Oil : 109 bopd
Gas : 167 boepd
Total : 276 boepd
Oil produced from :-
Somerset : 43 bopd
Shoats Creek : 34 bopd
Alta Loma : 32 bopd
Gas produced from :-
Alta Loma : 120 boepd
S.Weslaco : 33 boepd
Shoats Creek : 14 boepd
Oil sold at $98/bbl and gas at $4.86 mcf
What about the future ?
The recompletion of Alta Loma(Sunny Ernie) in April resulted in restricted flows net to AEX of :-
Oil : 112 bopd
Gas : 437 boepd
Assuming all other flow rates remain constant, H2 should look something like :-
Oil : 189 bopd
Gas : 484 boepd
Total : 673 boepd
That’s a sizeable increase. Assuming same product prices for H2, I’d forecast revenues in the region of $3.4m for oil and $2.5m for gas, $5.9m in total, double that of H1.
But what of Shoats Creek? Will production increase in H2?
Hopefully it will but I suspect we‘ll need to be patient. As of 31 Aug, permission had been granted for a nearby well to be used for water disposal…critical for increasing production. One would have thought that shouldn’t take too long to organise. The other point to make is that the Cockfield sands require water-flooding at some point to maximise recovery of reserves. At what point I don’t know but it’s worth noting that the reserves upgrade was largely attributed to the Cockfield sands and the waterflood thereof.
Here’s a reminder of Shoats Creek initial discovery rates :-
OM-1 : 150 bopd (100% AEX)
OM-10 : 450 boepd, comprising 315 bopd + 135 boe gas (50% AEX)
The H1 figures look pathetic against these, which maybe tempers expectations. However, there has been a lot of stop-start during trials, producing too slowly causing the wells to wax up and too fast producing more water, hence the disposal requirement. Once they get the facilities sorted and the balance right, the figures will obviously make H1 look silly but will they actually impress? Time will tell. Looking ahead, the two planned wells are step-outs to the OM-10 well in the Willcox formation, so that should herald higher production rates than Cockfield if above numbers are anything to go by, which is good to see.
Clearly though, Shoats Creek production levels are going to be crucial in any valuation, particulary as these reserves represent 85% of the US assets. Because so many US assets produce oil over decades rather than years, I prefer to discount anything likely to be produced beyond 20 years as worthless in any valuation. So, of Shoats Creek booked 2P reserves, how many boepd on average need to be produced to deliver the booked 6.434mmboe within 20 years? Answer 881 boepd. Seems plausible on the face of it but we need to bear in mind that the seemingly higher producing Willcox wells are only 50% owned. We also need to bear in mind that greater reserves are attributed to the lower producing Cockfield sands. Note Shoats Creek 2P reserves increased from 3.73 mmboe to 6.43 mmboe, largely down to Cockfield. Note also, 150 boepd(OM-1) for 20 years will recover 1.1mmboe.
So what should we value these reserves at?
AEX ‘s audited April 2011 reserves report states PV10 of $134m (equivalent to 12p/sh). Whilst that may prove to be the case if AEX actually produces the reserves, we all know nothing like that would be achieved in a sale. Historically, in a market of average conditions, half decent flowing US 2P barrels of oil would fetch $10/bbl. Gas a good bit less(albeit Shoats Creek gas amounting to 3mmboe yields a large premium). Reserves are made up of approx 45:55 Oil:Gas. So maybe $9/boe in a fair market? Of course a fair market is not what we’ve got, so maybe $7/boe if AEX don’t have their backs to wall and $5 if they do? But all that assumes Shoats Creek delivers. As implied above though, the Cockfield formation will need to outperform the Wilcox in production terms to exploit all reserves within 20 years. I’ve no idea whether they’ll be able to do that, hence it leaves a question mark. My considered view is that a forced sale right now would likely be at $3/bbl equal to 2p/sh. Decent early progress on Shoats Creek production might push that to $4/bbl and spiffing results over the next several months might elevate that to $5 or $6/bbl. What it tells us is that Shoats Creek results are crucial to any evaluation.
Of course, AEX won’t be looking to sell as growing revenues could provide a vital lifeline, these being potentially substantial. No account has been taken of any deep Wilcox prospectively which might prove an added attraction to any buyer.
For those brave enough to get this far, perhaps somebody could explain why the April Shoats Creek reserves report appears to show gas being equivalent to 6mcf = 1boe. Surely, with a much higher calorific value, the boe figure has been understated?