Company Overview – Sundance Energy is engaged in the exploration, development and production of Oil and Natural Gas in the US. It is also involved with the expansion of its mineral acreage portfolio in the US. The company has exploration assets in the south Texas region in the Eagle Ford shale play, the greater Anadarko area chasing a Mississippi Lime – Woodford Shale Play and the Denver – Julesburg Basin on the Niobrara and Codell play. We categorise Sundance energy as an emerging oil producer. Sundance will be exposed to an 83 gross well programme focussed on its Eagle Ford and Mississippi Lime assets.
Analysis - Sundance energy is a US onshore oil and gas producer with assets located in a number of high quality US resource plays, but of most investment interest are the are the Eagle Ford and Mississippi Lime holdings where the opportunity set could be considered as relatively low risk based on predictable and repeatable oil plays. The diversified nature of the company’s asset base does not provide the specific leverage of more focussed exposures but does provide a point of differentiation and provides the company with more flexible opportunity set.
One of the key positive points for Sundance is that encouraging results keep coming out of Mississippi Lime/ Woodford Shale wells on Oklahoma. We understand that Devon Energy (NYSE:DVN) is now using at least 10 of its 15 rigs in the area to drill Woodford wells rather than Mississippi Limestone targets while range resources (NYSE:RRC) has upgraded reserves from its Mississippi Limestone wells using bigger fracs. With 42,600 net acres in this area SEA is well leveraged to the upside. That’s also a big reason that Sundance energy has acquired 10,000 acres in Logan County, Oklahoma for US $5.9 Million. The acreage is contiguous with Sundance’s current acreage position and is prospective for the Mississippian and Woodford formations. Sundance says that it produced 825 boed from Logan county in November.
SEA has announced the sale of the better part of its Bakken assets in North Dakota for US$35.5 Million. The phoenix project of about 1200 net acres represented the bulk of SEA’s Bakken current production which we estimate at a net 350 boepd out of a Bakken contribution of 500 boepd. SEA retains another 640 net acres near the phoenix project plus 3000 net acres at the Goliath project to the North. We regards these assets as inferior to the main Phoenix assets just sold and have adjusted down our remaining Bakken asset valuation to $18 Million.
The company is currently conducting a four rig horizontal drilling programme in the Eagle Ford, Mississippian and Woodford. These two plays could be considered the primary focus of the company’s acquisition strategy and growth plans. Drilling results are delivering to target. The company could deliver upside to our expectations based on successful results against the type curves but also by the application of horizontal drilling in its Wattenberg asset. The company is well financed providing some flexibility to increase work activity if required but also to target further acquisitions if the opportunities arose particularly in the Eagle Ford where the company could benefit from larger scale operations.
Source – Company Reports
Industry results from Oklahoma are very encouraging. Both Mississipi Limestone and the underlying Woodford Shale are coming up with encouraging results with flow rates and reserves moving up while costs are maintained or being reduced. Devon Energy (DVN: NYSE) has 15 rigs in the play. With 350 wells planned for 2014.DVN is shifting its focus from the Mississippi Limestone to the Woodford with two thirds of its wells targeting Woodford. Range resources (RRC:NYSE) has also just released positive results from their missiispi Limestone acreage to the north of SEA’s logan county focus area, where Estimated Ultimate Recovery (EUR) are now said to be between 600 – 900 Mboe per well. We believe that SEA’s 42,600 net acres in Oklahoma represents huge upside potential.
Source – Company Reports
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Price |
Price % Change |
|
Close: |
1.00 (05-Feb-2014) |
3M: |
(14.53%) |
|
52 Wk High: |
1.19 (04-Nov-2013) |
6M: |
2.91% |
|
52 Wk Low: |
0.77 (25-Jun-2013) |
1Y: |
7.53% |
Source - Thomson Reuters
The eagle ford and Mississippi Limestone plays are considered to be very predictable and repeatable based on the extensive number of historical wells in and around the permit area. Drilling results to date have been excellent and confirm the type curves. We see little risk to 2014 production estimates and suggest that there may be risk to the upside. Onshore US plays can be capital intensive especially if the drilling schedules are aggressive. On the basis of the work programme that has been guided, we feel the company will have adequate financing capacity through its operational cash generation and existing cash balance. The company has secured a $300 Million Senior Credit facility and $100 Million Junior credit facility of which only $15 Million has been drawn to date. We do not see financing as an issue.
Some of the key risks associated with SEA would be. 1 – Oil and gas prices can be quite volatile with no certainty of future trends. 2 – Exchange rate trends are also difficult to predict which implies that revenues and costs will differ from the assumptions made. 3 – Dealing with explosive and highly flammable products creates operational and environmental risks. 4 – The risk that geological formations and structures vary from expectations can impact on productivity and reserves. 5 – The main risks associated with the drilling and completion of shale wells is that the frack designs are appropriate for the Oil and Gas bearing formations with minor variations potentially having large impacts on productivity and reserve recoveries.
Sundance has been able to deliver significant reserves growth over the last three years through both drilling and acquisitions and we expect the company to continue this. We will be putting a BUY on the stock at the current price of $1.00.
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