http://www.theaustralian.com.au/business/mining-energy/punt-pays-off-as-aurora-rides-the-texas-shale-boom/story-e6frg9df-1226563055652
Punt pays off as Aurora rides the Texas shale boom
by: Paul Garvey
From:The Australian
January 28, 201312:00AM
Aurora's executive chairman Jon Stewart says that a strong US economy is key to the company's success in its Texas acreage.
FEW Australians can claim to have witnessed first hand the incredible growth of the US shale industry as Aurora Oil & Gas executive chairman Jon Stewart has.
It was Stewart who first took Aurora, a company born out of the shell of a failed tuxedo hire venture, to Texas in 2005, looking for oil and gas assets from which it could build a real business.
The result was the securing of some prime assets in what would become known as the Eagle Ford shale basin, one of the richest sources of oil and gas to emerge out of the US's extraordinary shale boom.
Perth-based Aurora's punt on a parcel of leases paved the way for one of the better success stories among Australian-listed oil and gas stocks.
Today, the minnow that showed up in Texas in 2005 carries a market capitalisation of more than $1.5 billion and boasts almost 18,000 barrels a day of production, making it the fifth-largest Australian-listed oil producer.
The acreage it secured in the days before the US shale boom took off is now surrounded by some of the biggest names in the oil and gas industry, such as BHP Billiton and Marathon Oil, who have forked out billions of dollars for their positions.
From a low of 10c a share in April 2009, Aurora now trades around $3.50 a share.
"We would certainly say we had our share of luck in the whole process," Stewart says.
"At the end of the day, you can have the most beautiful seismic and all sorts of things, and when you put it through the lie detector and drill it, it's not what you thought it was. For us it turned out very well indeed.
"There was a certain degree of serendipity and luck involved, but it was based on good science."
Aurora's early exploration work showed signs of promise, and the company moved swiftly to try to build its land position.
The then-tiny Aurora needed cash to carry out its plans, but such is the competition for acreage in the US when rumours of discovery break out that Aurora needed to keep the details of its efforts under wraps.
Aurora set out to raise $22 million -- representing about 40 per cent dilution to its equity base at the time -- without being able to go into specific detail about how the money would be used.
"I remember vividly raising that money, and it was done on a 'trust me' basis," Stewart says.
The money was raised, and the acreage was secured. A joint venture in 2009 with the KKR-backed private company Hillcorp Energy saw drilling efforts over the leases step up substantially and put Aurora on the path to production.
Unlike other shale basins that are abundant in gas, the Eagle Ford shale is particularly rich in oil, making the economics of the projects there far more robust.
Hillcorp was eventually swallowed by Marathon in 2011 for $US3.5bn. While Hillcorp had other assets, its most profitable acreage was shared with Aurora.
When Aurora started out, there were two drilling rigs working in the region. Today, there are about 240 actively drilling in the area.
The companies in the Eagle Ford shale are investing an estimated $US28bn ($26.8bn) on drilling and capex there this year, making it one of, if not the, most intense areas of oil and gas investment in the world right now.
Aurora spent $400m on capex and drilling last year and is set to spend in that ballpark again this year.
But unlike the liquefied natural gas projects in Australia, where development can cost tens of billions of dollars and take years to execute, Aurora can convert that investment into cashflow far more quickly.
Spudding a well to cashflow can take as little as 66 days.
As it stands, Aurora is continuing to reinvest much of its cash flows back into more wells and more drilling.
But the prospect of dividends is becoming more and more real, and Stewart says there's no reason "technically" why dividends couldn't start this calendar year.
"To date we haven't sought to pay a dividend because we've been in that sharp growth phase with significant capex spend and we're creating more value for our shareholders by spending it on that growth rather than returning it to them," he says.
"As we move into next year and start generating that cashflow, that'll certainly be on the horizon."
When Stewart first showed up in Karnes County, where the bulk of Aurora's acreage is located, the area ranked as the poorest part of Texas.
A single, lonely Dairy Queen outlet was the only place in town.
The shale boom has turned all that on its head.
New hotels have sprung up around town, and the generous 25 per cent royalties handed to local landowners have more than sorted out the county's previous economic issues.
One of the more notable new arrivals in the region since Aurora showed up has been BHP Billiton, which bought into the US shale gas industry with a wave of big-ticket acquisitions in 2011.
A subsequent fall in US gas prices forced BHP to write down the value of the assets, with the company focusing its attention on its oil-rich Eagle Ford acreage in an attempt to improve the economics.
While many investors were critical of the price BHP paid for its entry, Stewart is adamant that BHP's investment will prove wise in the long run.
"Their timing stank a little, because if they'd been a month or so later they could have got it a bit cheaper, but we knew how good their core assets were and we didn't have any problem justifying what they paid," he says.
"That's going to prove to be a very good acquisition for them, PetroHawk, with lots of upside depending on what happens with the gas assets."
Just what the US does with its sudden glut of domestic gas resources is a topic of much debate in the country.
As it stands, the debate is split over whether the US would derive a greater economic benefit by exporting its gas to other nations -- and potentially driving up gas prices as a result -- or by keeping its gas to itself and boosting its manufacturing industry with low gas prices.
Exports out of the US could potentially undercut Australian LNG producers.
At present, Stewart is unsure which way the US will go.
"If I was going to bet on it I'd sit on the fence and say they're going to grow their LNG exports, but perhaps not at the scale that some people would like to see," he says.
"And perhaps the US government will not want to be seen to be restrictive on trade, but they may not go as fast as they could do in terms of authorising, enabling, incentivising infrastructure development and permitting for (LNG) exports."
Either way, gas contributes only a small amount to Aurora's earnings. Oil prices -- and therefore Aurora's cashflow -- look likely to remain healthy for some time.
"What's more fundamental for us is a strong US economy," Stewart says.
"If the US continues to grow, then it's going to be good for business for us, and a strong US economy is good for the world generally."
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