newsletter article for discussion

I was able to see a copy of the John Campbell weekly oil and gas newsletter which a relative and I share a subscription to. I've posted a section of interest to us. John Campbell has been cool on the Eagle Ford until quite recently , but results appear to have won him over.He is not a fiancial advisor but is fearless in telling it as it is IMO .The article was presented better than I have managed to copy it as a table didn't copy well but think it should generate some discussion.


The Sugarloaf trio, Adelphi Energy, Eureka Energy and Aurora Oil & Gas reported initial flush production of 5.15 mmcf of gas and 2,046 barrels of condensate from their Morgan #1 well and 6.81 mmcf of gas and 780 barrels of condensate from the Easley #1 well. The trio acknowledged that these initial production rates were not indicative of a short or long term production profile. But they claimed the rates compared very favourably to results achieved by other participants in the wider Eagle Ford Shale play.
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The current four Sugarloaf wells could return $13,000,000 gross a year to ADI and AUTs 10% equity interest. So far we have the following daily production profile for the Hilcorp farm in wells: Well Gas Condensate mmscfep/d Weston # 1H * 5.70 mmscf 378 bocpd 9.1 mmscfe Kennedy #1H * 2.47 mmscf 540 bocpd 9.6 mmscfe Easley #1H ** 6.81 mmscf 780 bocpd 31.0 mmscfe Morgan #1H ** 5.15 mmscf 2,046 bocpd 17.9 mmscfe Total 20.13 mmscf 3,744 bocpd 67.6 mmscfe # * 60 day average. Recompleted previously drilled wells. ** Initial production. New wells. H stands for horizontal. # Converted at 12:1 that is 1 bo equals 12,000 cubic feet of gas (12 mcf). Adelphi Energy and Aurora Oil & Gas each have a 10% interest in the Sugarloaf project after Hilcorp‟s farm in. Eureka Energy has 6.25%. So ADI and AUT have net daily production on the above numbers of 6.76 mmscfe/day. Or 2 mmcfs/d and 374 barrels of condensate per day. One mmcf of gas at US$4.00 per mcf is worth a gross US$4,000 a day or US$120,000 a month or US$1,460,000 a year. One hundred barrels of condensate at say US$75 a barrel is worth US$7,500 a day or US$225,000 a month or US$2,700,000 a year. So provided flow rates don‟t change and oil and gas prices remain the same, ADI and AUT could be looking at some US$13,000,000 a year in gross sales revenue from the first four wells alone. But flow rates will decline. That‟s inevitable. How fast only time will tell. It is not unusual to see up to a 30% decline in the first year. That decline could be offset by higher prices. The break even gas price for the project looks to be around US$2.73 an mcf, reportedly the lowest of all US shale plays. And of course by drilling more wells. The JV expects to have one more recompleted well, Kowalik #1H, and one new well, Rancho Grande #1H, in production by the end of June. In Adelphis recent investor presentation it claims up to 200 potential new well locations on the 23,500 acre lease that is the Sugarloaf AMI. With full scale, multi rig development to commence in 2011 when the JV partners will pay for development wells at their respective equity interest level. The Sugarloaf project‟s economics look very strong. The numbers stand up to close scrutiny. The professionalism and experience of Hilcorp has made all the difference to a project we once derided. All three companies involved are competently managed and factual and transparent in their presentations. There is little of the hyperbole that accompanies so many of the junior Aussie oilers operating in the US. So the share price of the JV partners have not been inflated with b/s.
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AusTex plugs and abandons Clarke #3 in Kansas. Drillsearch production tests Brownlow wet gas discovery. Which stock to support is a question. Adelphi, Aurora or Eureka with its slightly smaller equity interest. Aurora has an interest (50%) in the Longhorn and Ipanema projects in the same Sugarkane field. These are AMIs not shared by Adelphi or Eureka. And Hilcorp is now drilling the first two of three farm in wells on Longhorn (Turnbull #1 and Turnbull #2) with one farm in well to come on Ipanema. So the Longhorn and Ipanema acreage that only Aurora has the interest in provides Aurora with three times the net acreage interest that it, ADI and EKA have in Sugarloaf. Paterson Securities recently put a research paper on Aurora with a target price of $0.92.But bear in mind that Adelphi like Adelphi and Eureka before it, will likely need to raise more capital to meet their drilling commitments if, as seems anticipated, Hilcorp will go hell for leather in developing the three AMIs. We don‟t know what a well costs but assume it is around US$5 million so payback is reasonably quick at less than six months. In short it probably doesn‟t matter which of the three stocks one chooses. Adelphi which is currently raising money at $0.25 and Eureka Energy are our current preferences given the leverage of their lower share prices when compared to Aurora. This past week ADI dropped from $0.295 to $0.275, AUT from $0.65 to $0.61 and EKA from $0.14 to $0.13. The drivers for these stocks will be the news flow as Hilcorp gets on with the drilling and completes and places more wells on production. The third well Rancho Grande was due to be fracced and completed this month. And for Aurora only, results from the Turnbull wells can‟t be too far away. The possible downside is a dramatic fall in gas prices though we don‟t see them falling much further as the US economy rebounds. It is always possible decline rates will exceed expectations, though the JV doesn‟t think that will happen based on analogue fields. And for ADI and EKA the drilling priorities of Hilcorp could become an issue if Longhorn and Ipanema prove even better fields than Sugarloaf.