Arawak Energy ARWKF W
April 03, 2008 - 1:28pm EST by
ran112
2008 2009
Price: 2.26 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 441 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Arawak Energy (ABG $2.26 US):  Capable of exceeding modest investor expectations.

 

All estimates and prices are in US dollars.  Current share price is converted from Canadian to US currency at the rate of .9918.

 

Fully diluted shares outstanding (includes proposed 

8.36 million share payment for Saigak Investments BV):                       195.56 million 

 

Total liabilities –short term cash and equivalents:                                   $105.2 million.

 

Enterprise Value:                                                                                      $547.2 million

 

EBITDA for 2007:                                                                                    $97.8 million.

 

2007 EV/EBITDA ratio:                                                                           5.6X

 

2005 average production:                                                                           5,667 bpd

2006 average production:                                                                           7,905 bpd 

2007 average production:                                                                        10,180 bpd

 

2008 forecast production:                                                       12,645*bpd-13,265 bpd**

2008 forecast EBITDA:                                                        $153.2 million-$158.8 million 

2008 forecast EV/EBITDA:                                                                       3.5X-3.6X                                           

 

Thesis

 

Investors seeking a rapidly growing oil producer in Kazakhstan and Russia at an inexpensive valuation should consider a purchase of Arawak Energy.  Due to rising oil prices and rapidly increased production, the firm has been transformed from a capital intensive explorer, to a positive cash flow generating producer. 

 

Currently, the shares are selling for a significant discount to peers, based upon 24 months of modest under execution. 

 

I forecast that in 2008, production and financial targets will be met or exceeded.  Recognition that current growth plans may look to be about fully funded from operations could remove concerns about further dilution, or leveraging of the balance sheet.

 

Arawak should carry a valuation comparable to the median smaller mid cap international developer. A return to investor favour could occur as soon as the release of 1st quarter results. This could be on or about May 14th, 2008.

 

Company description

 
Arawak Energy produces oil in Kazakhstan and Russia. In addition the firm has a minority non operated interest in Azerbaijan, which produces a modest amount of natural gas.  2007 revenues were $202.7 million. 

 

The Vitol Group, a major oil trading firm based in Switzerland, holds 67.3 million common shares. 

 

Kazakhstan is where Arawak generates the bulk of revenues.

 

Arawak produces oil from 3 fields in Kazakhstan in which it holds a 100% interest.  Oil produced is medium grade crude that sells for a healthy discount to Brent.  80% of produced oil can be sold to export markets, with the remainder being sold to domestic markets. 

 

At year end 2007, there were 72 producing wells in three fields; Akzhar, Besbolek and Karataikys.  A new exploration concession, Alimbai, demonstrated productivity from 2 reworked Soviet era wells, and 1 recently drilled exploration well was also successful.

 

In 2007, average production from these fields averaged 5898 bpd.

 

Russia is Arawak’s secondary source of oil production.

 

Arawak owns a 50% interest in two producing fields, Sotchemyu-Talyu and North Irael.  The remaining 50% interest is held by Lundin Petroleum.  These two fields generated (net to Arawak) average production of 4282 bpd in 2007. Oil produced is a relatively low grade light crude.  Roughly 45% of crude oil is exported, and the remainder sold to domestic markets.

 

At year end, there were 70 producing wells in Russia.

 

Arawak has a modest concession in Azerbaijan.

 

The firm has an effective 29.736% interest in exploration properties and 10 productive oil and natural gas wells in Azerbaijan.  This profit sharing agreement (PSA) is operated by a third party, whose controlling interest is China National Petroleum.   Oil production averaged 20 bpd in 2007.

 

Natural gas sales were converted to oil equivalents by Arawak. For accounting purposes, this added 130 bpd.  However, as Azerbaijan natural gas sells for about $1.25 per mcf ($7.5 per barrel equivalent), this represents purely a theoretical exercise.

 

In the past, detractors have criticized Arawak for lack of reserve growth and poorly defined reserves.

 
At the start of 2006, proven and probable reserves in Kazakhstan and Russia stood at 40.41 million barrels.  Since that time, the company has made an acquisition and invested more than $132.1 million of capital in operations.

 

As a result of these expenditures, Arawak has been able to increase proven and probable reserves, in the past 24 months by 5.46 million barrels.  The firm had also produced 6.6 million barrels of oil.  

 

Arawak has also booked large natural gas and associated oil reserves in Azerbaijan.  However, many investors and analysts have largely ignored these reserves.  This reserve base is poorly defined.  Furthermore, most of this Azerbaijan reserve is natural gas, difficult to produce and sells for little more than breakeven.  No development or exploration drilling is planned in Azerbaijan until late 2008 at the earliest.

 

Given the funding requirements, the geological complexity of the region, and the lack of proper modern seismic over much of the concession, it seems that investors are actually penalizing Arawak for continuing to hold and fund the Azerbaijan PSA.   I completely exclude any valuation for Azerbaijan reserves.

 
Net of production, the 2006-2007 capex spending improved Kazakhstan and Russian 2P reserves by 30%.

 

At year end 2007, proven reserves in Kazakhstan and Russia were 32.2 million barrels, up from 22.2 million in the prior year, mostly producing.  Probable reserves fell to 13.6 million barrels at year end 2007, as compared to 22.1 million barrels at year end 2006.   

 

The decline in probable reserves was entirely due to a conversion to proven, with development drilling.

 

My confidence level attached to the proven reserve estimate in Russia and Kazakhstan is high.

 

Most of the proven reserves in Kazakhstan estimated by Arawak are contained in shallow, highly porous fields.  They are easy to access through infill drilling, and well covered with modern seismic.  In Russia, while the reserves are deeper, they are equally well defined, and the firm has proven to be capable of extracting the oil with modern reservoir management.

 

A significant amount of the $132.1 million in capex was for infrastructure in key fields, not drilling.  Much of this development cost has been completed.    Stripping out these expenses indicate that F&D costs become 1st quartile.

 

Overly optimistic production forecasts by management have been the other sore point.

 

In the last 3 years, Arawak increased net oil production by 79.6%.

 

While this would normally be a cause for celebration, executive has continually confounded analysts on a quarter to quarter basis.  Management has used such terms as  “peak” oil production for any given period, or “productive capability” in conferences and press releases.  These terms have been repeated over the past 2 years, to the point whereby investors have been led to believe a high water mark on any given day represents the net average production for a quarter.  Consequently, production rates have failed to meet the rosy estimates in every quarter since 2006. 

 

Annual information forms (AIF), supplied by Arawak have also proven to be erroneous.

 

For 2006, executive estimated that annual production would average 8,780 bpd.  At year end, production averaged 7,905 bpd, a miss of 11%.

 

For 2007, management provided original guidance for average production of 11,024 bpd, and averaged just 10,180 bpd, a miss of 7.7%.  

 

In fairness, more than 30 of the 54 wells drilled in 2007 were defined as exploration wells. These will always carry a lower success rate than development wells.  Nevertheless, management should have taken this into account, when outlining a production estimate. 

 

Investors now seem cautious to accept production forecasts at face value.

 

For 2008, Arawak predicts average production 13,700 bpd.  Based upon the prior two years failure to hit targets, retail and institutional investors may be penalizing this forecast by about 7.7%-11%, to be safe.

 

A long delayed acquisition of a small oil field interest in Kazakhstan may close in the 2nd quarter of 2008.

 

Vitol, the majority shareholder of Arawak, had agreed sell a 40% gross interest in the Saigak producing block in Kazakhstan.  The cost was originally set at 8.353 million shares of Arawak + additional shares for working capital adjustment. 

 

At the time that the deal was announced (June 6th 2007), Saigak was reported to be producing 3500 bpd gross.  At present, the gross production is 2500 bpd.  This implies an annual depletion rate of 38%. 

 

Based upon the original estimate of proven and probable reserves – annual production, Saigak would add about 2 million barrels of reserves for Arawak.  The acquisition cost, at the current share price, works out to be $9.8 per barrel of 2P reserves.  Alternatively, based upon a 620 bpd forecast 2008 average, the cost is about $31,665 per flowing barrel. 

 

A 20,000 bpd pipeline is planned to link the Akzhar field to a main pipeline.

 

At an estimated $25 million capital cost, this pipeline has the potential to reduce transport costs at Akzhar by $3-$4 per barrel. If completed by mid 2009, it could save about $6.5-$8.8 million per year in costs.  The excess capacity might create a further source of revenue, if utilized by neighbouring producers. 

 

For the first time in years, it appears that management may be accurate with 2008 forecasts.

Management intends to drill 52 wells in 2008, up from 46 wells the previous year.  In 2007, 55% of the wells were considered exploratory, resulting in 11 dry holes. 

 

For 2008, the emphasis will be more focused upon development drilling.  Only 38% of the proposed 2008 drilling program will be for exploration.  This should add greater certainty to the 2008 estimate. 

 

Kazakhstan:  average production of 9040 bpd is projected by Arawak. 

 

2008 Akzhar production is estimated by management to be 5389 bpd.  Production from 36 wells in the field was about 4700 bpd at year end, and had risen to 4725 by March 2008.  Management was planning to drill a further 8 wells in the first quarter of 2008.  It takes about 6-8 weeks to bring an Akzhar well on stream.  A further 11 wells are planned for 2008.  

 

Based upon the timing of the drilling, and assuming that 2007 development and exploration success rates are matched, this estimate seems entirely reasonable. The number of productive wells might increase by 35% in 2008.

 

2008 Besbolek production is estimated by management to be 3273 bpd. Production at year end was 3000 bpd, and averaged 3150 bpd in March.  Management intends to drill 15 more wells at this field in 2008. 

 

As the total number of wells at Besbolek might increase by 50% in 2008, production forecasts might be conservative by 200-300 bpd.

 

The 2008 Alimbai concession is estimated by management to produce 216 bpd. There are already 3 producing wells now reported at Alimbai, producing an average of 195 bpd in March.  One of these wells was simply a reworking of an old Soviet era well and has modest production.  Assuming a 70% success ratio, the proposed 3 well program + present production, suggests that 320 bpd is a more realistic target.

 

2008 Karataikyz production is estimated by management to be 202 bpd for March, down from 216 bpd.  As no drilling is planned at this small field, I assume that normal depletion will bring this average down to about 170 bpd for 2008.

 

2008 exploration plans for East Zharkamys III, a major new concession, indicates that 5 exploration wells will be drilled in late 2008.  No success rate has been built into this program at present.

 

Judging by 2007 results at Akzhar, Besbolek and recent success at Alimbai, it appears that overall production forecasts might be conservative by 300-500 bpd.  Any success at East Zharkamys would be incremental to this forecast.

 

In aggregate, I forecast Kazakhstan production of 9340-9540 bpd over 2008.  If Saigak comes on line, it will be backdated to January. This would result increase overall production to 9960 bpd-10,160 bpd.

 

Russia:   oil production estimates for 2008 are forecast to be 4657 bpd.

 

Average production for 2007 was 4282 bpd.  March average production was 4410 bpd. Arawak intends to try and maintain constant production at Sotchemyu-Talyu with workovers, sidetracks and infield drilling.  This has held production at constant levels for the last two years.  Management seems to have a good handle on this field.

 

4 new wells are scheduled to be drilled at North Irael.  Three wells have been successfully drilled at this field to date. The average well has initially produced in excess of 300 bpd. 

 

A 100% interest in an adjoining concession, South Sotchemyu, will have an exploration well drilled in the first half of 2008.

 

Given the scope of development drilling and the current level of workovers, the Russian forecast seems quite reasonable.  Successful drilling at North Irael and South Sotchemyu may not result in an acceleration of development.  Under the Russian system, companies can be penalized for not meeting spending requirements. They can also be penalized for overproduction.  Therefore, Arawak will not likely exceed forecast volumes in this region.

 

2008 revenues & EBITDA may increase by 64% and 57% respectively.

 

Assuming that their Kazakhstan production continues to sell for the 4th quarter 2007 average of $66.41 per barrel, revenue from Kazakhstan could be $219 million.

 

Should my own projection be met, revenue at Kazakhstan could be in the range of $226.3 million-$231.2 million.

 

A successful acquisition of Saigak can improve total revenues in Kazakhstan by up to 8% in 2008.  This production is lighter than Arawak’s present Kazakhstan output, and not subject to domestic quotas.  Assuming that the 620 bpd average forecast rate sells for $75 US per barrel, this would increase total Kazakhstan sales to a range of $236-$248.2 million.

 

As for Russia, Arawak is budgeting for average production of 4658 bpd.  Assuming that Russian oil prices remain at the 4th quarter 2007 price of $57.13 per barrel, revenue could be $97.1 million.

 

Total 2008 revenues could be $333.1-$345.3 million.  Netbacks from production increases and Saigak premiums may be fully offset by increases in operating costs. I apply EBITDA margins modestly lower than that generated in 2008 (46%) and come up with $153.2-$158.8 million.

 
Due to the aformentioned miscues, Arawak shares trade at modest valuations.

 

At the end of 2005, Arawak had an enterprise value of $471.6 million US.  This enterprise value was supported by 40.41 million barrels of reserves (mostly probable) and average production of 5667 bpd.  EBITDA was $29.3 million, which was completely inadequate to cover capex.  The firm sold for 16X EV/EBITDA

 

As of today’s’ date, Arawak has an enterprise value of $547.2 million. This enterprise value is supported by mostly proven reserves of 45.8 million-47.8 million** barrels, trailing average production of 10,180 bpd and trailing EBITDA of $97.8 million. 

 

In light of current oil prices, there seems to be a very clear disconnect.    The enterprise value should have grown by much more than 14%, given all of the positive results generated for the past two years.  Investors traditionally assign at least SOME value for production growth estimates.

 

In the case of Arawak, it seems that investors have largely “given up”.

 

A comparative analysis suggests that Arawak is greatly undervalued.

 

The median international small cap producers I use for comparative purposes include BNK, BVX, CAX, CYR, HOC, ORC.b, POE, PAR, SOR, TGL and WIN.  They trade for an average of 10.5X EV/EBITDA.  Many of the producers in this market cap tend to have little production to speak of, and also have poorly defined reserves.  Most trade upon expectations, and not production.

 

While metrics are not necessarily directly comparable from one producer to the next, it appears that ABG sells for, by far, the greatest discount among peers.

 
2008 could be the breakout year for long suffering Arawak shareholders.

 
Management has not done shareholders any favours in the past.  They now appear somewhat chastened, and will need to earn respect from the investment community.

 

With 11,500 + barrels of trailing 1st quarter production, forecast EBITDA in excess of forecast capex, and a production growth plan capable of increasing output by 30% for 2008, Arawak now seems a very logical investment. 

 

The firm has grown reserves by a very satisfactory level in 2007, and has the ability to expand reserves further at Besbolek, Alimbai and North Irael.   A continuation of development and exploration success comparable to 2007, may push Russian and Kazakhstan 2P reserves to more than 50 million barrels.

 

I view Arawak energy as a strong buy for value investors, at current prices.

 
All that needs to occur, for a shift in investor sentiment, is for management to simply meet expectations.  Based upon the capital budget for 2008, I consider it quite possible that Arawak will beat expectations.

 

Should management deliver on production forecasts, oil prices remain constant and investor sentiment swing, Arawak could be fairly valued in one year at up to 6X 2008 exit EV/EBITDA. This suggests a fair market value of $4.16 per share, 84% above the current market.  I suspect that at least one of the major Canadian brokerage firms is considering coverage introduction.

 

2008 exit production rates of 15,000 bpd would certainly attract some market attention.  Reasonable exploration success at East Zharkamys III could greatly improve the mid term outlook, and may render this outlook as conservative.

 

The most recent investor presentation may be found by linking here

 

http://www.arawakenergy.com/docs/Arawak%20Presentation%20April%2001%202008.pdf

 

*assumes no closing of Saigak Investments BV

**assumes closing of Saigak Investments BV

 

 

Catalyst

64% forecast revenue growth and 57% EBITDA growth are forecast in 2008. Production has the potential to meet or exceed forecasts, which will reconfirm the growth story. A modestly accretive acquisition will support increased capex for 2009-2009.

Coverage by a major Canadian brokerage firm seems to be forthcoming, and won't be a "sell" recommendation.
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    Description

    Arawak Energy (ABG $2.26 US):  Capable of exceeding modest investor expectations.

     

    All estimates and prices are in US dollars.  Current share price is converted from Canadian to US currency at the rate of .9918.

     

    Fully diluted shares outstanding (includes proposed 

    8.36 million share payment for Saigak Investments BV):                       195.56 million 

     

    Total liabilities –short term cash and equivalents:                                   $105.2 million.

     

    Enterprise Value:                                                                                      $547.2 million

     

    EBITDA for 2007:                                                                                    $97.8 million.

     

    2007 EV/EBITDA ratio:                                                                           5.6X

     

    2005 average production:                                                                           5,667 bpd

    2006 average production:                                                                           7,905 bpd 

    2007 average production:                                                                        10,180 bpd

     

    2008 forecast production:                                                       12,645*bpd-13,265 bpd**

    2008 forecast EBITDA:                                                        $153.2 million-$158.8 million 

    2008 forecast EV/EBITDA:                                                                       3.5X-3.6X                                           

     

    Thesis

     

    Investors seeking a rapidly growing oil producer in Kazakhstan and Russia at an inexpensive valuation should consider a purchase of Arawak Energy.  Due to rising oil prices and rapidly increased production, the firm has been transformed from a capital intensive explorer, to a positive cash flow generating producer. 

     

    Currently, the shares are selling for a significant discount to peers, based upon 24 months of modest under execution. 

     

    I forecast that in 2008, production and financial targets will be met or exceeded.  Recognition that current growth plans may look to be about fully funded from operations could remove concerns about further dilution, or leveraging of the balance sheet.

     

    Arawak should carry a valuation comparable to the median smaller mid cap international developer. A return to investor favour could occur as soon as the release of 1st quarter results. This could be on or about May 14th, 2008.

     

    Company description

     
    Arawak Energy produces oil in Kazakhstan and Russia. In addition the firm has a minority non operated interest in Azerbaijan, which produces a modest amount of natural gas.  2007 revenues were $202.7 million. 

     

    The Vitol Group, a major oil trading firm based in Switzerland, holds 67.3 million common shares. 

     

    Kazakhstan is where Arawak generates the bulk of revenues.

     

    Arawak produces oil from 3 fields in Kazakhstan in which it holds a 100% interest.  Oil produced is medium grade crude that sells for a healthy discount to Brent.  80% of produced oil can be sold to export markets, with the remainder being sold to domestic markets. 

     

    At year end 2007, there were 72 producing wells in three fields; Akzhar, Besbolek and Karataikys.  A new exploration concession, Alimbai, demonstrated productivity from 2 reworked Soviet era wells, and 1 recently drilled exploration well was also successful.

     

    In 2007, average production from these fields averaged 5898 bpd.

     

    Russia is Arawak’s secondary source of oil production.

     

    Arawak owns a 50% interest in two producing fields, Sotchemyu-Talyu and North Irael.  The remaining 50% interest is held by Lundin Petroleum.  These two fields generated (net to Arawak) average production of 4282 bpd in 2007. Oil produced is a relatively low grade light crude.  Roughly 45% of crude oil is exported, and the remainder sold to domestic markets.

     

    At year end, there were 70 producing wells in Russia.

     

    Arawak has a modest concession in Azerbaijan.

     

    The firm has an effective 29.736% interest in exploration properties and 10 productive oil and natural gas wells in Azerbaijan.  This profit sharing agreement (PSA) is operated by a third party, whose controlling interest is China National Petroleum.   Oil production averaged 20 bpd in 2007.

     

    Natural gas sales were converted to oil equivalents by Arawak. For accounting purposes, this added 130 bpd.  However, as Azerbaijan natural gas sells for about $1.25 per mcf ($7.5 per barrel equivalent), this represents purely a theoretical exercise.

     

    In the past, detractors have criticized Arawak for lack of reserve growth and poorly defined reserves.

     
    At the start of 2006, proven and probable reserves in Kazakhstan and Russia stood at 40.41 million barrels.  Since that time, the company has made an acquisition and invested more than $132.1 million of capital in operations.

     

    As a result of these expenditures, Arawak has been able to increase proven and probable reserves, in the past 24 months by 5.46 million barrels.  The firm had also produced 6.6 million barrels of oil.  

     

    Arawak has also booked large natural gas and associated oil reserves in Azerbaijan.  However, many investors and analysts have largely ignored these reserves.  This reserve base is poorly defined.  Furthermore, most of this Azerbaijan reserve is natural gas, difficult to produce and sells for little more than breakeven.  No development or exploration drilling is planned in Azerbaijan until late 2008 at the earliest.

     

    Given the funding requirements, the geological complexity of the region, and the lack of proper modern seismic over much of the concession, it seems that investors are actually penalizing Arawak for continuing to hold and fund the Azerbaijan PSA.   I completely exclude any valuation for Azerbaijan reserves.

     
    Net of production, the 2006-2007 capex spending improved Kazakhstan and Russian 2P reserves by 30%.

     

    At year end 2007, proven reserves in Kazakhstan and Russia were 32.2 million barrels, up from 22.2 million in the prior year, mostly producing.  Probable reserves fell to 13.6 million barrels at year end 2007, as compared to 22.1 million barrels at year end 2006.   

     

    The decline in probable reserves was entirely due to a conversion to proven, with development drilling.

     

    My confidence level attached to the proven reserve estimate in Russia and Kazakhstan is high.

     

    Most of the proven reserves in Kazakhstan estimated by Arawak are contained in shallow, highly porous fields.  They are easy to access through infill drilling, and well covered with modern seismic.  In Russia, while the reserves are deeper, they are equally well defined, and the firm has proven to be capable of extracting the oil with modern reservoir management.

     

    A significant amount of the $132.1 million in capex was for infrastructure in key fields, not drilling.  Much of this development cost has been completed.    Stripping out these expenses indicate that F&D costs become 1st quartile.

     

    Overly optimistic production forecasts by management have been the other sore point.

     

    In the last 3 years, Arawak increased net oil production by 79.6%.

     

    While this would normally be a cause for celebration, executive has continually confounded analysts on a quarter to quarter basis.  Management has used such terms as  “peak” oil production for any given period, or “productive capability” in conferences and press releases.  These terms have been repeated over the past 2 years, to the point whereby investors have been led to believe a high water mark on any given day represents the net average production for a quarter.  Consequently, production rates have failed to meet the rosy estimates in every quarter since 2006. 

     

    Annual information forms (AIF), supplied by Arawak have also proven to be erroneous.

     

    For 2006, executive estimated that annual production would average 8,780 bpd.  At year end, production averaged 7,905 bpd, a miss of 11%.

     

    For 2007, management provided original guidance for average production of 11,024 bpd, and averaged just 10,180 bpd, a miss of 7.7%.  

     

    In fairness, more than 30 of the 54 wells drilled in 2007 were defined as exploration wells. These will always carry a lower success rate than development wells.  Nevertheless, management should have taken this into account, when outlining a production estimate. 

     

    Investors now seem cautious to accept production forecasts at face value.

     

    For 2008, Arawak predicts average production 13,700 bpd.  Based upon the prior two years failure to hit targets, retail and institutional investors may be penalizing this forecast by about 7.7%-11%, to be safe.

     

    A long delayed acquisition of a small oil field interest in Kazakhstan may close in the 2nd quarter of 2008.

     

    Vitol, the majority shareholder of Arawak, had agreed sell a 40% gross interest in the Saigak producing block in Kazakhstan.  The cost was originally set at 8.353 million shares of Arawak + additional shares for working capital adjustment. 

     

    At the time that the deal was announced (June 6th 2007), Saigak was reported to be producing 3500 bpd gross.  At present, the gross production is 2500 bpd.  This implies an annual depletion rate of 38%. 

     

    Based upon the original estimate of proven and probable reserves – annual production, Saigak would add about 2 million barrels of reserves for Arawak.  The acquisition cost, at the current share price, works out to be $9.8 per barrel of 2P reserves.  Alternatively, based upon a 620 bpd forecast 2008 average, the cost is about $31,665 per flowing barrel. 

     

    A 20,000 bpd pipeline is planned to link the Akzhar field to a main pipeline.

     

    At an estimated $25 million capital cost, this pipeline has the potential to reduce transport costs at Akzhar by $3-$4 per barrel. If completed by mid 2009, it could save about $6.5-$8.8 million per year in costs.  The excess capacity might create a further source of revenue, if utilized by neighbouring producers. 

     

    For the first time in years, it appears that management may be accurate with 2008 forecasts.

    Management intends to drill 52 wells in 2008, up from 46 wells the previous year.  In 2007, 55% of the wells were considered exploratory, resulting in 11 dry holes. 

     

    For 2008, the emphasis will be more focused upon development drilling.  Only 38% of the proposed 2008 drilling program will be for exploration.  This should add greater certainty to the 2008 estimate. 

     

    Kazakhstan:  average production of 9040 bpd is projected by Arawak. 

     

    2008 Akzhar production is estimated by management to be 5389 bpd.  Production from 36 wells in the field was about 4700 bpd at year end, and had risen to 4725 by March 2008.  Management was planning to drill a further 8 wells in the first quarter of 2008.  It takes about 6-8 weeks to bring an Akzhar well on stream.  A further 11 wells are planned for 2008.  

     

    Based upon the timing of the drilling, and assuming that 2007 development and exploration success rates are matched, this estimate seems entirely reasonable. The number of productive wells might increase by 35% in 2008.

     

    2008 Besbolek production is estimated by management to be 3273 bpd. Production at year end was 3000 bpd, and averaged 3150 bpd in March.  Management intends to drill 15 more wells at this field in 2008. 

     

    As the total number of wells at Besbolek might increase by 50% in 2008, production forecasts might be conservative by 200-300 bpd.

     

    The 2008 Alimbai concession is estimated by management to produce 216 bpd. There are already 3 producing wells now reported at Alimbai, producing an average of 195 bpd in March.  One of these wells was simply a reworking of an old Soviet era well and has modest production.  Assuming a 70% success ratio, the proposed 3 well program + present production, suggests that 320 bpd is a more realistic target.

     

    2008 Karataikyz production is estimated by management to be 202 bpd for March, down from 216 bpd.  As no drilling is planned at this small field, I assume that normal depletion will bring this average down to about 170 bpd for 2008.

     

    2008 exploration plans for East Zharkamys III, a major new concession, indicates that 5 exploration wells will be drilled in late 2008.  No success rate has been built into this program at present.

     

    Judging by 2007 results at Akzhar, Besbolek and recent success at Alimbai, it appears that overall production forecasts might be conservative by 300-500 bpd.  Any success at East Zharkamys would be incremental to this forecast.

     

    In aggregate, I forecast Kazakhstan production of 9340-9540 bpd over 2008.  If Saigak comes on line, it will be backdated to January. This would result increase overall production to 9960 bpd-10,160 bpd.

     

    Russia:   oil production estimates for 2008 are forecast to be 4657 bpd.

     

    Average production for 2007 was 4282 bpd.  March average production was 4410 bpd. Arawak intends to try and maintain constant production at Sotchemyu-Talyu with workovers, sidetracks and infield drilling.  This has held production at constant levels for the last two years.  Management seems to have a good handle on this field.

     

    4 new wells are scheduled to be drilled at North Irael.  Three wells have been successfully drilled at this field to date. The average well has initially produced in excess of 300 bpd. 

     

    A 100% interest in an adjoining concession, South Sotchemyu, will have an exploration well drilled in the first half of 2008.

     

    Given the scope of development drilling and the current level of workovers, the Russian forecast seems quite reasonable.  Successful drilling at North Irael and South Sotchemyu may not result in an acceleration of development.  Under the Russian system, companies can be penalized for not meeting spending requirements. They can also be penalized for overproduction.  Therefore, Arawak will not likely exceed forecast volumes in this region.

     

    2008 revenues & EBITDA may increase by 64% and 57% respectively.

     

    Assuming that their Kazakhstan production continues to sell for the 4th quarter 2007 average of $66.41 per barrel, revenue from Kazakhstan could be $219 million.

     

    Should my own projection be met, revenue at Kazakhstan could be in the range of $226.3 million-$231.2 million.

     

    A successful acquisition of Saigak can improve total revenues in Kazakhstan by up to 8% in 2008.  This production is lighter than Arawak’s present Kazakhstan output, and not subject to domestic quotas.  Assuming that the 620 bpd average forecast rate sells for $75 US per barrel, this would increase total Kazakhstan sales to a range of $236-$248.2 million.

     

    As for Russia, Arawak is budgeting for average production of 4658 bpd.  Assuming that Russian oil prices remain at the 4th quarter 2007 price of $57.13 per barrel, revenue could be $97.1 million.

     

    Total 2008 revenues could be $333.1-$345.3 million.  Netbacks from production increases and Saigak premiums may be fully offset by increases in operating costs. I apply EBITDA margins modestly lower than that generated in 2008 (46%) and come up with $153.2-$158.8 million.

     
    Due to the aformentioned miscues, Arawak shares trade at modest valuations.

     

    At the end of 2005, Arawak had an enterprise value of $471.6 million US.  This enterprise value was supported by 40.41 million barrels of reserves (mostly probable) and average production of 5667 bpd.  EBITDA was $29.3 million, which was completely inadequate to cover capex.  The firm sold for 16X EV/EBITDA

     

    As of today’s’ date, Arawak has an enterprise value of $547.2 million. This enterprise value is supported by mostly proven reserves of 45.8 million-47.8 million** barrels, trailing average production of 10,180 bpd and trailing EBITDA of $97.8 million. 

     

    In light of current oil prices, there seems to be a very clear disconnect.    The enterprise value should have grown by much more than 14%, given all of the positive results generated for the past two years.  Investors traditionally assign at least SOME value for production growth estimates.

     

    In the case of Arawak, it seems that investors have largely “given up”.

     

    A comparative analysis suggests that Arawak is greatly undervalued.

     

    The median international small cap producers I use for comparative purposes include BNK, BVX, CAX, CYR, HOC, ORC.b, POE, PAR, SOR, TGL and WIN.  They trade for an average of 10.5X EV/EBITDA.  Many of the producers in this market cap tend to have little production to speak of, and also have poorly defined reserves.  Most trade upon expectations, and not production.

     

    While metrics are not necessarily directly comparable from one producer to the next, it appears that ABG sells for, by far, the greatest discount among peers.

     
    2008 could be the breakout year for long suffering Arawak shareholders.

     
    Management has not done shareholders any favours in the past.  They now appear somewhat chastened, and will need to earn respect from the investment community.

     

    With 11,500 + barrels of trailing 1st quarter production, forecast EBITDA in excess of forecast capex, and a production growth plan capable of increasing output by 30% for 2008, Arawak now seems a very logical investment. 

     

    The firm has grown reserves by a very satisfactory level in 2007, and has the ability to expand reserves further at Besbolek, Alimbai and North Irael.   A continuation of development and exploration success comparable to 2007, may push Russian and Kazakhstan 2P reserves to more than 50 million barrels.

     

    I view Arawak energy as a strong buy for value investors, at current prices.

     
    All that needs to occur, for a shift in investor sentiment, is for management to simply meet expectations.  Based upon the capital budget for 2008, I consider it quite possible that Arawak will beat expectations.

     

    Should management deliver on production forecasts, oil prices remain constant and investor sentiment swing, Arawak could be fairly valued in one year at up to 6X 2008 exit EV/EBITDA. This suggests a fair market value of $4.16 per share, 84% above the current market.  I suspect that at least one of the major Canadian brokerage firms is considering coverage introduction.

     

    2008 exit production rates of 15,000 bpd would certainly attract some market attention.  Reasonable exploration success at East Zharkamys III could greatly improve the mid term outlook, and may render this outlook as conservative.

     

    The most recent investor presentation may be found by linking here

     

    http://www.arawakenergy.com/docs/Arawak%20Presentation%20April%2001%202008.pdf

     

    *assumes no closing of Saigak Investments BV

    **assumes closing of Saigak Investments BV

     

     

    Catalyst

    64% forecast revenue growth and 57% EBITDA growth are forecast in 2008. Production has the potential to meet or exceed forecasts, which will reconfirm the growth story. A modestly accretive acquisition will support increased capex for 2009-2009.

    Coverage by a major Canadian brokerage firm seems to be forthcoming, and won't be a "sell" recommendation.

    Messages


    Subjectpage #1 clarification
    Entry04/03/2008 04:39 PM
    Memberran112

    On page #1, I note a 2008 production forecast of 12,645-13,265 bpd. It differs from both management forecasts and my personal estimate.

    This amount represents management's 2008 estimates - a 7.7% "penalty discount" for previous unreliability.

    Should drilling meet expectations, average 2008 production by Arawak is projected by management at 13,700 bpd-14,320 bpd.

    My estimate, which assumes that management intends to deliver a positive report for 2008, suggests average production of 13,900 bpd-14,830 bpd.

    The lower end of my 2008 EBITDA forecast assumes a successful closing of Saigak, and production as per management estimates.

    The higher end of my 2008 EBITDA forecast assumes a successful closing of Saigak + the higher end of my own production estimate.

    If one reduces the EBITDA estimate to match the "penalty" forecast as noted on page #1, this suggests 2008 EBITDA of $134.2 million to $142 million.

    Such a result prices Arawak at 3.9X-4.1X 2008 exit EV/EBITDA.

    Subjectshare count difference...
    Entry04/04/2008 12:42 PM
    Memberran112
    when investors review the financial reports of Arawak, and when reading the various investment overviews bandied about;
    most reports state that Arawak has about 174 million shares outstanding. While this is true, MY report includes all non excercised options which are outstanding. Most of them are applicable when the share price of Arawak is $2.60 Canadian. Therefore, only a modest increase (less than 10%) in the price increases the diluted share count by about 7.5%. Exercise of options does add cash to the books, and therefore is not completely dilutive.

    I prefer to be conservative, and exclude any potential payments for option assignment.

    There WILL be an additional share consideration applied towards the working capital purchase of Saigak Investments BV. The agreement indicates, but does not specify, that these will be paid in shares of Arawak at the price of $2.92 per share.





    SubjectArawak seeking London listing
    Entry04/24/2008 03:00 PM
    Memberran112
    Arawak Energy Limited - Appointment of JPMorgan Cazenove
    24 Apr 2008 13:50 ET

    TSX TRADING SYMBOL: ABG

    JERSEY, Channel Islands, April 24 /CNW/ - Arawak Energy Limited ("Arawak"
    or the "Company") has appointed JPMorgan Cazenove Limited to advise the
    company in relation to a potential additional listing of its common shares on
    the main market of the London Stock Exchange.

    Arawak's common shares are listed for trading on the TSX under the symbol
    "ABG". The Company is engaged in the exploration, development and production
    of oil and natural gas in Kazakhstan, Russia and Azerbaijan. The Company's
    four producing fields and one exploration block in Kazakhstan are held through
    its 100% wholly-owned subsidiary Altius Energy Corporation ("Altius"). Altius'
    main producing field is Akzhar, extended in 2006 from 3.8 to 71.5 square km,
    with smaller fields at Besbolek, Karataikyz and Alimbai. The exploration block
    East Zharkamys III, is also situated in western Kazakhstan. Arawak's assets in
    Russia are held through ZAO PechoraNefteGas ("PNG") and LLC NK Recher-Komi
    ("Recher-Komi") in which Arawak has a 50% interest with the remaining interest
    being held by Lundin Petroleum AB. Also in Russia, Arawak holds a 100%
    interest in the Kymbozhyuskaya exploration block and in the South Sotchemyu
    appraisal block. In the Azerbaijan Republic, the Company's asset is its
    interest in the South West Gobustan Exploration Development and Production
    Sharing Agreement (the "EDPSA"). Commonwealth Gobustan Limited ("CGL"), in
    which Arawak has a 37.17% interest, holds an 80% interest in the EDPSA with
    the remaining 20% owned by SOCAR Oil Affiliate.

    This announcement is for information purposes only and does not
    constitute an offer or invitation to acquire or dispose of any securities or
    investment advice in any jurisdiction.

    JPMorgan Cazenove Limited is acting exclusively for Arawak and no-one
    else in connection with the matters described herein and will not be
    responsible to anyone other than Arawak for providing the protections afforded
    to its customers or for providing advice in relation to any transaction or
    arrangement referred to herein.

    This press release includes "forward-looking statements", which are based
    on the opinions and estimates of management at the date the statements are
    made, and are subject to a variety of risks and uncertainties and other
    factors that could cause actual events or results to differ materially from
    those projected in the forward-looking statements. These risks and
    uncertainties include, but are not limited to, risks associated with the oil
    and gas industry (including operational risks in development, exploration and
    production; delays or changes in plans with respect to exploration or
    development projects or capital expenditures; the uncertainty of reserve
    estimates; the uncertainty of estimates and projections in relation to
    production, costs and expenses and health, safety and environmental risks),
    the risk of commodity price and foreign exchange rate fluctuations, the
    uncertainty associated with commercial negotiations and negotiating with
    foreign governments and risks associated with international activity. Although
    Arawak believes that its expectations represented by these forward-looking
    statements are reasonable, there can be no assurance that such expectations
    will prove to be correct. Additionally, the estimates of reserves and future
    net revenue for individual properties may not reflect the same confidence
    level as estimates of reserves and future net revenue for all properties, due
    to the effects of aggregation. A barrel of oil equivalent (boe), derived by
    converting gas to oil in the ratio of six thousand cubic feet of gas to one
    barrel of oil, may be misleading, particularly if used in isolation. A boe
    conversion is based on an energy equivalency conversion method primarily
    applicable at the burner tip and does not represent a value equivalency at the
    wellhead. Due to the risks, uncertainties and assumptions inherent in
    forward-looking statements, prospective investors in the Company's securities
    should not place undue reliance on these forward-looking statements. For a
    detailed description of the risks and uncertainties facing Arawak, readers
    should refer to Arawak's Annual Information Form as filed at www.sedar.com.


    For further information: Brunswick Group LLP, PR Advisers to Arawak,
    Patrick Handley, Mark Antelme, Phone: +44 (0) 20 7404 5959


    SubjectArawak refinances debt.
    Entry05/03/2008 12:03 PM
    Memberran112


    http://biz.yahoo.com/cnw/080430/arawak_loan_facility.html?.v=1

    Subjectprospective acreage acquired
    Entry05/03/2008 12:10 PM
    Memberran112
    http://biz.yahoo.com/cnw/080502/arawak_acquisition.html?.v=1

    This concession appears to be attractive. Any successful oil production will be at fiscal terms equivalent to that produced on Arawak's main fields. Oil seeps to surface imply that production horizons are shallow. Drilling to convert undeveloped acreage to proven producing reserves could occur within 12 months.



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