Nighthawk Energy - Sale of Jolly Ranch - Macquarie Overview of Project Memorandum

Thanks for posting Pezza & good luck with your investment.

However, the proof of the pudding will be in the eating. We shall see whether any buyers are convinced by the document and content of the data room and are prepared to pay more than a small fraction of the claimed $1bn+ NPV10 value for 75% of the project.... or whether this simply prompts speculators to buy in and suffer subsequent disappointment, as has happened in the past.

If the project really is economic, I still fail to understand why Nighthawk have not been able to demonstrate profitable operations on a small portion of the acreage.

Regards,

Mark

In reply to marben100, post #1

PS if a single vertical well can produce an NPV10 net cashflow of $1.5mn in the base case, and much of this cashflow should be produced in the first year, given a 63% annual decline rate, why was Nighthawk's TOTAL revenue for the 6 months to 31st December 2009 no more than US$1m (across several projects), despite drilling numerous wells on the Jolly Ranch acreage?

Has any JR well produced more than 100boepd for a year or more, as suggested by the decline curve presented on p6 for an average well?

Perhaps you can understand the reason for my scepticism.

Mark

Mark,

Quite right..

Just came across this article. Whilst it relates to shale gas, it seems rather reminiscent of Nighthawk's experience and I strongly recommend a reading of the full, lengthy article to anyone considering an investment in the company.

Other analysts like Ben Dell, a senior energy analyst at Bernstein Research in New York, are suspicious about corporate reporting of returns on shale wells.

In a March 27 research note, [Dell] notes “a growing discrepancy between the internal rates of return (IRR) presented in corporate presentations and company reported ROACE (return on average capital employed)… For example, in many plays companies claim to generate IRR’s above 100% at $7.50/mcf gas or claim that their production is economical even at $2-3/mcf gas prices, but at the same time report 6-7% ROACE at a corporate level over the last 3 years, when the average gas price was $7.50/mcf.”

Titled “Why the Haynesville Won’t Work…at $4, $5, or $6/mcf gas”, Dell posits that companies are overstating production, understating costs, or there is a terminology gap at work. For example, a producer could say the IP rate of a well (Initial Production) is 8 mmcf/d (million cubic feet per day). But was that a 30 day average, as is normal, or was it a 12 hour average just after coming online. These HD wells can decline in production so rapidly sometimes that for stock promotion purposes, companies issue figures that may have been correct for a short time, but have no context and are not really “best practices” type numbers.

Dell also questions if the all in costs of a well are being amortized properly into the economics that appear in a company’s press release. If the cash operating cost of a well is $3/mcf, which is the number that appears in a release that does not include the $4-7 million it cost to buy the land and drill the hole - costs that Dell suggests basically doubles the breakeven level of the well to $6/mcf. And to get an acceptable return - even to generate enough cash to drill the next well - would be $8/mcf.

 

Dell’s analysis and Berman’s are the same in all the essentials. Let’s sum up the situation so far—

• Shale gas operators are up to their eyeballs in debt. They would need to borrow vast sums of money—Berman suggests it would take ~30,000 wells and ~$150 billion—to get shale gas up to 40% of total U.S. dry gas production by 2013.
• Shale gas operators can’t possibly make money at current natural gas prices, or medium-term future prices if these are close to the 15-year average (~$5.50/Mcf).

The situation is actually worse than our summary indicates. Shale gas wells have very steep decline rates...

Cheers,

Mark

Mark,

Come on mate, I don't go to an ice cream van and ask for a pint.....if I want a pint, I'll go down the pub !! If I want oil, I'll got to JR ;-)

When your looking at the economics of JR, you've got to look at the price of oil and the costs of bringing shale oil into mass production.

I've not read the article to be honest but did Bernstein actually mention shale gas in the USA or has someone just taken a quote from them and thrown it into another article ? Knowing Bernstein, they would more likly be talking about eastern europe shale gas, although early stages. Also, I beleive they are keen on shale gas anyway so I assume its just over the corporate governence they have an issue.

While we're on the supject of shale gas, I agree that many of these companies are probably in huge debt due to the price of gas but JR doesn't have that problem with their shale oil, due to the oil price. Also, how long is gas going to be so low, maybe a good time to purchase the acrerage ?

The other point of the article you have posted is about companies overstating their production figures and I don't think anyone could accuse HAWK of that ;-) I believe it's half a pint glass of oil a day at the moment !!

Elliott Gue who specialises in energy markets currently see's the possibility of 100% profits on US domestic shale oil (at current oil prices). Also, there has been a couple of large acquisitions on oil shale projects in the US recently which shows confidence is growing. Add to that, euorpe are building up projects too.

I know you don't like HAWK and I'm frustrated by the lack of information myself but unless we have been deliberately mislead by the BOD, I can only see a positive outcome from the sale.

Once this is over, I may even start posting about another company !!