April 16, 2014 - 12:34am EST by
2014 2015
Price: 6.70 EPS $0.00 $0.00
Shares Out. (in M): 66 P/E 0.0x 0.0x
Market Cap (in $M): 442 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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  • Oil and Gas
  • Small Cap
  • Energy
  • E&P





EOX is a quickly growing Bakken exploration and production company currently operating a 2 rig program in McKenzie and Williams Counties, North Dakota.  The company will move to 3 rigs within the month and 4 rigs by the end of the year.  EOX is fully funded through the end of 2014 and is set to grow production by over 100% and EBITDA by over 200% year over year. Catalysts include a borrowing base redetermination in April 2014, increased 2014 production guidance, continued strong well results, and the eventual addition of a 4th operated rig.

Dropbox Link: https://www.dropbox.com/s/xbzq9u95817mein/EOX_Writeup_VIC_April_2014.pdf


Emerald Oil (EOX) is a small/mid (smid) cap exploration and production company primarily focused in the Williston Basin in North Dakota and Montana.  It is the love child of the July 2012 merger between Voyager Oil & Gas and the prior version of Emerald Oil. 

EOX has spent the last two years shedding non-operated acreage and raising money in an effort to embark on an operated program in the Bakken.  It looks like the bulk of the capital raising is behind us and the shares appear to be an attractive investment as the company grows its production rapidly in the near term.





EOX has approximately 85,000 net acres in the Williston Basin, spread across 5 focus areas in 4 counties.  These five focus areas are:

1)    Low Rider in Southwestern McKenzie County ND

2)    Emerald Lewis and Clark also in Southwestern McKenzie County ND

3)    Emerald Pronghorn Sand in Eastern Billings County

4)    Easy Rider in Northeastern Williams County and

5)    Richland area in (you guessed it) the world-renowned Richland County, Montana. 

All of the company’s acreage will be developed prospecting the Middle Bakken and Three Forks formations.

100% of EOX’s operated drilling to date has been in the Low Rider focus area, but this will change soon.  Management has indicated they will begin developing the Richland and Lewis and Clark focus areas at some point in 2014.



EOX’s operated well results to date have been very good. You can see in the below chart that average well IPs are strong.  These results are a quite a bit stronger than those of adjacent wells operated by competitors (see corporate presentation for comparison).  I anticipate that EOX will continue to be a superior operator in the Low Rider area.  Further well results will tell the tale.




Since the beginning of 2013, EOX has been very active with regard to M&A activity, private placements, and the like.  The M&A activity obfuscates the current state of the company, so I thought it would be helpful to run through the deals they have done since the beginning of 2013.

  • In February 2013, they received a $50M investment from an energy PE firm, White Deer Energy. 
  • Then in May 2013, management increased the capital budget and guidance, which was followed by another capital raise.  The raise was $79.7M of common equity at $6.10 per share.  The over allotment was taken.  White Deer participated for another $16.2M at $5.82 per share.   
  • In early September 2013, EOX sold substantially all of its non-operated assets for $113M. 
  • In late September 2013, EOX added 33,851 net acres in the Williston Basin for $24.7M ($730/net acre).  Concurrent with the acreage addition, management introduced a third rig and announced 2014 drilling and production guidance. 
  • In order to fund the 2014 plan (which we learned subsequently), EOX did yet another equity raise.  This time in October 2013 EOX raised $109.7M at $6.70 per share.  White Deer participated again by ponying up $32.5M at $6.39 per share. 
  • In November 2013, EOX established a 2014 Capital plan of $207M ($182M drilling, $25M land costs).
  • In February 2014, EOX closed on an acquisition of 20,000 net acres in the McKenzie and Williams Counties for $75.1M ($3,755 per net acre). Following the transaction, EOX enlarged its 2014 capital plan by $100M to $307M in order to reflect an increased acreage budget.  (Makes me think this 20k acre add was opportunistic.)
  • Finally, in March 2014, EOX issued $172.5M in aggregate principal amount of 2.00% convertible notes. Again there was full exercise of the over-allotment.  The notes are convertible at $8.78 per share (19.6M fully diluted shares, 35% premium to current prices).  Needless to say, this was a very strong convert offering. 

Current state of the company: Following the March convertible offering, EOX had 66.3M shares outstanding and $172.5M in debt.  Or you can think about EOX as having 85.9M fully diluted shares outstanding and no debt. 

It is also worth noting that EOX has liquidity of $282M ($207M cash + $75M revolver availability) as of 3/14/2014 versus a 2014 capital plan of $307M.  Note: the borrowing base is set to be re-determined this month, which should cover any funding gap there might be (if it isn’t already covered by internally generated cash flows).



See the below slide from the corporate presentation that outlines the 2014 capital plan. EOX will drill 18.2 net operated horizontal wells, each costing approximately $10M.  EOX will also allocate $125M to land acquisitions ($75M of which was used in February).





EOX has grown production from 1,065 boepd in Q1 2013 to 2,430 boepd in Q4 2013 after having sold some 850 boe/d of non-operated production in Q3.  

EOX exited 2013 with 2,630 boepd production. 

The company has guided to 3,550 boepd for FY 2014.  Given the completion backlog after a harsh winter and the addition of a 3rd (and perhaps even a 4th rig later on in 2014), it is clear the company guidance is light.  Management has said that they will increase guidance on the Q1 call.

I suggest they will average closer to 5,000 boepd in 2014 just based on the addition of a third rig.  The importance of the 3rd and 4th rig are outlined below with respect to their potential impact to NAV growth.





As of March 2014, EOX has 435 potential well locations in its Williston acreage.

[Note: Management estimates based on 4 Middle Bakken wells and 3 Three Forks wells per 1,280-acre spacing unit for Easy Rider, Low Rider and Richland. Pronghorn based on 4 Pronghorn sand wells per 1,280-acre spacing unit. Lewis & Clark based on 4 Three Forks wells per 1,280-acre spacing unit.]

The addition of a third rig will accelerate the development cycle of the company’s acreage by ~6 years.  That addition of a fourth would accelerate the development by another ~3.5years. 

It is clear the rig additions are a positive to NAV.  Following the convertible offering, it is likely the company will look to add a 4th rig outside of the Low Rider area by the end of 2014, which should be a boon for shareholders.



I’ll admit EOX looks expensive on the surface.  For instance, CapitalIQ has the company trading for 45x EBITDA. I think EOX’s trailing EBITDA is misleading.  As a growing E&P, EOX is required to make various investments that cause per BOE profitability to fall.  All is not lost!

The additional costs EOX incurs are directly related to its growing inventory of wells and related infrastructure.  Often these costs are fixed in nature.  As production increases, we should expect these costs to decrease on the margin and to become more predictable over time.  Will these costs per BOE remain volatile over the short run? Certainly.  But over time they should naturally decline. 

It is important to note that management is making efforts to centralize certain cost centers in an attempt to drive down marginal costs.  They have guided for $11 LOE in 2014, which would suggest that these cost-saving developments will take place in the near term.

As an aside: Cost volatility negatively impacted EOX’s results in Q4.  Cash costs (production expenses + production taxes + and cash G&A expenses) jumped from $35 per BOE in Q3 to $56 per BOE in Q4 and EBITDA dropped correspondingly.  The shares sold off from over $8 to the $6.50 level where the shares sit now. 



There is little doubt that EOX’s production will rise over the next year.  However, there is considerable doubt about what the company’s EBITDA will look like.  In an ideal world, EOX would make $50-60 per BOE like its competitors in the Bakken (think KOG).  Since EOX is the new kid on the block with respect to operated Bakken players and it has considerable efficiencies yet to exploit, it will make less than that per BOE.  Here is EOX’s EBITDA sensitivity:

At $50 EBITDA per BOE, EOX’s 2014 EBITDA is likely to be in excess of $80M EBITDA. 

At $40 EBITDA per BOE, EOX will do just shy of $70M EBITDA.

At $30 EBITDA per BOE, EOX will do only $50M EBITDA.

I have them doing in the neighborhood of $40 EBITDA per BOE.  Proforma the recent convertible offering, EOX is trading at 5.96x my projected 2014 EBITDA and 4.80x what I call normalized EBITDA (if EOX were KOG and making $50-60 per BOE). 

Given EOX’s clean balance sheet, excellent growth prospects, and stellar operated results, I think the company should be afforded a stronger valuation in the marketplace. 

At 8x EBITDA, EOX’s shares would be worth $10.75 per share, which is my price target for this exercise.  This represents 60% upside from current levels (obviously contingent upon continued operated drilling success, limited further dilution, and successful marginal cost decreases). 




I want to address the short interest very quickly because it needs to be addressed.

Following the yearend earnings announcement and convertible issuance, EOX is now one of the most shorted stocks on the AMEX.  Short interest jumped from 4.3M shares prior to 13.8M shares post conference call and issuance.

I assume the short interest jumped for two reasons: 1) pessimism surrounding the company’s volatile marginal costs and 2) convert arb delta hedgers.  I assume reason #2 was the lion’s share of the almost 10M share increase in short interest, but I am biased because I am long the stock.



  • Borrowing Base Redetermination – Revolver availability goes over $100M
  • 3rd rig gets rocking and rolling – 2014 Guidance Raised
  • 4th rig brought into Richland – 2015 Guidance Raised
  • Next fundraise happens in the debt capital markets



Emerald Oil's CEO Discusses Q4 2013 Results - Earnings Call Transcript


Management on upping guidance and/or EURs:


“Due to the large amount of production coming online during the back half of the first quarter and beyond, production in the second quarter will be higher than our previous guidance, and we plan to increase quarterly, annual, and exit rate guidance on the first quarter earnings call.”


  • My only question is how high will they increase guidance? I have them easily surpassing 4,000 boepd in 2014.  Reminder: They are currently at 3,550 boepd for 2014, which is the equivalent of drilling less than 5 wells in 2014 given their 2013 exit rate of 2,630 boepd.



Management on what acreage they will develop next:


“We successfully [cored] up multiple operated units in Richland County, Montana. This area has both recent Middle Bakken and Three Forks well control, and we are very encouraged by the strong results. We believe our style of completion of Low Rider can be replicated in Richland County due to geologic similarities. We anticipate a potential fourth rig addition will be used to develop this area and our Lewis & Clark position later in 2014, and will be financed through both our borrowing base and accessing fixed income markets.”


  • After this call was completed, management did in fact access the fixed income markets and secured financing that should allow the 4th rig to be brought in this year.  This would be a very big development for such a small company.
  • Also it is important to note here that Lewis & Clark and Richland will be the next areas developed.




Management on the Q4 cost spike:


“The increased expense is primarily due to the development, execution and acceleration of our operated drilling program. While the increased costs are primarily associated with workovers, artificial lift installations and the use of specific drilling equipment, these items have improved well performance and reduced downtime. As we and other industry players continue to successfully develop (indiscernible) Central and Southern McKenzie County, we anticipate further cost efficiencies.”


  • As you might imagine, rural North Dakota doesn’t have much infrastructure – roads, electricity, compression, saltwater disposal, etc.  EOX has to do things like build their own power grid in order to service their rig sites!  They are in the process of developing those types of necessities, which once centralized will reduce marginal costs significantly.


Management on Q1 weather-related issues:


“In the first quarter, we experienced weather-related frac delays, which could result in a first quarter production shortfall of between zero and 10%.


  • You can’t complete wells when the temperatures are 40 degrees below for 60 straight days.



Management on 2014 LOE Guidance:


We have guided to an annual 2014 LOE per barrel of $11, and we remain comfortable with that estimate. We also incurred two separate one-time G&A expenses in the first quarter. The first consisting of $2.8 million stock-based expense related to the severance of a prior officer of the company, and the second a $2.4 million cash charge attributed to transaction related fees and expenses.”


  • This is management’s way of saying not only will we miss production guidance, but we will also see higher than normal G&A expenses per BOE. Just a heads up.


Management on the Alleged Fourth Rig:


“Paul Grigel - Macquarie
Okay. And in regards to the fourth rig, you have mentioned taking up to the back half of the year. What point in time would that decision be made to go forward with that addition?

McAndrew Rudisill - President & CEO
Well, that's really a permitting-based decision. So, the NDIC is -- we have a lot of permanent spending right now and we are waiting for some of these permits to come through. There are also some federal lands that we are rating owned permits on. Once we receive those, then we will be able to know exactly when that fourth rig comes on. What we anticipate is mid to late third quarter type of event.”


  • Sellside, adjust your models accordingly for 2015.




Legal Notice:

  • Do your own due diligence = Don’t take blind advice from anonymous people on the internet.
  • I am long shares of EOX.
  • I am free to trade my shares however I’d like.
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.



  • Borrowing Base Redetermination – Revolver availability goes over $100M
  • 3rd rig gets rocking and rolling – 2014 Guidance Raised
  • 4th rig brought into Richland – 2015 Guidance Raised
  • Next fundraise happens in the debt capital markets
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