|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|
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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.
Acquisition of Emerald by Voyager
- Management and Board of Directors own ~ 9% post transaction close
Emerald Oil Asset Highlights
Management Team Pro forma Deal
James Russell (J.R.) Reger
- 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.
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.
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.
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.
Non Operated Overview
~36,700 net non-operated acres in core of Williston Basin
Tiger Ridge Gas
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