oilbarrel.com article on aut

Aurora Oil & Gas Raises A$41 Million To Support Shale Play Ambitions


Aurora Oil & Gas has announced a A$41 million fundraising through a placing and share purchase plan to support its shale drilling ambitions in Texas. The ASX-listed company has placed 46.67 million shares at a price of A$0.75 per share to raise A$35 million, bringing a number of new institutional shareholders onto the register, plus a fully underwritten share purchase plan, at the same issue price, to raise the remainder of the balance.
The proceeds will be used fully to fund the company?s planned drilling programme in the Sugarkane field in Texas, which is part of the emerging Eagle Ford Shale trend. The money will also provide some financial flexibility to accelerate the drilling or acquire additional acreage in the area.

This is proving to be an exciting project for Aurora and its backers, putting the small cap company on the frontline of the booming unconventional gas industry in North America. This has been reflected in a share price that has more than doubled since the start of the year, to stand at more than 80 cents a share this week. Analysts are betting that rise will continue as ongoing drilling drives up production and puts the oil junior on the radar of reserves-hungry predators, willing to play a premium for a commercial shales play.

Aurora has bagged itself a participating interest in 50,000 acres of the liquids-rich Sugarkane gas and condensate field in South Texas, which has happily turned out to be an Eagle Ford shale play, one of the more economic shales in the US. The project wasn?t going anywhere fast, however, as the company went into survival mode during the financial crisis and it has only started to motor over the past nine months following a key farm-out deal with Hilcorp Energy, the fourth largest private E&P company in the US and an experienced shale operator.

Hilcorp agreed to carry the small cap company through ten wells, a deal that reduced Aurora?s stake in the Sugarloaf portion of the field to 10 per cent, in the Longhorn portion to 25 per cent and the Ipanema portion to 30 per cent. This is a much more appropriate cost exposure given the potential scale of the development ? there are 500 well locations on the acreage, with 50 expected to be drilled by the end of 2011.

This drilling programme should deliver some serious data about the potential of the shales, which can prove difficult and costly to develop. Some big money has been piling into the Eagle Ford shale, including big hitters like ConocoPhillips and Petrohawk, and their drilling experiences are proving invaluable: wells are now being drilled cheaper, with higher initial production rates and slower decline rates (an important factor in shale plays, where first year production declines can be 80 per cent or more). The well results from nearby acreage has also started to confirm that Aurora?s project lies in one of the sweeter spots of the trend, with a high condensate ratio and high pressure rates.

The condensate is important, particularly given the current low gas price regime in the US. Speaking at an oilbarrel.com event in March 2010, Stewart said about 70 to 80 per cent of the value of the production comes from condensate, even though this is a gas field. ?We break even at a gas price of below US$2.70 because of the condensate ratio,? said the Aurora boss. ?It means we are largely immune to the lower gas prices.?

The joint venture partners are busy with the initial ten well programme under the Hilcorp farm-out. Earlier this month, the company released details of the Rancho Grande-1H well in the Sugarloaf area of the field, which flowed at an initial test rate of 3.19 million cubic feet of gas per day and 1,170 barrels of condensate per day on a restricted choke setting. The company is choking back the well to see if a limited reservoir drawdown can improve decline rates and the ultimate recovery from the wells.

This is part of the ongoing trial and error of process of optimising the development plan to drain the shale rocks effectively. The company is learning as it goes, both from its own experiences and those of nearby operators: it recently, for example, advised investors that it would redrill the Kowalik-1 well because that earlier well didn?t use the completion that is proving more effective on more recent wells.

Some of the more recent wells are certainly delivering some strong production numbers. The first 30 production figures from the Morgan-1H well indicate average daily production equivalent to 19.97 million cf/d, with the Easley-1H well flowing 10.13 million cfe/d. The company said these production numbers were ?very encouraging for the economics of the field?.

The company reckons it could have up to 50 wells on production by the end of 2011, which should deliver 3,700 barrels of oil equivalent per day net to the company. By FY 2013, analysts expect the company to be generating net production of 5,500 boepd and possibly double that by FY 2015. Analyst Jon Bishop of Perth-based Euroz Securities said the company?s equity in the project could see it become a ?significant oil and gas producer.? ?In addition, growing production will support steady growth to reserves, which will make for an increasingly attractive target to larger operators looking to enter or increase their presence in the play,? said Bishop, who in May initiated coverage of the stock with a Buy rating and a price target of A$1.02 a share. ?On this basis and given the current market capitalisation we feel that AUT is significantly undervalued.?