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Sundance Energy



 

Stock Of The Day - Sundance Energy (BUY)

Sundance Energy (SEA), an independent energy exploration company, remains a decent investment choice in the energy space despite falling oil prices. This is given SEA’s proven track record of capital efficient growth and high quality drilling assets. With regards to SEA’s major drilling asset, it has been in the highlight that the Company has increased Eagle Ford’s acreage position from over 7,200 acres by entering the basin to over 26,160 net mineral acres as of 2014 (including the acquisition of over 18,000 net acreage in 2014) and to 38,701 net mineral acres as of first quarter 2015. Eagle ford’s production grew 10x at a CAGR of 290% from March 2013, to an exit rate of 8,177 barrels of oil equivalent per day (BOEPD) in 2014. After Eagle Ford, Greater Anadarko Basin is another strong asset to the Company, which generated a production of 1,460 BOEPD in 2014, growing at 190%, compared to 503 BOEPD of production in 2013.




Performance of Eagle Ford and Greater Anadarko (Source: Company Reports)
 
Overall, SEA had 75 gross (42.7 net) wells into production in 2014 and saw a significant increase across 1P, 2P and 3P Reserves, compared to 2013, summing the total Constant Case 3P Reserves to 147,723 MBoe and PV10 (discounted cash flows of reserves using a 10% discount factor) of 3P Reserves to $1.5 billion in 2014. The Company completed 42.7 net wells (with 26.1 net wells, i.e., 35 gross coming from Eagle Ford) which helped achieve the total count to 81.3 net wells in 2014. Strong production growth in 2014 increased the overall revenue from the Company’s oil, NGL and natural gas segments by 87% to $159.8 million in 2014, from $85.3 million in 2013.


Reserves (Source – Company Reports)
 
SEA has a proven track record of investing capital in development opportunities as well as opportunistic dispositions, giving it a significant competitive edge. The Company disposed six prospects or basins with an aggregate transaction value of nearly $400 million, from 2007, yielding weighted return of 83%. Recently, the Denver-Julesburg (DJ) disposition (transaction value of $113 million) in 2014, yielded highest internal rate of return (IRR) of 104% till date. Moreover, historically, the management was very careful in its operations and looks for investments with good investment propositions.


Revenue and Production (Source: Company Reports)
 
Earlier in 2005 and as a part of an early strategy of exploring unconventional oil and gas plays, the Company was listed on for the Cooper Basin. However, with the risk/reward balance for US unconventional assets looking more lucrative, SEA exited the Cooper Basin and formed a portfolio of US based assets subsequently.


Prospects (Source: Company Reports)

In June 2014, Eagle Ford was amid the highest IRR yielders compared to other U.S. Shale players. Eagle Ford yielded 70% IRR, compared to the industry average of 20% IRR, according to certain market data reports. The Company’s management believes that the high quality Eagle Ford assets with extensive drilling inventory will keep adding value to the shareholders going forward.
 

Top 20% Development Economics at January 2015 Strip (Source: Company Reports)

With a bearish outlook on oil prices in the near future by industry experts, the Company expects over 8% to 9% of decline to be witnessed in U.S. production over the course of 2016. Accordingly, SEA is slowing its drilling activity in 2015 with the production guidance for 2015 at 7,850 – 8,500 BOEPD (an increase of ~13% to 17% year on year). But at the same time and to keep up with the shareholder value creation, the Company is striving for operational excellence and a stronger balance sheet. These efforts can be seen from its EBITDAX margin of 79% in 2014, which improved by 17 percentage points as compared to 2013 and was at the top 15% of the peer group, with high EBITDAX margin, in 2014. The Company had $69.2 million of cash, total debt of $130 million, $15 million of unused borrowing capacity, and was among the lowest 15% of the peer group analysis of debt to EBITDAX ratio.


Financial Performance Summary (Source: Company Reports)
 
The NPAT was seen to be affected by one-off impairments and exploration expenses. Primarily, SEA impaired ~50% (about $60m) of its Mississippian/Woodford carrying base and Eagle Ford assets by ~$11m. We also note that SEA has neither declared nor paid any dividends for the financial year.


Sundance Energy Daily Chart (Source - Thomson Reuters)
 
Nonetheless, what we see is a strong interplay of robust track record of management on production enhancement and return on capital from SEA’s assets, successful value additions and divestments, and top tier Eagle Ford assets. The Company has also commented for a positive medium-to-long term growth trajectory under its outlook for 2015. The aspects highlighted by the Company with regards to limited drilling obligations given only three net well commitments in 2015 for Eagle Ford and no current long-term service commitments speak for balance sheet flexibility upgrade. SEA is also attempting to better top quartile operational performance with improving well results and having a top tier cost structure. The Company has been able to achieve 35% cost reduction to $5 - $6mm for new Eagle Ford wells in last few months. It has also added 13,500 acres contiguous to Dimmit project for $1000 per acre. All these speak leaps and bound for the future projection.
 
Based on the above, we reinstate a BUY recommendation for this stock at the current price of $0.54.