The drilling program of Nighthawk Energy plc (ticker: HAWK.L) is up and running again, and new arrangements in its marketing firm agreements are expected to provide increased upside in the second half of 2015.
The plan to drill the first of six gross wells (three net) commenced on schedule in September, as part of its joint development agreement with Cascade Petroleum. Drilling operations have already begun on the second of four wells scheduled to be drilled before year-end 2015, and preliminary 30-day production results from its first well is expected within the month of October.
Margins on the Rise
As mentioned in previous reports, Nighthawk’s low drilling costs (about $1.5 million per well) and estimated ultimate recoveries of 286 MBOE gross (234 MBOE net) in the Denver-Julesburg Basin provide favorable economics even in a constrained environment. Internal rates of return are estimated at 48% in a $40/barrel oil world, according to Nighthawk estimates.
However, the estimates were made before Nighthawk renegotiated its oil marketing contracts, lending management belief that the margins are set to increase. The new arrangement went into effect in April 2015, and resulted in “more cost effective oil transportation solutions saving the group approximately US$3 to US$4 per barrel in costs,” according to the company’s H1’15 results, issued on September 30, 2015. The release goes on to explain, “in this US$40 per barrel oil price environment, that represents approximately an 8% to 10% margin improvement and Nighthawk is working on longer term solutions for 2016 and beyond.”
Cost Savings in Place
Management has implemented several cost savings measures in the face of the commodity downturn, and the transportation solutions are just one element. Management believes drilling costs have dropped as much as 30%. Another factor is the potential construction of a water pipeline system that could begin before the end of the year. If successful, the system would be in service by early 2016 and result in lease operating expenses by as much as $0.50 to $0.75 million per year.
The company’s Arikaree Field, the focus of its drilling operations, also holds the potential for secondary recovery waterfloods and is being pursued as a possible expansion project for 2016. The infrastructure associated with the project will be built out once approval is received from the state, and will likely be in service by mid-2016. A 3D seismic shoot was also conducted on potential Mississippian Spergen prospects, and management believes results may yield as many as 65 additional possible drilling locations.
Nighthawk believes new reserves will result from the waterflood prospects, with results from the 3D seismic shoot potentially adding to the reserve book down the road. As mentioned in the press release, the new reserves will “increase the asset value of the Company, increase the related borrowing base loan facility and the increased production will improve the operating cash flows.” Additional details are expected to be provided in October.
A report earlier this month from Westhouse Securities believes production volumes could reach 3,626 BOPD by 2017 – approximately 85% above HAWK’s H1’15 average volumes of 1,950 BOPD. It’s worth mentioning the company’s production volumes actually grew on a year over year basis for the first six months of 2015 despite not drilling any new wells.
Any near-term stress is not on the radar; HAWK’s first debt payments are not due until 2019. The joint ventures with Cascade is providing the near-term drilling capital, and Nighthawk has plenty of running room considering an estimated 80% of its acreage is undeveloped to date.