October 05, 2012 - 2:20pm EST by
2012 2013
Price: 0.80 EPS $0.00 $0.00
Shares Out. (in M): 169 P/E 0.0x 0.0x
Market Cap (in $M): 135 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Energy
  • Driller
  • Oil and Gas
  • E&P


Emerald Oil, Inc. (NYSE: EOX)

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Emerald Oil, Inc. (“Emerald”) has recently undergone a transformational merger and a recapitalization financing and is now on the cusp of a fully financed drilling plan that will increase production by over 100% in 2013 and an additional 50% in 2014.  The Company was formed with the recently announced acquisition of Emerald Oil, a wholly owned subsidiary of Emerald Oil & Gas NL (ASX: EMR), by Voyager Oil & Gas (“Voyager” formerly NYSE: VOG).  The acquisition is the first step in transitioning from a non-operated Bakken focused E&P to an operated model with a very strong production growth profile.  The acquisition also brings in a very solid management team lead by Mike Krzus with 29 years of experience in upstream oil and gas operations.  The transition to the operated model will allow Emerald to increase its production profile in short order, with the longer-term goal of producing 10,000boepd within five years.  Given Emerald will be a pure play Bakken E&P with operating capability, we believe its valuation will re-rate to trade in line with its comparable peer group in the Williston Basin on a number of metrics including EV/EBITDA, EV/Acre and EV/Flowing barrel + acreage.


To effectuate the transformation, Emerald recently completed an equity offering of approximately $75MM @ $0.80/share. Pro forma for the equity raise, Emerald is trading at a severe discount to its peer group in the Williston Basin and we believe there is significant equity upside from current levels, ranging from $1.41 to $3.70 per share, as illustrated below.


Business Description


  • Emerald, a Montana corporation, is an independent oil and natural gas Exploration and Production company engaged in the business of acquiring acreage in prospective natural resource plays within the continental United States.  They are primarily focused in the Williston Basin, located in North Dakota and Montana, but the Company also holds acreage in other emerging oil plays in Colorado, Wyoming and Montana. The Company seeks to accumulate acreage that builds net asset value by growing reserves and converting undeveloped assets into producing wells in repeatable and scalable shale oil plays.
  • The Company currently participates in well development as a non-operator and is in the process of building operations to plan and design well development as an operator on acreage where a controlling interest is held. With the acquisition of Emerald Oil and Gas during third quarter of 2012, the Company has added executive management that is experienced in well development and intends to build on these capabilities internally and through partnering with other proven service providers.
  • Liquidity - As of June 30, 2012, the Company had cash and cash equivalents and accounts receivable of approximately $11.6MM and accounts payable and accrued expenses of approximately $35.5MM. In addition, as a part of the acquisition of Emerald Oil, Inc. the Company assumed $20.2MM of debt that matures in November 2012. Concurrent with the Emerald Oil, Inc. acquisition the Company entered into an amended and restated credit agreement with Macquarie Bank expanding the Company’s outstanding borrowings by $15.0MM which is due and payable in November 2012. The additional $15.0MM drawn under the credit facility was used to offset a portion of the $35.5MM of current liabilities. The company is currently producing 938boepd and 2011 proved reserves were 3.5mmboe.


Acquisition of Emerald by Voyager

  • Announced the acquisition of 100% of Emerald Oil Inc. on July 11, 2012 in an all-stock transaction
  • Issued 11.6MM shares or 19.9% of Voyager’s common stock

- Management and Board of Directors own ~ 9% post transaction close

  • Assumption of $20MM of indebtedness
  • Acquisition adds attractive operated inventory and expands executive and technical expertise to kick off operated Bakken and Three Forks drilling program by early 2013


Emerald Oil Asset Highlights

  • 10,600 Williston net acres in Dunn county, North Dakota
  • 14 gross (5.4 net) operated DSU’s and an inventory of 58 net unrisked locations in the Middle  Bakken and Three Forks
  • 45,000 net acres in the Sandwash Basin Niobrara in Northwest Colorado &                    Southwest Wyoming, actively being developed by offset operators including Shell, Quicksilver and Gulfport Energy


Management Team Pro forma Deal

 Mike Kruz

  • 29 years of upstream oil and gas experience
  • Prior to Emerald Mr. Kruz held various executive positions at Woodside Petroleum (Australia’s largest operating oil company) involving technical oil and gas field development


McAndrew Rudisill

  • 11 years of investment management and investment banking experience in the natural resources sector
  • Was the Managing Partner and founder of Pelagic Capital Advisors LP from 2007 to 2011


Paul Wiesner

  • 20 years of experience in oil and gas finance and accounting
  • Prior to joining Voyager, Mr. Wiesner was the Chief Financial Officer of Tracker Resource Development II, LLC from 2008 to 2011


Karl Osterbuhr

  •  20 years of unique experience in the field that gives him a thorough understanding of all types of field operations.
  • Expert in 17 separate petroleum provinces in the US and Canada with a particular expertise in geo steering horizontal wells, under balanced drilling in high temperature high pressure environments and managed pressure drilling operations.


James Russell (J.R.) Reger

  • Mr. Reger was born and raised in Billings, Montana and is the fourth generation in a family of oil and gas explorers and developers dating back more than 60 years.


Strategic Plan


-                     Convert acres to operated blocks and move from non-operated model to operated model.  Spud first well in the beginning of the 2013 in Dunn County using exact technique performed by Hunt (Bakken operator) in wells drilled just a few miles away.  Expect each well to cost $7-9MM. 

-                     They will operate in three core areas, Richmond, McKinsey and Dunn Counties and should have most of their drilling spacing units (DSUs) converted to operating in less than a year.

-                     The 18 month drilling program expects to spend ~$88MM to drill ~5 net (8 gross) operated acres and ~3.6 net non-operated Bakken wells which will bring the total of net wells to ~15 producing for the company exiting 2013.

-                     Leverage local network to swap non-operated acreage for operated units

-                     The five year goal is to reach 10,000 bbls of production per day and sell the company

-                     In addition, they plan to evaluate small and distressed private operators who have production, as potential additions to the portfolio.  These would be $10-15MM acreage deals like the “McKenzie Acquisition” announced September 10, 2012 for $15.6MM.


Recent Activity


Slawson Exploration derisking Richland County



Quicksilver Resources Announces Sand Wash Basin Joint Development and AMI agreement


Emerald Oil, Inc. Announces McKenzie County, North Dakota, Operated Acreage Acquisition and Reserve Report Update

Emerald entered into a definitive agreement on September 6, 2012 to acquire approximately 4,500 net operated acres in McKenzie County, North Dakota, which the Company expects to close early in the fourth quarter of 2012. The Company has agreed to pay approximately $14.3 million in cash for this acreage, or approximately $3,200 per net operated acre. The average working interest on this acreage is greater than 60%. As part of the transaction, the Company will also acquire a recently constructed well pad and tank battery at an additional cost of $1.3 million in cash. These drilling and production facilities will allow the Company to drill some of its first operated wells on the acreage. From this well pad, the Company anticipates being able to hold by production three of the approximately nine operated drilling spacing units. Recently, certain offset operators to this acreage have announced wells that have had initial 24-hour production rates of over 3,000 barrels of oil equivalent per day (Boe/d). The initial 24-hour production rates achieved by others may not be indicative of the results the Company achieves from its wells


June 30, 2012 Estimated Proved Reserves


Emerald recently commissioned a reserve audit by Netherland, Sewell & Associates, Inc. ("NSAI") on the Company's oil and gas reserves as of June 30, 2012. The results of this audit illustrate the reserve growth Emerald experienced during the first half of 2012 from total estimated proved reserves of approximately 3.5 million Boe with a PV-10 value of approximately $59.6 million at December 31, 2011 to approximately 4.6 million Boe with a PV-10 value of approximately $83.2 million at June 30, 2012. This audited reserve report does not include assets of Emerald Oil Inc. acquired in July 2012 or reserves associated with the aforementioned McKenzie acquisition.


Acreage Swap


The diagrams below show an example of how EOX can convert non-operated working interest acreage into operated acreage through entering into a zero cost acreage swap with “Company A” to benefit both parties. Before the swap EOX owns a 30% non-op interest, after the swap EOX would have a 40% operated interest in the DSU. 


Comparable Transactions

At $13,000/acre Emerald’s Bakken acreage would be worth $625MM or $3.70/share. Including flowing barrels ($80,000/Exit 2013 flowing) and using $7,400/acre for the remaining acres, Emerald’s Bakken position is worth $525MM or $3.13/share. Note: this excludes any value for their other assets.


Bakken Pure Play Comparables as of end of Q2 (pro forma money raise)


NOG (included below) remains the only non-operator in the comp group. One can see the delta in valuation from non-operator to operator. Currently NOG is trading at 6.1x, 4.2x and 3.7x EV/EBITDA versus operators trading at 11.5x, 8.1x and 4.1x EV/EBITDA for 2012, 2013 and 2014, respectively. Backing out production from the comparable group, NOG’s non-operated acreage trades for $3,140/acre versus their operating peers trading at $8,210/acre. Market valuations are significantly higher for operators that control their own destiny versus non-operating competitors.

The Bakken pure play operated comp group is trading at 8.1x and 4.1x EV/EBITDA for 2013 and 2014 respectively while Emerald is trading at only 4.6x and 2.5x EV/EBITDA for 2013 and 2014 respectively.  On an acreage basis, backing out production, the average pure play Bakken operator is trading at $8,210 per acre. Pro forma merger and a ~$75MM equity infusion, Emerald is trading at $1,250 per acre.


Assuming $80k per flowing bbl at 2,000bbls/day (end of ‘13) and $5000/acre, EOX is worth $2.41/share post recap


If you assume $80k per flowing bbl at 3,100bbls/day (end of ’14) and $5,000/acre, EOX is worth $2.72/share post recap


Using a 5.0x EV/EBITDA multiple for 2014, the Company should trade at $1.41/share. However, we believe the Company should trade closer to a Triangle Petroleum Corporation (NASDAQ: TPLM) multiple b/c EBITDA doesn’t capture the full value of the Company’s assets.


Why is Emerald more compelling than TPLM?


-                     Valuation – Buying Triangle at $7.50 per share when they raised money, investors paid approximately $7,000/acre.  This deal today is sub $1,500 per acre.

-                     Production – TPLM had no production whereas EOX has ~1000bbls/day

-                     Much lower cost basis of acres – Voyager had an avg cost per acre of ~$1,250 and Emerald avg. was $1,150 while TPLM was closer to $4,000

-                     Not locking up a rig at $35k/day (going rate in the mid $20ks) and they will be drilling a well by Q1, not a year from the raise

-                     Strong management team already in place

-                     Optionality in the Rockies and the Heath Shale rather than the unproven Eastern Canadian gas shale.


Land Position – While the core of the EOX strategy will be focused on developing the oily Bakken, they have some legacy positions in other basins that should be considered a call option on industry exploration activity and a natural gas recovery.


-                     Williston Basin – 48,100 acres

-                     Sandwash Niobrara 45,000 acres

-                     Heath Shale – 33,500 acres

-                     Tiger Ridge Gas – 74,7000 acres

-                     DJ Basin Niobrara – 2400 acres


Emerald Database –A strategic advantage in acreage trading


There are two primary sections to the database that generate the GIS (Global Information System) output.


The Emerald database integrates all non-operated well AFEs received by VOG since inception and inputs the data into an easily sortable format with columns A – AM, ~40 variables. This data can then be sorted by each of these variables.  For example, the database has the ability to look at wells drilled in Williams post 2011 with AFE’s over $8MM and see what the returns have been.


The second part of the database takes all available NDIC (North Dakota Industrial Commission) and MTOG (Montana) available drill and production data and layers it into a similar set of variables.  They can then take this publicly available data and the internal data and compare it to one another.


A third set of data they monitor is rigs currently drilling by operator.  This output can then be dynamically pushed to a GIS mapping software which allows them to analyze individual sections in great detail.  The illustration below shows the output 154N/100W zoomed in Williams. VOG wells are sorted here by EUR/CAPEX to produce a graphical output of relative well economics.  Bigger circles are generally better, but if you get a big pink circle then it means too much was spent to generate that particular EUR.  Usually, EURs follow CAPEX, but this is not always the case.  High AFEs doesn’t always translate into great wells.  Rates of return are color coded in this output but can be changed to any visual they want.  If they were looking to acquire in a specific section then they would use this to pull all wells and surrounding data in that section, check the best operators, their economics, and how the wells were drilled (frac stages, propant types, pressures, etc.)  When analyzing an individual operator on a non-op AFE, the data becomes clear section by section and basin wide when both quantitatively and qualitatively examined. Using this database, Emerald believes they can increase their non-op returns by 1,000bps and horse trade more competitively than any operator for more DSUs.



Williston Basin


  • Emerald has approximately 48,100 net acres in the Williston Basin in North Dakota and Montana, prospective for shale oil in the Bakken and Three Forks formations. They believe that industry activity in the basin has substantially de-risked both drilling and capital return profiles by providing industry accepted type curves defining production profiles and individual well recoveries for different producing areas. Reserves per well and well costs vary across the Williston Basin, depending on the characteristics of the area. However, based on publicly available information, they believe representative estimated ultimate recoveries, or EURs, for their areas of interest range from 350 to 700 MBoe per well with drilling and completion costs between $7.5 to $13.0MM per well. The Williston Basin is geologically and aerially well-defined and almost all of their approximately 43,600 net acres are positioned within Williams, McKenzie, Dunn and Mountrail Counties in North Dakota and Richland County, Montana, which are all generally recognized as being prospective for both the Bakken and Three Forks formations.


  • The pre-acquisition Williston acreage is comprised of approximately 11,400 net operated acres in Dunn McKenzie Counties in North Dakota. They are confident that they can core up the additional 6,800 acres in Williams and McKenzie Counties in North Dakota and Richland County in Montana within the next 12 months. The remaining  29,900 net acres in Williams, McKenzie, Dunn and Mountrail Counties in North Dakota that are currently low working interests either will remain non-operated or be traded to consolidate operating interests in selected areas.



Operated Overview


  1. Total of 11,400 operated acres in Dunn and Mckenzie
  2. ~6,900 net acres in Dunn County, ND 5.4 net operated DSUs with 7 potential wells per DSU
  3. ~ 4,500 net acres in McKenzie County, ND ~9 net operated DSU’s
  4. Working interest ranges from 1.5% to 75% in 46 gross DSUs
  5. ~38 net operated unrisked locations / 14.3 Mmboe of unrisked potential


Non Operated Overview


~36,700 net non-operated acres in core of Williston Basin

  1. Williams, McKenzie, Dunn, & Mountrail Counties, ND
  2. Richland, Roosevelt, and Sheridan, Counties, MT
  3. 5% average working interest
  4. ~200 net non-operated unrisked locations / 76.1 Mmboe of unrisked potential(1)
  5. ~6,800 net acres in Williams, McKenzie, and Richland Counties, ND/MT targeted for conversion to operated acreage within the next 12 months


Sandwash Niobrara


  • ~45,000 net non-operated acres in Sandwash Niobrara Moffat & Routt Counties, CO & Carbon County, WY
  • ~45% working interest in joint venture
  • Operators in the area include: Quicksilver, Anadarko, Gulfport, Double Eagle, Cirque and Shell Various well and completion designs
  • Substantial competitor drilling programs in 2012
  • Quicksilver reported IP 793 boe/d from partially fracked short horizontal well and 162 boe/d from fracked zones in vertical wells Plan to drill 7 additional wells in 2012


Heath Shale


  • ~33,500 net acres prospective for Heath shale oil Musselshell, Petroleum, Garfield, and Fergus Counties, MT
  • Low cost of entry and 3-year extensions through 2017 provide optionality as industry de-risks the play
  • Early signs of resource play operators are beginning to “crack the code” – believe results can be replicated
  • Offset operators include: Cirque/StatOil, Fidelity, Endeavour Resources, Central Montana Resources, and True Oil
  • Recent reported well results Cirque Resources - Recent IP of 271 boe/d, EUR241, IRR’s 44%, NPV $3.8MM and Payout 1.7 years on Rock Happy 33-3H
  • Fidelity E&P - Recent IP of 248 boe/d on Schmidt 44-27H


Tiger Ridge Gas


  • Approximately 74,700 net acres in the Tiger Ridge area, a large gas field located in north-central Montana. Exploration for natural gas in the Tiger Ridge field dates back to the 1960’s, and has resulted in significant discoveries of both natural gas and oil. Natural gas production continues in the Tiger Ridge field today and they believe new opportunities still exist to exploit hydrocarbons in the area as a result of advanced technology in drilling and completion as well as seismic and geologic evaluation techniques. Drilling costs have declined and success rates have improved significantly with the utilization of updated 3-D seismic technology.


DJ Niobrara


  • Voyager participated in an exploration and development agreement with Slawson Exploration Company, Inc. to develop acreage owned in the Niobrara formation of the Denver-Julesberg (D-J) Basin in Weld County, Colorado and Laramie County, Wyoming. Voyager participated on a heads-up basis for a 50% working interest in the acreage and holds a current position of approximately 2,400 net acres. Drilling operations commenced in late 2010 and into the first half of 2011. Voyager currently has 2.5 net wells producing in Weld County, Colorado.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


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