CompanyOverview – Aurora Oil and Gas produces oil, gas liquids and gas from Eagle Ford Shale in South Texas. It listed on the Australian Securities Exchange in 2005 launching exploration in north America the same year. In 2009 the Eagle Ford’s prospectivity and the company’s acreage really came into focus. Aurora farmed out to Hilcorp Energy, the fourth largest E&P Company in the US at the time to outstanding success. Production began in late 2010 and in just two years Aurora’s annualised output has grown to more than 6.5 million barrels of oil equivalent.

Analysis ( Recommendation - SELL)– aurora has agreed into an agreed acquisition by Canada’s Baytex for AUD 4.10 per share. The transaction will be implemented via Scheme deed subject to shareholder and Australian Foreign Investment Review Board approval. The scheme meeting will be held and April/Early May. In the absence of a higher offer, Aurora’s directors will vote their Aurora shares in favour and recommend shareholders to do the same. We recommend selling the shares on market at the current price of $4.12.

Aurora’s equity share of Eagle Ford reserves grew surprisingly rapidly via both acquisition and the drill bit. At the end of 2013 equity proven and probable reserves stood at 225 mmboe, compound annualised growth of 100% during the last 3 years including depletion. During December, Marathon presented successful results from down spaced pilot drill holes. The pilots indicated that reserves could continue to be added across the acreage as indicated by the observed reservoir performance.

Aurora’s primary asset is its interest in the Sugarkane field in the Eagle Ford Shale south Texas. Marathon oil operates the majority of the 88,000 acres in which Aurora participates. Compared with the September quarter, Aurora reported a better than expected 15% increase in production to 1.7 million of barrels of oil equivalent (mmboe) and a 9% increase in revenue to USD 116 Million, both figures are after royalties. Annually production doubled to 5.7mmboe net. Since Aurora’s previous reserve statement, annualised compound production has grown at 100% during the same period, naturally slowing more recently in percentage terms. Reserve life at today’s production rate is favourably high 25 years though production growth will likely see that fall.
Aurora does stack up well on the cost front. Weighted average cash production cost since start up in late 2010 including royalties is a favourably low USD 8.40 per barrel of oil equivalent or boe versus average price achievement of USD 75/boe. However AUT is by and large a minority partner in its Eagle Ford holdings with a weighted average 28% equity in just under 80,000 acres and for now it is an operator of just a very small portion.


Daily Chart AUT   (Source - Thomson Reuters)

Prospectivity of the Eagle Ford shale in Texas is famed. Aurora’s near 20,000 net equity acres are an enviable asset from which to grow liquids rich hydrocarbon output. Aurora’s reserves, production and profit has grown very strongly. In just two years the company annualised equity output has risen to more than 6.5 million barrels of oil equivalent from a standing start. Joint venture partner Marathon Oil brings serious fire power to Aurora’s joint ventures. As operator Marathon is well qualified to deliver on projects. A favourably high 40% of Aurora’s production is oil, condensate or natural gas liquids. Oil and condensate generate 90% of the revenue. Until the Baytex bid, Aurora shares fell by a quarter in the past six months. The company’s premier Eagle Ford location and hotly contested growth acreage along with many US shale gas focused peers trading at lofty premiums got the bid going. We recommend selling at the current price of $4.12 and are happy to take the profits.
 
 

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