Emerald Oil (ticker: EOX) is an independent exploration and production operator that is focused on acquiring acreage and developing wells in the Williston Basin of North Dakota and Montana, targeting the Bakken and Three Forks shale oil formations.
Emerald Oil exited 2013 producing approximately 2,630 BOEPD, according to an operations update on January 23, 2014. The company averaged approximately 2,430 BOEPD in Q4’13 – respective increases of 30% compared to Q3’13 and 103% compared to Q4’12. Both rates exceed initial guidance numbers predicting a 2013 exit rate of 2,400 BOEPD with an average Q4’13 rate of 2,300 BOEPD.
Rig Program Close to Expanding
EOX is currently running two rigs in its Low Rider project area and completed 3.9 net wells since reporting its Q3’13 results in November 2013. The company has an additional 6.9 net wells drilling, completing or waiting on completion. A third rig is expected to be added to its fleet in April 2014. In terms of its current drilling locations, management says the new rig will allow EOX to drill all potential wells approximately six years sooner than drilling under its current program.
EOX: Green Wells
EOX successfully completed its first well targeting the Three Forks formation, which produced a 30-day rate of 573 BOEPD (1,113 BOEPD for a 24-hour span). EOX management says it plans on drilling more Three Forks wells in 2014 and will be aided by the addition of the extra rig. Historically, Emerald’s plan of action has been to move its rig program across its acreage and hold its assets by production. The success of its Three Forks well will lead to further exploitation of the formation and potentially extra value of its existing assets. Pro forma for the acquisitions, EOX estimates roughly 435 potential net drilling locations on its acreage (320 operated).
New Rig + New Acreage
EOX purchased approximately 20,800 net acres in the Williston Basin on January 10, 2014, in two separate transactions for a total of $74.6 million in cash. Roughly 19,500 of the net acres are immediately next to its Low Rider assets, representing a bolt-on acquisition. Approximately 62% of the acreage is held by production and currently produces an estimated 350 BOEPD (net) with 19 operated drilling spacing units (17 in Low Rider).
Emerald now holds approximately 84,617 net acres in the Williston Basin and is the operator in roughly 75% (63,237 net acres) of its properties.
Approximately half of the acquisition costs were funded by cash on hand, with the remaining half covered by borrowings from its credit facility. Upon completion of the payment, EOX has $105 million cash on hand and $35 million withdrawn from its credit facility. Its borrowing base is currently $75 million but management is expecting the limit to rise due to its recent acquisition. The base is redetermined on a semi-annual basis, with the next meeting to occur in April 2014.
2014 Guidance
EOX first established its 2014 guidance during its Q3’13 earnings release on November 5, 2013. With a 2013 exit rate of 2,630 BOEPD, the company has already initial its Q1’14 forecast of 2,600 BOEPD. Production is expected to reach 4,000 BOEPD by year-end 2014, with a yearly average of 3,300 BOEPD. If achieved, production totals for the upcoming year would more than double 2013’s average of 1,590 BOEPD.
EOX’s budget for fiscal 2014 is $258 million, with $182 million intended for production and the remaining $76 reserved for land acquisition. The company anticipates drilling 18.2 net operated wells, a jump of 42% from 2013’s total of 12.8 net wells.
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Analyst Commentary
Baird Energy Daily Dirt – (1.24.14)
Emerald Oil reported 4Q13 average production of 2,430 boe/d and 2013 exit rate of 2,630 boe/d, a 103% increase in Y/Y production. EOX currently has two rigs operating in McKenzie County, ND and intends to add a third rig in April 2014. EOX drilled and completed 3.9 net wells during the quarter that are currently producing and has 6.9 net wells drilling, completing, or waiting on completion in 1Q14. The company’s first TFS well came online at 24 hour and 30 day IP rates of 1,113 boe/d and 573 boe/d, respectively, and plans to drill more TFS wells in conjunction with its Middle Bakken development program in 2014.
Johnson Rice & Company LLC Morning Energy Call – (1.24.14)
In advance of tomorrow's analyst meeting, Emerald provided an operational update with six new well results (5 Bakken and its first Three Forks well). The Bakken wells at Low Rider had an average 30-day rate of 750 boe/d, which remains above the 550 mboe type curve used in its guidance and is back in-line with earlier wells utilizing restricted flow back (and above the Hot Rod wells that were limited by inability to utilize gas lift). The initial Three Forks well result was encouraging and will lead to additional Three Forks wells this year. The results should highlight Emerald's attractive core position in the Low Rider area, where both of its operated rigs are currently operating (see the well results table on page 2). The third rig is still on track to start drilling in April and will move between its other operating areas. Emerald's 4Q average and '13 production exit rates exceeded guidance, highlighting the conservative nature of its guidance and should allow for upward guidance revisions. Note, our '14 production estimates already include the impact of its recent acquisition (~350 boe/d), which should close in mid-February. We expect additional color on its '14 drilling program, targeting both the Bakken and Three Forks, at tomorrow's meeting, which should also include greater depth on its geologic modeling driving its acreage acquisitions.
Global Hunter Securities Dirty Energy Daily – (1.24.14)
Q4:13 production of 2,430 boepd exceeds 2,248 boepd forecast.
Reducing EPS/CFPS slightly to ($0.00)/$0.18 from $0.02/$0.20 on lower crude prices.
Reiterate Buy rating, $12 price target based on EOX's strong, oily growth profile and ample liquidity.
SunTrust Robinson Humphrey Quick Thoughts – (1.24.14)
Pre-announces production ahead of views. Emerald pre-announced 4Q production of 2.43 Mboepd and an exit rate of 2.63 Mboepd ahead of its analyst day this morning. 4Q output represents 30% q/q growth and comes in 6% above the 2.3 Mboepd guidance/consensus and 7% above our 2.27 Mboepd estimate. Similarly, Emerald's 4Q exit rate beat the 2.4 Mboepd guidance and the ~2.5 Mboepd we and the Street were expecting.
New wells in line. The company announced five new Bakken wells averaged 1,729 Boepd and 750 Boepd in 24 hours and the first 30 days, respectively. We view these rates as in line with expectations as the first 24 hour rate was stronger than the prior ~1,650 Boepd average though the 30-day production slightly weaker than the prior ~800 Boepd average.
Extended production suggests strong capital efficiency. Additionally, 60-day/90-day rates from three existing wells averaged 548/576 Boepd versus the 713/622 Boepd previous average. Given our December Williston study implied average first 60/90-day rates of 370/310 Boepd from wells drilled across the basin, we view these extended production rates as quite strong.
First Three Forks well derisks acreage despite completion problems. Emerald announced its first operated Three Forks well commenced at 1,113 Boepd and averaged 573 Boepd over the first 30 days. While these rates are lower than those of Emerald's Bakken wells, they look as good or better than those of a large peer. As such, we see the result as supportive to our views on resource potential and likely additive to some investors that may have been skeptical on Emerald's Three Forks potential.
Moreover, our conversations suggest only a portion of the lateral - perhaps 50% or 60% - is properly flowing back as the perf gun is stuck and obstructing the flow of oil from part of the well. At least two additional Three Forks completions are planned in the near future.
Continuing to ramp activity. Emerald completed 3.9 net wells since its last ops update on November 5. The company currently has 6.9 net wells in various stages of drilling/completion and should add its third rig in April.
What to expect. During the analyst day presentation, we look for more insight into the leasing program and science behind Emerald's success. Updated 2014 guidance and, potentially, type curves may have to wait for the pending acquisition to close, which is scheduled for mid-February.
Wunderlich Securities – (1.24.14)
Initial operated results from the Three Forks look solid. Emerald announced its first horizontal Three Forks well; Excalibur 4-25-36H came in at a solid 24-hour IP rate of 1,113 boe/day as well as a 30-day rate of 573 boe/day. The well is near a Bakken well of the same name that showed strong production and de-risks considerable inventory in the Three Forks formation in areas that already have shown solid Bakken results. Look for more Three Forks activity in 2014 to grow production and prove out the formation further.
Recent operated Bakken wells keep coming in at positive rates. The most recent Bakken operated results came in at about 2,000 boe/day 24-hr IPs and strong 800+ boe/day 30-day rates, which are two of the best wells to date for Emerald as it moves down the learning curve. The continued strong results should help production grow further as Emerald brings on its third drilling rig in April 2014 as the weather in North Dakota improves.
4Q13 production and the exit rate were slightly ahead of expectations. Despite rough weather in December, Emerald was able to grow production to 2,430 boe/day, which was about 100 boe/day above our estimate. Further, the company's exit rate of 2,630 boe/day was slightly ahead of our 1Q14 figure. We have moved our estimates up for production slightly based on the solid results, and though weather is still tough so far in January, we believe Emerald can meet its production goals going forward.
Funding future growth while avoiding dilution should be the focus. Few can argue against Emerald's success in 2013 as it became an operator and built a sizeable drilling inventory for future development. However, the stock seemingly bounced around current levels due to multiple equity raises to fund the acquisitions and activity. Looking forward, Emerald has a solid cash position and credit facility availability (some of which was recently used on acquisitions), but minimizing dilution impacts is something we intend to watch again in 2014.
Reiterate a Hold rating and $8 price target. Emerald continues to operate at a high level, as evidenced by its production gains, well results, and strong asset package. However, the company's financing remains a concern and with Emerald trading at an 8.2x 2014E P/CFPS multiple versus peers at 4.3x, we feel the valuation is too rich at this time.
