Equal Energy (NYSE: EQU, TSX: EQU) announced its Q4’11 and year-end 2011 financial and operating results for the period ended December 31, 2011.

During Q4’11, EQU reported oil and gas revenues increased 22% to $42.4 million, as compared to $34.7 million during the same period in 2010. During the full-year 2011, the company reported oil and gas revenues increased 14% to $163.7 million, as compared to $143.7 million in 2010.

The company reported a net loss in Q4’11 of $14.4 million, or a loss of $0.42 per share, as compared to a net loss of $38.6 million, or a loss of $1.39 per share, during the same period in 2010. During the full-year 2011, the company reported a net loss of $14.0 million or a loss of $0.44 per share, as compared to a net loss of $42.7 million, or a loss of $1.73 per share in 2010.

Equal also reported strong performance from the drillbit as the company reported an average production rate of 11.2 MBOEPD for Q4’11, 29% more than the rate during the same period in 2010. Year-over-year production rates increased 11% to 10.1 MBOEPD. Production volumes during Q4’11 comprised 18% oil, 32% NGLs and 50% natural gas.

OAG360 Comments:

During 2011, EQU retired and/or refinanced its $119.9 million in convertible debentures bearing interest rates ranging from 8.00% to 8.25% by selling non-core assets, using its revolver which is priced on a floating interest rate (it was 3.00% at year-end 2011) and issuing $41.3 million in new convertible debentures at a 6.75% interest rate. The move strengthens EQU’s liquidity heading into 2012, which is important as 50% of its production in Q4’11 consisted of natural gas, a commodity with weak price fundamentals. OAG360 notes that although the company reduced its debentures, it increased borrowing on its $200 million credit facility to $138.8 million from $24.9 million during 2011. The revolver will be reviewed next in June 2012 and has a maturity date of June 24, 2013.

EQU’s CAPEX guidance for 2012 is $64 million, down from $82 million in 2011. To date, the company hasn’t disclosed its capital allocation per play; however, in 2011 EQU split development evenly between its Hunton acreage in Oklahoma and its legacy assets in Canada. In 2011, the company drilled 12 wells in its Hunton play ($2.9 million per well) and invested an estimated $34.8 million. In Canada, Equal drilled three wells in the Cardium ($4.5 million per well) and nine wells in the Viking ($1.7 million per well), investing an estimated $13.5 million and $15.3 million, respectively. If natural gas prices remain low and NGL pricing continues to trend lower (see graph below), expect the company to divert capital from the natural gas-weighted Hunton, where the company’s production is 56% natural gas, 41% NGLs and 3% oil, to its oil-weighted assets in Canada and the emerging Mississippian play in Northern Oklahoma.

With $5.6 million in cash as of December 31, 2011, planned non-core asset divestitures, cash flow from operations, which the company estimates will range from $60 to $65 million in 2012 and $61.2 million in availability on its revolver, the company has sufficient liquidity to fund its projected $64 million 2012 CAPEX.

EQU’s 15,200 net acres in the Mississippian, 88% of which is held-by-production, holds the potential to be a growth catalyst for the company in 2012. One point of comparison is SandRidge (NYSE: SD), who has drilled over 230 horizontal wells and holds 1.5 million net acres in the Mississippian. SandRidge estimates it generates a 91% IRR from its Mississippian wells (Price deck: January 17, 2012 NYMEX strip price). Based on SD’s spacing estimate of three wells per section (sourced from its February corporate presentation), EQU has approximately 71 net unrisked drilling locations in the Mississippian.


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