EnerCom, Inc. traveled with Mr. Terry Barr, CEO of Samson Oil & Gas Ltd. (NYSE: SSN, ASX: SSN), meeting with investors in Los Angeles and San Francisco.
The company is actively working on four oil projects in two primary project areas located in the Williston and Denver-Julesburg Basins. In this note, we provide an update on the company’s operations and efforts to advance its oil prospects.
North Stockyard Field – North Dakota Bakken (1,200 net acres).
Drilling in the company’s non-operated North Stockyard Field in the heart of the Bakken oil shale play (Williams County, ND) has increased oil production to 375 BOEPD in Q3’11, an increase of 58% over Q1’11. To date, five gross wells have been drilled into the Bakken on 640-acre spacing and the development plan for 2012 calls for drilling an additional four gross wells on 320-acre spacing. Production from the North Stockyard Field generates cash flow to cover fixed costs and preserve cash for executing the company’s exploration drilling program. Upside from the Three Forks formation exists in the North Stockyard Field as well.
Hawk Springs – Niobrara (16,400 net acres).
The Defender US 34 (37.5% WI) well is the first well drilled to test the Niobrara Oil Shale at the company’s Hawk Springs project area located in Goshen County, Wyoming. The lateral portion of the well has been drilled to a length of 4,500 feet and has been hydraulically fracture stimulated. The well is currently flowing back frac fluid and a rod pump has been set to pump off fluid from the formation. More time is needed to flow back the frac fluid, after which the well results can be evaluated. The Defender US 34 was drilled and completed by Halliburton (NYSE: HAL), who carried Samson for 100% of the well costs. Halliburton has the option to drill a second well in the joint venture project area.
In a related event, Chesapeake Energy Corporation (NYSE: CHK) recently put out a bid package consisting of ~257,410 gross acres in the Goshen, Laramie and Platte Counties, Wyoming. The package includes the ~24,000 acres purchased from SSN in 2010 at $3,150 per acre. The asset package includes eight operated wells that have been drilled with four waiting on completion. Three of the wells have been drilled and completed into the Niobrara and one into the Codell. The broker estimates the value of the transaction between $25 MM and $100 MM, which would imply a range of $97.12 to $388.49 per acre, although the per-acre value could be higher, depending on the assumptions underlying the valuation range and how value is allocated between the wells and undeveloped acreage. From our perspective, the final sale, if any, is likely to have a negative impact on the value of the company’s undeveloped acreage in Goshen County.
Hawk Springs – Conventional Targets (10,000 net acres).
The Spirit of America US 33 well was drilled to test the conventional Permian age targets in the Hawk Springs project area, also located in Goshen County, Wyoming. The Spirit of America US 33 failed to reach a planned total depth of 11,000 feet after two attempts to penetrate a gummy shale, which fell in on the drill bit, impeding drilling progress. Consequently, the well will be completed into the oil-prone Muddy formation as a bailout zone, which will provide some preservation of value. The company’s estimate of resource potential of 50 MMBO for the conventional targets merits a second test, which SSN plans to commence in Q1’12 with an improved well design.
Roosevelt Project – Montana Bakken (26,400 net acres).
Samson’s Roosevelt project is located on the Fort Peck Indian Reservation in Roosevelt County, Montana. The project area is ringed by other large Bakken operators, including Continental Resources (NYSE: CLR), Brigham Exploration Company (NASDAQ: BEXP), EOG (NYSE: EOG) and others. Samson has 20,000 gross acres under lease and an obligation to drill two wells to earn an option to acquire an additional 20,000 gross acres, all subject to a 33.33% back-in by the partner (Fort Peck Energy Company, a 50-50 joint venture between the tribe and a private equity investor).
Samson’s first appraisal well at Roosevelt is the Australia II well located on the east side of the leasehold. The vertical section of the Australia II has been completed and drilling of the horizontal leg commenced on Wednesday. Once drilling operations are completed, the rig will be mobilized to the second location to drill the planned Gretel II well on the western portion of the leasehold. The current completion plan calls for fracture stimulating both wells in late Q1’12.
Based on the performance of nearby offsets, we do not expect the Montana Bakken wells to perform like those in the heart of the Bakken play (e.g., Williams County) where initial production (IP) rates of 2,000 BOPD and 3,000 BOPD are routine. The company suggests that IPs of 600 BOPD to 1,000 BOPD for Montana Bakken wells are economic and would be considered commercially successful. EnerCom’s well economics model of the Montana Bakken wells assume an IP of 600 BOPD, which is expected to yield an EUR of 400 MBOE and generate an IRR of 28%, assuming a price deck of $85.00 per barrel ($5.00 negative differential) and $5.00 per MMBtu ($1.15 negative differential) and well cost of $6.5 million to drill and complete. Before readers get too excited about the natural gas price, keep in mind that the company said it is realizing a price of $8.00 per MMBtu, substantially higher than NYMEX or other pricing hubs in the Rockies.
Capital Expenditures.
The company previously guided to a 2012 capital budget of $23.2 million, which assumed that both wells in the Roosevelt project would be drilled in 2011. It is likely that the Gretel II well will be spud in late Q4’11 or early Q1’12, which implies that some of the planned expenditures will be pushed into early 2012. The company’s capital plan for 2012 is contingent on drilling results and success will guide the capital allocation to the most prospective projects.
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Liquidity and Capital Structure.
Samson has maintained a conservative capital structure and strong balance sheet. With no debt and $54 million of cash at September 30, 2011, the company has guided to a cash balance of $32 million at year-end 2011, which provides more than enough capital to execute the company’s current exploration and appraisal drilling programs. We anticipate that the company’s year-end cash balance may be higher than forecasted, given the timing of expenditures in the Roosevelt project.
Valuation.
As an exploration company, cash flow multiples are not the best valuation metrics to apply to Samson. Consequently, we focus on per-acre and resource valuation metrics. In our Catalyst Report of July 29, 2011 “Transformation Continues: Samson Oil & Gas Ltd. Becoming More Unconventional” we estimated the company’s break-up value at $2.35 per share.
In light of the CHK sale of Niobrara assets we no longer feel comfortable with the value we assigned to the overriding royalty interest ($0.43 per share), since it is unlikely that a multi-rig drilling campaign will commence on the subject acreage in the foreseeable future. In addition, the CHK sale puts our original valuation of the undeveloped acreage at Hawk Springs prospective for the Niobrara of $0.83 per share at risk.
However, we are more confident in the value of the Roosevelt Project’s Montana Bakken undeveloped acreage after hearing the encouraging results from Australia II’s core analysis. If we assume that the Montana Bakken acreage is worth $3,000 per acre, or $0.80 per share, then that substantially replaces the value of the Hawk Springs acreage. Our revised estimate of the company’s liquidation value is summarized in the table below.
Samson Oil & Gas Ltd. Estimated Liquidation Value
The liquidation value estimate provides no credit for exploration success at Roosevelt or any potential value at Hawk Springs. SSN shares closed at $1.69 on December 15, 2011.
We also note that the value of the North Stockyards asset value assumed a price deck of $85.00 per barrel ($5.00 negative differential) and $5.00 per MMBtu ($1.15 negative differential) and well cost of $6.2 million to drill and complete.
