ELK PETROLEUM and Metgasco look set to become the first junior explorers to merge as a result of the oil price squeeze, with other small players expected to follow as they grapple with decreasing returns and sinking shareholder support.

Metgasco, which was left reeling in May when its drilling licence for a well near Lismore was suspended by the NSW government, was banking on the merger opening it up to revenue from Elk’s US operations.

The company said it a statement it had acknowledged further delays in NSW were likely and had been examining opportunities outside the region “for some time”.

Metgasco chairman Len Gill said the deal opened up the company to Elk’s Grieve field oil reserves with ready access to market, and “potentially higher oil prices” in 2017, when production should begin.

“With the bulk of the wells and facilities for the Grieve project in place, it is a well advanced development with relatively low capital costs remaining before first production,” Mr Gill said.

“We believe we can grow the oil business in the USA,” he said.

The company said the project, operated by Denbury Resources, would provide it with a medium-term cash injection, and access Merger on the table for Elk and Metgascoto operations existing within a supportive business and regulatory environment.

The all-scrip merger was announced on 22 December, with Elk shareholders to be offered 0.67 Metgasco shares for each Elk share

After the deal is completed Metgasco shareholders will own about 77 per cent of the company and Elk shareholders 23%.

Elk said in an announcement the merger would “result in a geographically diversified portfolio of exploration and development assets”, with coal seam and conventional gas assets in New South Wales, and oil interests in the Rocky Mountains in the United States.

The companies said the new entity would initially focus on bringing the Wyoming-based Grieve project into production in 2017, providing cash flow to sustain the combined group’s US and NSW operations.

After the deal is completed the new entity will have access to $9 million cash, 4,000 billion cubic feet of contingent gas, further exploration potential in NSW and another oil play at Elk’s Singeton field in Nebraska.

The companies said the merged business would be “better positioned for growth compared to either company on a standalone basis” and said the deal would place the company well in the medium and longer terms.

“We welcome Metgasco’s offer as representing an opportunity to ensure Elk’s assets are appropriately funded,” Elk chairman Neale Taylor said.

Dr Taylor said after the company’s strategic review earlier this year it had endeavoured to deliver “certainty” to shareholders, and the new deal did just that.

He said the merger was the best option for the company after a period of sustained market uncertainty and a “severely depressed oil price”.

As part of the deal Metgasco will loan Elk $2.5 million to assist with its immediate funding requirements.

The companies are targeting a 15 June completion date for the merger, with Mr Gill saying the sourcing of additional capital had drawn “significant interest” from financiers.

Metgasco’s NSW future

Metgasco will sit on its Clarence Moreton basin assets until changes in regulation and the market make their monetisation possible, the company said.

In announcing the merger plans, Metgasco said its NSW operations continued to be constrained by regulatory issues, with the NSW government having extended a moratorium on coal seam gas exploration to at least September 2015.

The company said the assets would be pursued in the future when gas supplies were insufficient to satisfy the eastern states market, prices were higher and the regulatory environment had improved.