our share of sugarloaf ami worth abit?

Marathon runners

Wednesday, 30 January 2013
James McGrath

IS PUTTING all your eggs in one basket ever a good idea? US-focused Aurora Oil & Gas certainly thinks so.
Last week EnergyNewsPremium sat down with Aurora executive chairman Jon Stewart who says risk is a relative term.

“Diversity is a two-edged sword,” he said.

“We think what’s most important for our shareholders is maintaining quality of investment, maintaining returns and not seeking to materially change the risk profile of their investment.

“While we have one project in one area, it’s quite a large project and is virtually completely de-risked in terms of production levels, infrastructure, reserves we have in place … it’s all there.”

He was referring to the Sugarkane project in the almost-fabled Eagle Ford shale region of Texas, with Aurora currently holding a net 19,100 acres in Karnes County.

Aurora was formed in 2005 with Stewart venturing out to seek private backers, plus finding a bit of retail funding along the way.

His desire to try his luck in the US was largely driven by his experience in the former Soviet Union in the 1990s.

“Having done that type of project formation and operation where you have relatively low technical risk but higher jurisdictional risk, I was more interested in the opposite and prepared to go to a more reasonable jurisdiction in the US, even if the trade-off was higher technical risk,” he said.

With money in hand, Stewart was able to strike up a partnership with private company Texas Crude Energy, farming into what is now known as the Sugarloaf Area of Mutual Interest to drill a deep prospect.

“We encountered an over-pressured liquids-rich zone in the Austin Chalk, transitioning from what was a shaley looking chalk to a zone which was chalky looking shale, which is now referred to as the Eagle Ford,” Stewart said.

That was the signal for something of an acreage acquisition spree, which Stewart described as the highest risk part of the Aurora story to date.

Having snapped up some more acreage, Aurora decided it needed to put some wells into production as soon as possible to demonstrate the potential of the play.

Enter Hilcorp Energy, which farmed into Aurora’s acreage and drilled 13 wells in 2010.

The results were impressive enough for Hilcorp to start buying acreage on trend.

However, the activity soon caught the eye of a larger fish.

In late 2011 Marathon Oil Corporation bought out Hilcorp’s position for $US3.5 billion ($A3.35 billion) and subsequently spent a further $2 billion on acquisitions and $1.5 billion on development in the Eagle Ford to date.

It is also looking to spend about $1.9 billion this year.

That spending means a lot of drilling.

“Marathon is simply trying to make their money back on the acquisition as soon as possible,” Stewart said.

The increased drilling meant Aurora exited 2012 with net production of 13,850 barrels of oil equivalent per day net from about 50 wells. Importantly, about 80% was derived from liquids.

The growth in production from Aurora’s interest in the Sugarkane field has driven almost exponential growth in revenues.

In the first quarter of 2012 it chalked up $39.5 million, in Q2 it managed to wring out $57.5 million and in Q3 it recorded $85.4 million.

With 139 gross wells planned for 2013 (of which 40 will be net to Aurora), the company decided it needed to borrow in order to keep up with Marathon.

In 2012 Aurora completed two bond issues and now has $365 million worth of notes in the market.

It also has a revolving borrowing facility of $150 million, although it could increase to $300 million depending on reserves growth.

It also swung two acquisitions of additional interest in the Sugarloaf AMI, including a $107 million takeover of Australian Securites Exchange-listed company Eureka Energy, signalling its appetite for the play.

In fact, RBC Capital Markets gave the deals an average acreage valuation of $65,000 per acre as opposed to the $250 per acre Aurora originally paid for its position.

Is Stewart worried about the debt on the books required to keep up with Marathon and increase its position in the field?

“The level of debt we have compared to our production profile and our market cap is very modest and, in fact, that funding is way more than we actually need,” Stewart said.

He says concerns over Aurora’s debt position are a matter of perspective.

“You would struggle to find too many North American companies of our size with a balance sheet as pristine as ours and that’s the comment we often get when we’re presenting in North America,” he said.

For Stewart and Aurora, the borrowing is worth it.

He maintains that he expects Aurora to become cash-generative by the end of the year on the back of the frenzied drilling program lined up by Marathon.

“That’s a really significant step for a company involved in a development of this size,” Stewart said.

“At that point the project is paying for itself and we’ll have a significant inventory of wells to drill over the next few years.

“At that stage, given we’re already profitable, we’ll be looking towards paying dividends to shareholders … which as a shareholder I’m looking forward to.”

Two key pilot initiatives could make that assertion a mere formality.

Firstly, Marathon is seeking to tap the shallower Austin Chalk on 60-acre spacing to offset existing wells and secondly, it is seeking to drill horizontal wells into existing production horizons on closer 40-acre spacing rather than the traditional 80 acre spacing it had been working with.

“What we’re trying to understand at the moment is if we drill two horizontal wells relatively close to each other, are we affecting the performance of either well by doing that?” Aurora technical director Ian Lusted said.

“We’re also trying to understand how many of these [stimulated wells] we have to stack in … in a 3D sense, to efficiently and effectively recover our reserves from the reservoir.”

On 80 acres, it’s assuming there’s 660 feet between the horizontal wellbores.

What Aurora is doing as part of the pilot program is seeing what happens when it moves from 660ft to 350ft spacing.

Aurora looked at its reserves report and saw that the ratio of reserves against recoverable reserves was quite low, in the order of 10% to 12% in the gas condensate window, Lusted estimated.

It subsequently trialled a program in the middle of last year to wring out some more production from current producing formations.

“What happens to the well performance?” Lusted said.

“How do these wells behave and also what happens when some do vertical offset?

“So if I don’t have any interaction between the wells, at least in principle I’m doubling the well count if I’m doing 40-acre spacing versus 80-acre spacing.”

While Lusted remained coy on the results of the project to date, he did say the results were “encouraging”.

Investors should be on the lookout for results from the trial in the second quarter.

A positive result from the trial could help underline the growth potential of the Sugarkane asset and show potential investors that its one asset has multiple development options left to explore.

“I think among most of those who know our project there’s considerable recognition of the quality of our asset and the strategy we’ve followed and subsequently the results we’ve had,” Stewart said.

“There’s still a broad section of the market that don’t know who we are.

“That’s certainly the case in other parts of the world which we consider to be an opportunity for us in terms of reaching out to investors.”

The desire to reach out to new markets with the Aurora story led it to appoint Houston-based chief executive officer Douglas E Brooks last year to help take care of the business and interface with North American clients.

Before Brooks’ appointment, Stewart and Lusted were road-warriors, with Stewart estimating that the pair spent about 28 weeks away from home each year.

With the North American market serviced with a new CEO, Aurora is keen to get out and talk to potential investors (and journalists).

“There are a lot of investors in Europe and the US in particular who know little about this company and we think it’s a solid story with significant upside,” Stewart said.

“Now we’re a bit better resourced having hired a new CEO based in Houston, it does allow us to more effectively cover more of the planet in terms of investor relations.

“It also means we’ll have a bit more time to focus on Australia and to some degree western Europe … London in particular.”

The message being that you’ll be hearing a lot more about Aurora Oil & Gas this year and a lot more about the diverse opportunities for growth in the one basket.

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