Emerald Oil Reports Q3’13 Results; Clear Path to Double Production during 2014

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.

Recent Earnings Results

The headline of Emerald Oil’s Q3’13 results on November 5, 2013 was the over-deliverance on production volumes. The company reported a 35% increase in average daily production from last quarter averaging 1,877 BOEPD. The increase in production naturally had a drastic effect on adjusted EBITDA – totaling $10.1 million, an increase of 151% from Q3’12.

Current Wells Performing above Expectations

Four of the company’s operated wells are producing an average 622 BOEPD after 90 days of being on production. Most notably, the company said on its conference call that EOX’s Excalibur 5-25-36H well in the Low Rider area is performing well above its 550 MBOE EUR type curve with initial IP of 1,842 BOEPD. EOX spends approximately $10 million per well, but is targeting closer to $9 million due to increased efficiencies and completion techniques such as frac clusters and slick water fracs. If wells continue to get bigger while costs decrease, EOX could continue to outperform expectations.

Acreage Transactions Complements EOX’s Core

EOX expanded its core Low Rider (68% WI) property by adding 34,000 net acres in the Easy Rider, Pronghorn and Lewis & Clark areas for approximately $37.5 million. The new acquisitions are estimated to hold 59 potentially operated drilling spacing units (DSUs). Emerald sold substantially all of its non-operated net acres in the Williston Basin for $116.2 million in the quarter.

Pro forma for the sales, EOX now holds 66,000 net acres in the Williston Basin, of which approximately 60,000 are operable. Its leasing program added 138 additional operated drilling locations, which provides Emerald with a total of 313 drilling locations in the Williston Basin. EOX plans to spend approximately $127.2 million to drill 12.5 operated (12.0 net) Williston wells for the 12-month period ending December 31, 2013, and $41.8 was spent in Q3’13.

A Clear Plan for Expansion – “Hold by Production” Initiative

The company says it has identified seven wells per DSU, with four in the Bakken and three for Three Forks. Its current plan is to hold properties by production by placing one well in each DSU. Its two-rig program is moving south to implement the plan, and its newest horizontal rig will follow the same procedure once it becomes operational in April 2014. A fourth rig may be added in 2014, but is not guaranteed and therefore not included in the guidance. Its seven-well formation may increase as more wells are developed in the Williston Basin.

2014 Guidance

Emerald is on track to deliver its guidance of 12 completed wells for 2013. Average Q4’13 production is expected to increase to 2,300 BOEPD, with a 2013 exit rate of 2,400 BOEPD. For the 12-month period ending December 31, 2014, Emerald plans to spend approximately $182.0 million to drill 18.2 net operated wells in the Williston Basin at an average cost per net well of approximately $10.0 million. The Company has also budgeted approximately $25.0 million to increase its operated acreage position in its core operated areas.

Research Commentary

Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Emerald Oil following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.

*SunTrust Robinson Humphrey Note – 11.6.13

EOX – Strong Well Results Continue; Beat Now, Raise Later?

Emerald reported a strong 3Q beat highlighted by production 20%+ above our views. The company provided initial 90-day rates on its completed wells that showed not only stronger production but implied greater efficiency as well. Alas, the potential “beat-and-raise” quarter was missing the “raise” part but we feel like that could come as early as January with Emerald’s analyst day. We remain enthusiastic on Emerald shares and reiterate our Buy rating.

Bakken wells look more efficient than peers. On average, Emerald’s wells have commenced at a 24-hour rate of 1,654 Boepd and produced 622 Boepd over the first 90 days. For context, one large Bakken peer reported 90-day average rates of 425 Boepd while our year-old study suggests another peer’s 90-day rates were ~400 Boepd. Even assuming $10 million well costs versus peers’ current ~$8 million, Emerald’s wells still look 15-25% more efficient from a 90-day rate per dollar spent. This may be because Emerald is using industry-leading technology such as multiple frac clusters per stage and slickwater fracs (though not cemented liners at this time).

We cannot get to 2014 guidance – in a good way. Based on the fact 3Q production was over 20% (or 400 Boepd) above our expectation, we are raising our 2014 production expectation from 3,400 Boepd to 3,500 Boepd. Frankly, we feel this is conservative as we are still modeling productivity inferior to peers, anchored by unchanged guidance of 3,300 Boepd. That said, we would point out our 4Q14 estimate of 4,400 Boepd is 10%+ above the company’s 4Q14 guidance of 3,900 Boepd. We believe extended well data should show wells continuing to outpace Emerald’s 550 Mboe curve and allow the company to revisit guidance, perhaps at its January analyst day.

Additional potential outside the Bakken. Emerald recently completed its first upper Three Forks well and is waiting on initial oil flowback. Additionally, the company cited potential in the Middle Bakken Silt, Pronghorn and Red River on various parts of its acreage, which if successfully tested could present upside to our resource estimates and target.

Reiterate Buy, raise target. Our 2015 CFPS estimate increases from $1.28 to $1.57 on a stronger production outlook. Our target multiple increases from 7.5x to 7.75x on industry-wide multiple expansion. As a result, our target price rises from $10 to $12 and we reiterate our Buy rating.

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