Company Overview - Sundance Energy Australia Limited is engaged in the exploration for and development and production of oil and natural gas in the United States and the expansion of its mineral acreage portfolio in the United States. The Company’s focus is the exploration, development and production of large, repeatable onshore resource plays in North America. The Company’s activities are focused in the Greater Anadarko, Denver-Julesburg (DJ), South-Texas - Gulf Coast and Williston Basins. The Company holds primarily non-operated working interests across three projects in the Williston Basin - Phoenix, Goliath and Manitou. The Company’s diversified portfolio of projects in the Greater Anadarko Basin includes two projects, South Goltry and Mulhall, situated in Oklahoma targeting the Mississippian Lime and Woodford formations, and one project in southern Kansas targeting the Mississippian Lime.



Analysis - With the recent business updates of December 2014, Sundance Energy (SEA) is the Company in our radar today. SEA released its near-term strategy in view of the current market price for oil. Mainly, SEA reported that it has no long-term service contracts and ~6.0 net commitment wells are required in 2015 to preserve its 20,000+ net acre leasehold in the Eagle Ford. The Company’s expected development cost per well in the Eagle Ford, inclusive of drilling, completion, facilities and gas tie-ins, has been decreased by ~$1.5MM to less than $7.0MM, which becomes a part of its core strategy for driving reduction in development costs. SEA also expects to drill ~10.0 net and complete ~14.0 net Eagle Ford wells and complete ~2.5 net Mississippian/Woodford wells in 2015. Further, the base case 2015 capital program is believed to be funded from cash flow from operations. The capital plan is expected to lead to average production of ~7,800-8,500 boepd during 2015, i.e., a 20% increase over full year production during 2014.


Activity Pipeline (Source – Company Reports)

There is an expectation to have production which entails ~65% oil and 35% natural gas and natural gas liquids. Realized oil prices have been expected to be West Texas Intermediate (NYMEX) less $2.50-$3.00 per barrel. Hedges include ~250,000 barrels at a weighted average floor price of ~$89.93/bbl and 240,000 mcf at ~$4.14/mcf.

Cash operating costs inclusive of lease operating expenses (LOE), production taxes, and general and administrative expenses are expected to be $14-$15/boe. Cash interest expense is expected to be $2-$3/boe. SEA has adopted a low leverage business model capping debt to EBITDA at 1.5x for execution of its core business. The Company believes to be in compliance with all debt covenants throughout 2015, and is not currently considering any material acquisitions as part of its 2015 strategy. The net debt to run rate EBITDA was ~0.9x, as of 30 November 2014 (unaudited).


Operating Results (Source – Company Reports)


The Company is thus witnessing good progression, more or less, in alignment with its past updates. As per the quarterly updates for the period ending 30 September 2014, the Company’s quarterly production increased to 7,035 Boe/d. Excluding the sale of Denver-Julesburg and Goliath, production for the Eagle Ford and Anadarko Basins increased 1,878 Boe/d (39%) compared to the previous quarter. Revenue increased to $46.5 million bringing 30 September 2014 year-to-date revenue to $115.9 million (110.1% increase compared to $55.2 million for the same nine month period in 2013).


Revenue & Production, Net of Royalties (Source – Company Reports)

The adjusted EBITDAX and adjusted EBITDAX margin rose to $36.0 million, or 77.6% of revenue, respectively, for the quarter ended 30 September 2014 and $86.1 million, or 74.3% of revenue, for the nine months ended 30 September 2014, a 168.3% increase compared to $32.1 million, or 58.2% of revenue for the same nine month period in 2013. As at 30 September 2014, the Company had $50.9 million of cash on hand, with $65 million of undrawn borrowing capacity on its credit facilities.

The Company in 2014 completed the acquisition of about 5,700 net Eagle Ford acres with an additional 5,400 net Georgetown acres in South Texas for about $35 million. Divestment of the remaining DJ and Bakken assets was for about $113.4 million and $14.0 million in net proceeds, respectively. SEA could monetize DJ and Williston Basin positions freeing up ~$128 million to invest in growing the business. The Company brought 26 gross (17.2 net) wells into production during the quarter, in addition to 18 gross (7.2 net) producing wells that were acquired in July. The quarterly updates indicated that there was a 61.9% increase in revenue to $46.5 million compared to the same period in previous year. The production increase of 3,050 Boe/d from the Company’s successful multi-rig drilling program contributed $21.8 million and improved natural gas and NGL pricing contributed $1.0 million to the increase in revenue. However, a $10.89 per barrel decrease in oil price negatively impacted revenue by $5.0 million. For the current quarter, the Company realized $93.08 per Bbl (10.5% decrease compared to the same quarter in 2013) of oil and $3.27 per Mcf (81.7% increase compared to the same quarter in 2013) of natural gas, net of transportation and marketing fees. For the quarter ended 30 September 2014, the Company produced an average of 7,035 Boe/d including 378 Boe/d of flared gas.

Development Activities for the Quarter Ended 30 September 2014 (Source – Company Reports)

In September 2014, the Company completed the gas pipeline construction for Q-Ballard, Q-Kiel, Dusek and Lange wells in the Eagle Ford and hooked up 9 gross wells to the gas gathering system, which is expected to significantly decrease flared gas volumes. The Company produced an average of 6,657 Boe/d during the quarter which is 84.6% from 3,607 Boe/d in the same period in prior year, excluding the flared gas.

The Company also introduced changes in its field operations which led to a reduction of $6.82, or 53.4%, to $5.96 LOE per Boe for the quarter ended 30 September 2014 in comparison to 2013. Owing to the Company’s continued production movement out of North Dakota and Colorado (higher production tax rate jurisdictions) and into Texas and Oklahoma (lower production tax rate jurisdictions), the average production tax expense as a percentage of revenue reduced 2.4 percentage points (29.4 relative percent) from 8.1% in 2013, to 5.7% for the quarter ended 30 September 2014. In fact, there was a 45.9% decrease in general and administrative costs per Boe to $7.04 per Boe for the quarter ended 30 September 2014 compared to the same period in 2013.

Mississippian/Woodford Overview (Source – Company Reports)

SEA’s activities revolve around the Eagle Ford formation (Texas) and the Mississippian/Woodford formations in the Greater Anadarko Basin (Oklahoma), wherein the costs incurred for exploration, development and production expenditures in the quarter ended 30 September 2014 totaled $84.5 million.  The Company anticipated its fourth quarter development capital expenditures of $65 to $70 million in order to get full year development capital expenditures of $299 to $304 million, which is $9 to $14 million (~3.1%) higher than the $270 to $290 million range previous guidance due to faster than expected drilling. 




2014 Wells Outperform 2013 Wells by 30% per Foot (Source – Company Reports)

The October 2014 operations’ updates also signaled positive prospects with increased average daily production and reaffirmation of 2014 production guidance of 6,700-7,500 boepd and exit rate of 8,000-9,000 boepd.


Eagle Ford Project Increased to ~20,000 Net Acres (Source – Company Reports)

For Eagle Ford, the Company brought 14 gross (10.5 net) wells into production and had 17 gross (13.9 net) wells that were waiting on completion or had completions in progress at quarter end. Further, SEA dedicated frac crew continued operations throughout the quarter and the Company brought in a second frac crew in September.


Zipper Fraced Well Results in Logan County (Source – Company Reports)

For Mississippian/Woodford, the Company has completed delineation of the Mississippian formation on its ~32,000 acre position and has identified ~100 gross (~80 net) operated well locations and 330 gross (60 net) non-operated well locations. SEA plans to optimize future development through pad development and zipper fraccing in order to reduce cost per well and improve productivity per well.


Logan County – Mississippian Lime Economics (Source – Company Reports)

The 46% decrease in lease operating expense over the past 6 months comes with SEA’s efforts on cost control which include aggressive switch from higher cost electric submersible pumps to rod pumps reducing downtime and costs associated with generators, completion changes to eliminate jet pumps, etc.

Even the half year performance for period ending 30 June 2014 illustrated that sales volume increased by 535,582 Boe (157.1%) to 876,475 Boe compared to 340,893 Boe for the same period on previous year owing to successfully bringing online 37 gross producing wells primarily in the Eagle Ford and Mississippian/ Woodford Formations. As of 31 March 2014, the Company has a market capitalization of US$506 million.


SEA Daily Chart (Source - Thomson Reuters)

The strong portfolio of resource plays, track record of production and cash flow growth, high working interests in Eagle Ford and other basins and other such attributes pull our attention towards this oil and gas Company. Accordingly, we put a BUY recommendation for this stock at the current price of $0.495.

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