Nighthawk Energy - The Good Ol' US Of A

13th Nov '09 by monkeynuts

3 comments 5562 reads

While many investors in junior oil stocks head for plays in newly developing fields - off West Africa, or in Central Asia or the Urals - we shouldn't forget the attractions of the good ol' US of A.

The fact that the US is an oil producer of long standing creates some interesting opportunities for smaller oil companies - precisely because some of the fields are so old that the majors have turned their backs on them. In some cases, fields have been produced in the past and abandoned once flow rates fell - but with higher oil prices and relatively new technology, the wells can be stimulated to bring them back into commercial production.

That's what Nighthawk is doing at its Devon Oilfield licence in Kansas, using fluid injection techniques. Pressure in this area of the Cherokee basin is too low to produce otherwise, but fuel injection could potentially get 20-50% recovery rates.

Of course the fact that much of the US has been extensively mapped, and there's good seismic data and even drilling reports on most areas, also reduces the risk for explorers and producers. So Nighthawk's producing portfolio - five properties in Utah, Kansas, Colorado and Illinois - can be seen as a nice low risk bunch of assets. But it also has the potential to surprise on the upside.

Nighthawk listed on AIM in 2007 with a bunch of US assets which it has been developing over the last two years. It has been buying up land that the big players don't want - and is getting oil out of the ground at low cost. CEO Dave Bramhill says its oil is costing USD 25 a barrel, and that will fall further in the future as economies of scale begin to be enjoyed ^[1] .

The last year has seen the company announcing the results of independent reviews of two of its key assets - Jolly Ranch and Revere. At Jolly Ranch, 10 wells have already been drilled out of a 40 well programme; all of them have encountered commercial oil resources, and six are already producing. Rates of production have been improved by the fact that the company is now allowed to produce from multiple levels in each well (this was previously barred by the regulatory authorities).

An independent review by Schlumberger showed a P50 (most likely oil in place) of 1.462…

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marben100

13th Nov '09

Secondly, the share price has been affected by the fact that the company has held three capital raisings in eighteen months, in order to support future drilling programmes and financing of production facilities at Jolly Ranch and Devere.

IMO that is not the only reason the share price has been affected. Some shareholders (including me - I have sold my original holding) have been disappointed by a repeated failure to deliver on promises. Nighthawk has a track record of publishing obscure RNSs, followed by non-delivery on expectations. Here are some examples:

The “Revere” Project (originally Devon, then Buchanan, now Xenia added):

3^rd June 2008:

“The Devon project, covering 1,764 acres, is targeting the Upper and Lower Bartlesville channel sandstones and has seen an expanded appraisal drilling programme over the project area since March 2007.

One well has been on pilot primary oil production (without water injection) for some weeks. A further 28 successful appraisal wells have now been perforated, acidised and swabbed and are ready to be placed on primary oil production prior to and during full water injection. Construction of a surface gathering system, tying-in the production and injector wells has commenced and is expected to be completed by the end of July 2008.

As announced on 26 February 2008, four injector wells have already been drilled and cased in a four-spot pattern. A further 20 injector wells are currently being drilled and will be added to the production facilities.

The expanded waterflood injection and design is expected to take between four and twelve months. This will involve observing the effects of waterflooding, fluid migration paths and reservoir production characteristics.”

[we STILL, 17 months later, have not heard anything about the effectiveness, or otherwise, of this waterflooding.]

9^th June 2008:

“The Buchanan and Worden projects are now considered to be of development status and the operator anticipates water injection and the start of oil production during Q3 2008.”

18^th Sep 2008:

“To date, a total of 36 wells, including the 16 previously announced wells, have been drilled and cased for production on ten acre spacing. The wells all targeted the McClouth and Upper and Lower Bartlesville formations. Through petrophysical and core analysis, Running Foxes conservatively estimates the average oil in place to be 250,000 barrels for each ten acres with individual pay zone intervals ranging from 8 to 70 feet at depths of between 250 and 500 feet. The average oil in place per well will vary as wells are now being drilled to define the limits of each reservoir. The wells presently producing are estimated to have between 300,000 to over 650,000 bbls of oil in place each. Continuing core analysis indicates excellent porosity and permeability with an API oil gravity ranging from 28 to 33.

An average of three wells per week are currently being drilled to take advantage of good weather. To date, six wells have been perforated, put on pilot primary production (without water injection) and are flowing at rates of 1 to 2 barrels per day (BOPD) and approximately 30,000 cubic feet of gas per day in aggregate. The other wells drilled will be put on primary production in the near future. Once the waterflood process has been completed, production per well is expected to increase significantly, typically by between two and ten times over that seen under primary production.”

[So, one might expect some excellent production from these wells, once waterflooding takes effect]

…fast forward to 5^th October 2009:

Lots of very bullish waffle and then:

“Current gross primary production from Revere is averaging 150 barrels of oil equivalent per day ('BOEPD') (gross). Oil is being trucked to a nearby processing facility and gas is being sold via the third party owned Bourbon County pipeline.”

So, after 15 months we have minimal production (relative to market cap of £150m) and no indication of what the impact of waterflooding has been after all this time. Just more promises of lots of production later.

Now, on to Jolly Ranch…

21^st August 2008:

“Three wells, the Jolly 2-1, Jolly 16-1 and Craig 8-1, have been drilled to date, casing has been set and the wells are considered to be producers.”

….and where is the production from these “producers”?

8^th October 2008:

“The Jolly 16-1 flowed on a 24 hour test at 446 BOPD and over 1 MMCFGPD from the Lower Atoka shales and 100 per cent. oil cut. The flow rate is considerably higher than that reported on 2 October 2008. The well is awaiting delivery of a pump jack and oil storage tanks which are due to be installed within 10 days. The workover rig and frac tanks are being moved to the Jolly 4-13 for completion of the Lower Atoka shales.”

Sounds great… no report of ANY problems in subsequent RNSs – yet as at HAWK’s last interims, there had been negligible revenue from production at ANY projects – so clearly minimal production from this or any other wells.

RNSs go on and on in a similar vein: everything progressing marvellously, never word of any problems but still NO MEANINGFUL PRODUCTION. The finals don’t even state what the actual production was over the year. The only clue is from the low reported revenue.

NB many RNS quote “oil in place”. IMO this is highly misleading for investors. Oil in place has ZERO commercial value unless it can be produced economically.

Finally…

27^th October 2008:

“Our short term objective is to become self funding whilst generating significant value for shareholders through the successful development of Nighthawk's projects. The excellent drilling and testing results to date from the Jolly Ranch project, which incorporates the Middle Mist and Mustang Creek acreages, suggest that our short term objective will be achieved during the current financial year. We believe that the continuing successful development of Jolly Ranch will transform both the cash flow and reserve base of the Company.”

26^th Nov 2008 (AGM day):

“Production is increasing as more wells are brought onstream and output from each well grows. Nighthawk and Running Foxes are targeting the achievement of production in excess of 1,000 barrels of oil per day (gross) during the first quarter of 2009.”

Nighthawk has completely and utterly failed to deliver on these promises, without a word of explanation to shareholders in RNSs. To add insult to injury, the latest results () say this:

“Production, although important, has not been a priority. As stated in the Half Yearly Report for the period ended 31 December 2008, we believe that our efforts are best focused on proving up the extent of the asset to establish the project as a world-class non-conventional shale play, rather than concentrating on generating maximum production at this stage”

The “excuse” given in the interims ( ) was:

“Drilling and completion costs continue to fall and the Board is of the opinion that, with the background of relatively low, albeit improving, oil prices, our efforts are best focused on proving up the extent of the asset to establish the project as a high reward world class non-conventional shale play, rather than concentrating on generating maximum production at this stage.

A major factor in this decision has been our ongoing discussions, together with Running Foxes, with an industry participant in respect of the sale of a minority working interest in the Jolly Ranch Group project area. Discussions are advanced and the Board is hopeful that this transaction, which would set an attractive initial benchmark for the value of the Jolly Ranch Group project, will be completed during April 2009.”

Of course, these discussions with Ascent turned out to be a complete waste of time.

These comments do not give any indication of production problems with the wells, which the subsequent decision to apply horizontal drilling techniques strongly suggest is the REAL cause of this decision.

See also this report on yesterday's AGM for other shareholder views: http://www.iii.co.uk/articles/articledisplay.jsp?section=Markets&article_id=10060377

Regards,

Mark

Nighthawk Energy - The good ol' US of A

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Monkeynuts

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