re: Ann: Eagle Ford Shale Quarterly Update an... Despite a solid...

re: Ann: Eagle Ford Shale Quarterly Update an... Despite a solid share performance over the last year and increasing quarterly revenues, there are still significant causes for concern for those who understand shale oil production and have an eye on the downside risks. The recent March production rate of ~ 3,800 boepd is disappointing, but not unexpected. They are clearly having difficulties increasing the total rates and this is fundamentally due to the rapid declines that these wells experience and the high completion rates required just to offset lost production due to well declines.

There is a strong possibility that AUT may fall well short of their end of 2012 target of 14,000 boepd post royalty. The limiting factor here is how quickly they can stimulate and complete the wells. They have recently introduced a 3rd frac crew in March, because they understand the urgency to get more wells producing per quarter.

Simply plotting all the past reported rates shows that the increase in production rate is beginning to slowdown and ‘flatten off’. This effect was happening prior to the workover program in 4Q 2011. The average rate at which they bring new wells on production is ~ 19 wells per Q over the last 4 quarters. The ‘flattening off’ is due to the fact that this ‘well completion rate’ of 19 well/Q is only just enough to offset the decline in production from existing wells. A simple extrapolation of the data clearly indicates that, if they continue at completing 19 wells/Q, then the final 2012 rate will probably be less than 5,000 boepd.

AUT said they recently introduced a 3rd frac crew and the March production number included the impact of additional crew. AUT also allude to introducing further frac crews throughout the year. But no firm plans as yet have been outlined in the quarterly to introduce more crews after that. It’s easy to see from the plot that a massive step change in completions per Q is required to achieve the end of 2012 rate target. AUTs plans so far do not appear to be enough to achieve this.

And next year will be even harder to maintain rates. The more wells you have on production, the more wells you need to complete per Q just to replace declining production from the existing wells.

As an investor, I would be asking AUT why the current rates are behind plan? how many wells do they need to bring on production each quarter to offset decline in existing wells? is the current frac program sufficient to increase rates as per AUT forecasts?

I would also be wondering about the current Mkt Cap of AUT and especially the reserves base, which is what largely drives the current sp, but is essentially unproven in the long term.