Nighthawk Energy - The good ol' US of A
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 [ref] Small Cap News, 13 February 2009: http://www.smallcapnews.co.uk/article/Interview_with_David_Bramhill_at_Nighthawk_Energy_plc/6707.aspx [/ref] .
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 billion barrels of oil. Broker Hanson Westhouse says this makes Jolly Ranch a 'world class asset' similar to a major North Sea or West African oilfield [ref] Investors Chronicle, 20 July 2009: http://www.investorschronicle.co.uk/Tips/Buy/TipsOfTheWeek/article/20090720/4d1ad342-7528-11de-8d39-0015171400aa/Review-confirms-scale-of-Nighthawks-Jolly-Ranch.jsp [/ref] , and there are estimates that Jolly Ranch could produce USD 200k a month revenue in the near term. The Schlumberger review only covered about two thirds of the total acreage, so there's upside potential for further exploration.
Earlier this year Nighthawk was gifted an abandoned well by the state of Colorado, four miles from Jolly Ranch. The previous operator had given it up, but stimulation of the shales should enable Nighthawk and Running Foxes to improve production to commercially viable levels [ref] Investors Chronicle, 24 February 2009: http://www.investorschronicle.co.uk/Tips/Buy/TipsOfTheWeek/article/20090224/194e3d9a-028e-11de-888e-00144f2af8e8/Nighthawk-expands-Jolly-Ranch-project.jsp [/ref] .
Nighthawk's other main project is Revere, on the Missouri/Kansas border, which has consolidated the Devon oilfield, Buchanan, Worden and Xenia projects. Nighthawk holds 80% of Devon and 50% in the other interests, with Running Foxes as partner and operator. Drilling costs in this area are very low, at USD 50,000 [ref] Nighthawk web site: http://nighthawkenergy.com/NovRevere.html [/ref] , but fluid injection needs to be used to produce the oil owing to the low pressure in the reservoir.
An independent review of this project was released early in 2009 and showed a P50 resource of 210 million barrels gross. However this did not include outlying acreage, so again there is room for an upwards review of resources, which could be significant. There's also room for production to increase markedly as the next year will see many more wells being drilled on the Revere project.
This field is already producing oil, and with the recent announcement that the Xenia gas pipeline is fully operational, it will also be producing natural gas. Five more wells will be brought on stream shortly [ref] Reuters, 3 November 2009: http://www.reuters.com/article/americasMergersNews/idUSBNG49227320091103 [/ref] in addition to the existing eight, flowing over 650,000 cubic feet a day. The company's brokers estimate that gas revenues could reach USD 3.65m in the next year [ref] Proactive Investors, 'Hanson Westhouse retains buy': http://proactiveinvestors.co.uk/companies/news/9848/hanson-westhouse-retains-buy-recommendation-and-target-price-for-nighthawk-after-xenia-update-9848.html [/ref] .
A third project, Cisco Springs in Grand County, Utah, covers 24,000 acres; Nighthawk holds 50%, with operator Running Foxes Petroleum holding the rest. Of 32 wells drilled, 30 produced discoveries of commercial natural gas. 70 historic wells on the acreage have also been re-entered. Production facilities are now in place, though with natural gas prices at low levels, the company has decided not to produce at the moment - instead focusing its capital and effort on its other two key projects at Jolly Ranch and Revere.
The most recent company results showed revenues nearly quadrupled in the year to 30 June 2009 - though still coming in at under half a million dollars - while operating losses were significantly reduced from USD 3.5m to 2.0m [ref] Nighthawk Final Results 2009:http://nighthawkenergy.com/announce31__2009_10_02_Finalresults__-_FINALFINAL.pdf [/ref] . With production ramping up at both its major projects, the company is 'close to transformation' [ref] Investors Chronicle, 15 October 2009: http://www.investorschronicle.co.uk/articlessummary/index.jsp?destination=http://www.investorschronicle.co.uk/Tips/Buy/TipsOfTheWeek/article/20091015/0d74c04e-b354-11de-b38a-00144f2af8e8/Nighthawk-close-to-transformation.jsp&Cond=5 [/ref] , and should see profits next year for the first time.
There are a couple of issues. One is the fact that Nighthawk relies on a single operating partner, Running Foxes Petroleum, a privately held company. That does represent a potential risk factor - though currently the relationship seems to be working well. 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. (The failure of the sale of 20% of Jolly Ranch this summer, which was announced but not proceeded with by the purchaser, may also have left a bad taste in investors' mouths.) In August, the company raised USD 37m in a placing, and the company estimates its current funds will finance the development programme for at least another year, including a further 20 wells and some new seismic at Jolly Ranch, and a large number of water injection wells and oil production wells at Revere to increase production rates.
The company's balance sheet is now strong - it remains debt-free - but the shares are trading at only 39p, against an earlier high of 116p.
Valuing the company is not easy on a PER basis given that this will be its first year of profit, and profits are likely to be marginal. It seems more likely that the resource based valuation typically applied to explorers will continue to be the right one, and on this basis Hanson Westhouse, the company's broker, values the shares at 225p. Unsurprisingly, given the disparity between this valuation and the share price, Hanson Westhouse gives the shares a buy recommendation.
There is some good potential upside. The current resource estimates don't cover the whole project areas, and if the reservoirs underlie the remaining acreage there's room for a big increase in resources. That's not in the price. And as production increases, the company should start generating profits - which is definitely a good place to be, compared to the many small oil companies which are continuing to lose shareholders' money hand over fist.
Longer term, Nighthawk isn't going to be able to develop its projects all on its own - or even with Running Foxes. Its two major projects are large enough for a Chevron or Exxon to be interested. So while the company is making progress on getting them into production and showing that they can be profitable, the end game is to sell them on - either through a sale of the prospects, or perhaps, ultimately, through a takeover of Nighthawk itself.
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3 comments
DB and Mark, thanks very much for the detailed comments. I take all this onboard. To be fair, I am not a holder of this stock so my assessment above was very much outside-in based on taking the management statements at face value. If you tell me that management information is unreliable, then clearly that's new information that might impact my assessment of the stock.
Not necessarily, though - the fact that production has so far been disappointing, and that management communication has been poor, isn't necessarily a reason not to invest. Indeed, general shareholder frustration could be depressing the share price and lead to an attractive mispricing, which could be corrected on significant newsflow. I guess it all comes down to whether you believe the independent reviews of the assets and whether management will ever get there.
Clearly, at a certain point, management's ability to deliver gets called into question and it sounds like your view is that we are past this point. It's too early in my assessment of the business for me to comment, but your comments are very helpful and I will certainly be keeping a close watch.
Monkeynuts
This is probably the most misleading article I have seen on Stockopedia. Mark has listed a whole load of missed promises by the company, I will just highlight a few.
[it] 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 .
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).
All sounds wonderful! However you don't mention the fact that at the AGM last year, they announced Production of 1,000 barrels of oil per day (gross) targeted to be reached during the first quarter of 2009. So that was a target for less than 5 months away, and they had just raised a load of money - they should surely have been pretty confident that they could deliver on it, no? And if they failed, you would expect explanations to shareholders about what went wrong - contractor failure, dry holes, rapid decline of production rates whatever.
But since then trying to get any meaningful data on production from them has been like drawing teeth. Talking to Bramhill after the AGM last year, he promised regular updates on production - at least quarterly - but there has been nothing. How many oil companies actually do not state in their Finals what their production has been? And despite trumpeting such a great drilling record this year, they are still nowhere near their 1,000 b/day production target for end Q1.
The RNS yesterday said The directors are of the belief that lateral well technology, as demonstrated in the Bakken shale oil fields, should also be applied in parallel with vertical drilling at Jolly Ranch, potentially providing enhanced rates of return over and above those already demonstrated. Which is in depressing contrast to what Bramhill said at the previous AGM when he described horizontal wells as 'expensive and unecessary'.
Anyone interested in investing in this company should start by reading up about last year's AGM here: http://boards.fool.co.uk/Message.asp?mid=11337481&sort=whole. After that, many PIs decided that this company smelled bad. After the recent year and the astonishing lack of communications from the company about dismal production, many more PIs have decided the same.
db
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):
3rd 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.]
9th 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.”
18th 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 5th 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…
21st 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”?
8th 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…
27th 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.”
26th 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