondering about the big royalty checks they expected.

Geologists and gas officials say the wait may be very long.

With most of the prime areas of the Fayetteville Shale Play already snatched up by the likes of Southwestern Energy Co. of Houston and Chesapeake Energy Corp. of Oklahoma City, Maverick took a gamble in 2005-06 by spending $16 million leasing some 125,000 acres in and around an area known as the Mississippi Embayment, about 25 miles east of the play's primary gas reserves. That gamble seems to have backfired, and the company has now partly pulled out of north-central Arkansas and is selling off its properties in other states to generate cash.

"They put enough holes out there to know that they didn't really like what they saw and to know that they didn't want to be spending any more money out there," said Ed Ratchford, a geologist at the Arkansas Geological Commission. "There are a couple of geological reasons why that area doesn't look good right now to be drilling, but the bottom line is that it doesn't look to be a profitable area in the play, at least not now."

Despite the troubles detailed in Maverick's latest SEC filing, including the bankruptcy of Cygnus Oil & Gas Corp of Houston, Maverick's 45 percent partner in the Fayetteville Shale Play, one official said the company is still optimistic about its Arkansas holdings.

"We still intend to do things there and have not completely pulled out of the state," said Bill Irwin, geo-science manager at Maverick and its lead Arkansas contact. "I think it'd be accurate to say we're more in a holding pattern while our partner gets some things sorted out and we're able to put some things together to move forward."

Those "things," according to its second-quarter report, which does not spell out negative prospecting in its Arkansas leasehold, include obtaining additional capital to finance further development in the Fayetteville Shale, gaining additional partners to continue or the sale of its properties there.

"If we are unable to secure sufficient additional financing proceeds or other funding sources, we will not be able to maintain our operations as a going concern for more than the immediate term," according to the Aug. 3 filing.

Tumbling Dice

Maverick was not the only company to take a chance outside of the Fayetteville Shale trend to the east. Chesapeake and Hallwood Petroleum, a subsidiary of Hallwood Energy Partners of Denver, also aggressively leased and tested there--also to no avail.

It's not uncommon, according to Ratchford, for companies to take a gamble outside the main producing reserves inside a play. But the other companies testing the Mississippi Embayment area have producing wells to the west; Maverick put all its eggs in one basket.

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"It's common for companies to follow a producing trend and test areas to see how far the production might extend," Ratchford said. "There were a number of wells drilled from the east edge of the Mississippi Embayment all the way to the west side of the embayment and none were producing."

Unfortunately for Maverick, the entirety of its leasehold appears to be in the area experts agree will not be immediately profitable for gas prospecting.

Larry Bengal, director of the Arkansas Oil & Gas Commission, confirmed that there have been no producing wells east of Highway 167, and he said other companies testing there have come to the conclusion that the area cannot be profitably drilled.

Maverick drilled four of the nine wells in Woodruff County and is still set up and ready to go at one site, Bengal added.

Seeking Closure

If Maverick ultimately cannot come up with the money to continue its Arkansas operations, the final step will be to plug the wells it has drilled.

Bengal said the state is protected if it ends up having to clean up Maverick's mess.

"Since the wells are not in production and are not producing, a requirement by us is if they don't produce, then they have to be plugged," Bengal said. "Our concern right now is that the four they do have get plugged, and to make sure the state is protected relative to the status of those wells."

When companies begin the $2.5 million to $3.5 million process at each drilling site, the state requires the posting of a bond that varies in amount relative to their plans. Bengal said the AOGC asked Maverick to post an additional total of $50,000 bond on its four sites, which the company will get back if the wells are properly plugged and the surrounding area restored.

But if Maverick balks, Bengal said, the bonds will be sufficient to restore the sites.

Bengal added that there is no set deadline for plugging wells and closing a site other than that it be done in a "reasonable amount of time."

Bills Piling Up

As for the landowners in the once-promising Mississippi Embayment area, Bengal said the leases they signed with Maverick will eventually expire.

And some of the leases include penalties that Maverick must pay the mineral rights owner if no wells are drilled.

"We could be obligated to pay total penalties of up to $3 million to the landowners under those leases," according to Maverick's SEC filing. "We may also be obligated to pay for and acquire certain additional leasehold acreage within the project area. As our Fayetteville Shale project is being scaled back for a more measured evaluation of the play, we will seek to renegotiate the terms of these arrangements to mitigate the financial obligations of the company."

That time might be sooner rather than later, as Maverick also states that certain leases are "subject to cancellation or, in certain instances, financial penalties if wells are not drilled prior to the end of 2007."

The company also says a drilling rig it secured for two years, although currently assigned to another operator, could leave Maverick liable for rental fees of $16,600 per day through Jan. 31, 2008.

The quarterly report reveals a $2.2 million loss during the quarter and an accumulated deficit of $57.7 million. The company indicated that the only hope for the future was an infusion of cash from an outside source

"Our ability to remain in business as a going concern will require proceeds from a financing or other transaction sufficient to pay certain Fayetteville Shale related trade payables and to fund our continued plan of operations, as our other assets do not otherwise generate sufficient cash flow to provide us with any liquidity," the filing reports.

Those other assets include drilling projects in south Texas, west Texas and in the Piceance Basin in Colorado. Maverick also just recently completed the sale of its interests in the Barnett Shale, which is widely regarded as the Fayetteville Shale's sister shale, for nearly $22.5 million.

Legal Troubles

Another thorn in Maverick's side is a pair of lawsuits that could end up costing the company more than $3 million.

Union Drilling Inc. of Fort Worth, Texas, formerly Thornton Drilling Co. before a recent merger, claims Maverick Operating Co. LLC, a wholly owned subsidiary of Maverick Oil & Gas, owes more than $1.6 million for services performed under a January 2006 contract.

Union Drilling filed the non-payment suit in Pulaski County Circuit Court June 5. According to the complaint, Union Drilling was to "furnish equipment, labor and perform related services for drilling wells in Woodruff, St. Francis, Monroe, Cross and possibly Jackson counties."

A lawsuit filed against another Maverick subsidiary, called Maverick Woodruff County LLC, seeks $1.2 million for failing to follow through with the terms of a mineral rights lease on acreage in St. Francis and Woodruff counties. The suit was filed in Cross County Circuit Court by M.A. and Elvia Vaudine Wallace.

Maverick, in its quarterly report, said it filed an answer denying the claims and is "presently unable to predict with any certainty the outcome of this matter," but included the loss on its balance sheet "given our belief that the loss is probable and can be reasonably estimated."

By Nate Hinkel

nhinkel@abpg.com
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Title Annotation:MAVERICK OIL & GAS Inc
Comment:Maverick gas wells come up dry in Woodruff County.(MAVERICK OIL & GAS Inc)
Author:Hinkel, Nate; Byerly, Brenda
Publication:Arkansas Business
Article Type:Company overview
Geographic Code:1U7AR
Date:Sep 3, 2007
Words:1512
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