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Aurora Oil & Gas Limited: Pure Play Eagle Ford Producer Makes Strategic Acquisition

Current AEF:CA Stock Info

Aurora Oil & Gas Limited (tickers: AEF and AUT) is a Perth and Houston-based oil and liquids company with operations solely in the Eagle Ford shale of South Texas. At year-end 2012, the company exited the year producing approximately 13,850 net BOEPD. The company has 77,000 gross (19,100 net) acres in the “tri-County” area of Karnes, Live Oak and Atascosa. Marathon Oil (ticker: MRO) historically has been the company’s largest and only operator.

The company was 1 of 74 companies out of 1,415 public E&P companies all over the world that reported positive net income for 2012. From year-end 2011 to year-end 2012, AEF reported a 92% increase in net income, a 293% increase in revenue, and a 274% increase in production.

On the company’s quarterly conference call this week, Jon Stewart, Chairman said the following in response to M&A activity in the Eagle Ford: “We expected there to be quite a lot of opportunities within the Eagle Ford becoming available during 2012. There was, however, a material gap between hopes and expectations of parties looking for farm-in partners to sell out of their acreage versus disciplined buyers who wanted to ensure that taking on acreage perhaps with variable performance didn’t negatively impact their overall position (…) And frankly, we expect that in 2013 there will be more transactions undertaken on a more reasonable basis.”

They were right.

Strategic Foray into Operated Acreage

On February 28, 2013, Aurora made its first foray into operated acreage by purchasing 100% working interest in 2,700 net HBP acres for $117.5 million. Average December 2012 production was 1,620 BOEPD net (70% oil) from 11 wells representing a transaction value of $72,531 per flowing BOEPD.  Adding this production to the company’s year-end exit rate adds 12% of daily production to the company’s operations. Approximately 6.7 MMBOE of proved reserves were included in the deal (30% PDP and 84% liquids). This represents a transaction value of approximately $17.54 per proved BOE. Pro forma, AEF has 21,800 net acres in the Eagle Ford.  You can click here for a map of the purchased acreage. The median enterprise value to trailing twelve months production and enterprise value to 2011 proved reserves in EnerCom’s Eagle Ford peer database is $82,301 per flowing BOEPD and $18.77 per proved BOE, respectively.

Note: Data in the table above reflects reserves data as of 12/31/11, TTM production as of 9/30/12 and trading data as of 2/22/13.

Over the last 12 months, the company has put a skilled operating team together in Houston led by the newly appointed Chief Executive Officer Douglas Brooks. Given the nature of Mr. Brooks’ background, we don’t not expect this to be the only M&A deal for Aurora. He worked in business development and M&A roles at Marathon Oil for 25 years, including six years as Director of Mergers & Acquisitions, Worldwide, and Business Development across the Americas.

Operated Experience

With a new operated strategy implemented at Aurora through this acquisition, we feel it’s important to point out that after leaving Marathon, Mr. Brooks founded private equity-backed Compass Resources Corporation I where he recruited a highly experienced technical team, identified, developed and sold two resource projects, the last being in 2011. The main focus was South Texas assets primarily in the Eagle Ford and Austin Chalk.

How Will Aurora Finance the Acquisition and Balance its Operated and Non-Operated Program

The company’s 2013 plan prior to the announcement was to drill between 35 and 40 net wells under its non-operated program with Marathon. During 2012, Aurora spent $427 million of development capital to put 38.5 net wells on production, and generated $167.5 million in EBITDAX.  Production in 2012 was up 274%.

We believe the company will provide a clearer strategy on capital allocation between its operated and non-operated programs; however, we remind readers this new operated acreage position is HBP allowing for strategic decisions to be made with no lease expiry issues involved. As of February 27, 2013 (prior to the acquisition), Aurora had a pro forma liquidity position of $192 million including the $215 million available under its $300 million credit facility. Prior to the acquisition, they had $60 million drawn. The company obtained bridge loan commitments of $125 million from Credit Suisse Securities (USA) LLC and UBS Securities LLC.

Douglas Brooks was interviewed at EnerCom’s The Oil & Services Conference. You can watch the video below.

Upcoming Catalysts

Here in the next few weeks the management team will be releasing a 2013 capital program, as well as results from its pilot program in the Eagle Ford testing 60- and 40-acre spacing. By the end of 2013, Aurora believes it will be able to demonstrate a plausible development plan for both the Austin Chalk and the Eagle Ford.

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