Nighthawk Energy - Edison Investment Research

Transcription

Outlook
15 February 2010
Price
Market Cap
Nighthawk Energy
Year
End
Revenue
($m)
PBT*
($m)
EPS*
(c)
DPS
(c)
P/E
(x)
Yield
(%)
06/07
0.1
(1.5)
(1.3)
0.0
N/A
N/A
06/08
0.1
(2.5)
(1.3)
0.0
N/A
N/A
06/09
0.5
(1.7)
(0.6)
0.0
N/A
N/A
06/10e
3.1
0.5
0.2
0.0
N/A
N/A
28.3p
£93m
Share price graph
Note: *PBT and EPS are normalised, excluding goodwill amortisation and exceptional items.
Investment summary: US mid-tier E&P potential
US-focused Nighthawk has the potential to evolve from E&P junior to mid-tier status
over the next two or three years. In 2009 Nighthawk made considerable progress in
de-risking its key Jolly Ranch and Revere projects. Visibility on a sizeable reserve
position should improve radically in the coming months. There is scope for a sharp
Share details
Code
Listing
Sector
Shares in issue
HAWK
AIM
Oil & Gas
329.6m
upturn in the stock if, as we suspect, the development related news flow is positive
in the coming months.
Price
52 week
Resources and production: Substantial resource base
Nighthawk has substantial net oil-in-place at the Jolly Ranch and Revere projects of
730mm and about 123mmboe respectively. Tentatively, we believe Nighthawk could
have recoverable reserves of about 220mmboe un-risked and 122mmboe risked.
Production is about to gain momentum, reflecting intensified development and well
test work, particularly at Jolly Ranch.
Jolly Ranch: A potential company maker
Jolly Ranch is a large-scale shale oil play located in the Denver Basin of eastern
Colorado. It is broadly analogous to the Great Plains Bakken plays and based on our
estimate of possibly over 200mmboe is a potential company maker. The oil is sweet
High
57.3p
Low
22.6p
Balance Sheet*
Debt/Equity (%)
NAV per share (c)
Net cash ($m)
N/A
35
17.0
*NAV and net cash are estimated
Business
Nighthawk Energy is a UK registered oil
and gas junior with four development
projects in the Mid-Continent and Rocky
Mountain regions of the US. The largest
in terms of reserve potential is the Jolly
Ranch shale oil play in Colorado.
and light and the production economics are compelling. We have recently visited the
Jolly Ranch property and discussed with the managements of Nighthawk and the
Valuation
2008
2009
2010e
P/E relative
N/A
N/A
N/A
P/CF
N/A
N/A
N/A
EV/Sales
N/A
N/A
28.1
ROE
N/A
N/A
N/A
Geography based on revenues
UK
Europe
US
Other
operator the status of the project.
Revere: Waterflood project
Revere is an advanced-stage waterflood project located in the Cherokee Basin of
south-eastern Kansas and western Missouri. Historically, the basin has been a major
oil and gas producing province based on Bartlesville Sandstone reservoirs. The oil is
of medium quality, the production economics are attractive and capital costs are low.
Significant quantities of gas are already being produced from the Xenia field, part of
the Revere project.
Valuation: Considerable upside potential
We believe that Nighthawk can justify a valuation on a 12-month view of $488m or
N/A
Analysts
Peter J Dupont
N/A
100%
N/A
020 3077 5700
[email protected]
95p/share. This is based on our assessment of risk-adjusted recoverable reserves of
122mmboe, a $4/boe valuation quotient and an exchange rate of $1.56/£.
Farid Abasov
020 3077 5726
[email protected]
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Nighthawk Energy is a research client of Edison Investment Research Limited
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2 | Edison Investment Research | Outlook | Nighthawk Energy | 15 February 2010
Investment summary: The key is unlocking Jolly Ranch
Company description: US Mid-Continent and Rockies focus
Nighthawk is an oil and gas junior focused on development opportunities in the Mid-Continent and
the Rocky Mountain regions of the US. The strategic thrust project-wise has been on abandoned oil
and gas fields and prospective zones within mature producing provinces. The rationale behind this
approach is that the upward trend in prices in recent years combined with technological advances
has opened up re-development opportunities or, in the case of the shale plays, completely new
opportunities. The aim is to develop projects to a stage where they become attractive to a larger
independent rather than necessarily to evolve as a hydrocarbon producer. We would expect projects
to be sold largely on the basis of the price per barrel of potential recoverable reserves.
Nighthawk has four projects. The most important in terms of potential scale is the shale oil play,
Jolly Ranch, in eastern Colorado. This is broadly analogous to the Bakken plays in Montana and
North Dakota and is a potential company maker. In 2009 Schlumberger estimated the P50 oil-inplace for around two-thirds of the Jolly Ranch property at 1.46 million barrels of oil equivalent
(mmboe) gross. There is the potential for positive news flow in 2010 reflecting the drilling
programme, 3D seismic surveys and an anticipated upward trend in production from nominal levels
in 2009 to possibly over 1,000 barrels a day (b/d) gross in the coming months.
The Revere waterflood project in Kansas/Missouri could also see significant production gains in
2010 driven by development activity. More important for valuation in the near to medium term than
production is resource definition. During 2010 we expect greatly improved visibility on the potential
scale of the resource base at Jolly Ranch combined with production gains to drive the stock.
The valuation presently is to a considerable extent already underpinned by the Cisco Springs
operations, which have 24mmboe of 2P reserves and an established production infrastructure.
Financials: Production to drive earnings in 2010/11
Reflecting its status as an oil and gas junior development company, Nighthawk has incurred pretax losses in the years ended June 2008 and 2009 of $2.5m and $1.7m respectively. We believe,
however, that performance will improve significantly in 2010 owing to rising production in the
second half of the year. On a reported basis we see scope for a pre-tax profit of about $0.5m on
sales revenues of $3.1m based on an average production rate of 140 boe/d. This assumes that all
operational costs continue to be capitalised. There is inevitably a degree of uncertainty about the
outlook for 2011 and 2012 but we believe Nighthawk should be comfortably profitable at the
EBITDA and probably the pre-tax levels based on our production forecasts. This applies even if
there is a change in accounting methodology from capitalising development costs to expensing
operational costs through the income statement.
Nighthawk started the current financial year with a sizeable cash position of about $42m following a
share placing of $37m in August 2009. As of end January 2010 we believe the cash balance was
about $17m which is adequate to comfortably finance the current development programme.
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Sensitivities: Five key risks
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Development and appraisal risk: Further development work is required at Jolly Ranch to
determine the potential for recoverable reserves and production.
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Operator risk: All operational matters are the responsibility of a privately held company
which is also Nighthawk’s joint-venture partner.
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Oil and gas price risk: Like all oil and gas concerns, commodity prices are critical in
determining viability.
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Cost inflation: Project economics could be adversely impacted by an escalation of costs,
with steel tube being particularly significant.
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Financial risk: Nighthawk may require further significant capital outlays to complete
development work and therefore needs a benign capital market environment.
Valuation: Largely under-pinned by Cisco, scope for upside
We believe that Nighthawk can justify a valuation on a 12 month view of $488m or 95p/share,
assuming that the development related news flow is as positive as we expect. This is based on
estimated risk-adjusted recoverable reserves of 122mmboe, a $4/boe valuation quotient and an
exchange rate of $1.56/£. The valuation quotient reflects sector data and takes into account the
existence of very high quality oil at Jolly Ranch. With further development at Jolly Ranch a
considerably higher valuation is possible. Assuming solid indications of corporate net recoverable
reserves of over 200mmboe, which we believe is possible, a valuation in excess of 200p/share
would be plausible.
News flow potential: A potentially interesting news flow pipeline
We believe the key items of news in 2010 will relate to rising production, particularly at Jolly Ranch.
With this in mind, it is likely that there will be regular updates on production probably at the end of
each quarter. Near term in late February and March, we also believe that there will be news
surrounding the following issues:
•
Jolly Ranch seismic survey results along with potential new drilling targets.
•
Jolly Ranch operational update.
•
Revere operational update including the status of production and resources at Xenia.
In the second half of 2010 we believe that a new independent survey may be commissioned to
assess the resource base at Jolly Ranch across a broader area than hitherto.
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Company description: Mid-Continent and Rockies
Business background
Nighthawk Energy is an oil and gas junior focused on development opportunities in the US. It
currently has four projects located across the Mid-Continent and the Rocky Mountain regions
between Illinois in the east and Utah in the west. Interestingly, Nighthawk also has an energy
investment portfolio valued at over $1.5m and with an annual dividend flow of about $140,000.
Nighthawk commenced operations as a private company in April 2006 and was floated on AIM at
25p/share on 12 March 2007. Since the float, $125m has been raised in equity issues. With a
market capitalisation of £91m in early February 2010, Nighthawk (HAWK) is one of the larger AIM
stocks and is a constituent of the AIM UK 50 Index. It is also quoted on the OTCQX International
market in New York (NHEGY).
The company was the brainchild of the CEO, David Bramhill. An engineer by background, he has
considerable knowledge and experience of the petroleum industry. This stems from his
entrepreneurial and managerial involvement with several junior oil and gas companies and his longtime involvement with Rotork plc, a leading supplier of valve actuation equipment to the petroleum
and process industries. Executive Chairman Michael Thomsen is a US citizen and geologist with a
wealth of experience with Freeport McMoRan, Goldfields and Newmont Mining.
Operations: Joint-venture with the operator
All operations are the responsibility of Englewood (south side of Denver) based Running Foxes
Petroleum (RFP), a privately held US company which is owned and managed by the highly
experienced and well qualified oilman, Steve Tedesco. He is a geologist by background and
originally worked for Mobil and Shell in their coal divisions. Since the mid 1980s, he has been
involved as an independent in oil and gas exploration and production. Significantly for Nighthawk,
Steve Tedesco’s particular area of expertise is unconventional reservoirs based on coal and shale.
RFP is an equity partner with Nighthawk in all projects and is responsible for all property
management issues, acquisitions of leases, drilling programmes, well testing, production rates and
sales of oil and gas. The company has a headcount of 20 and largely operates on joint-venture
projects with Nighthawk. Exploration and development costs for each project are shared pro-rata
to the Nighthawk and RFP equity interests. Michael Thomsen and David Bramhill are responsible
for liaising with RFP on operational and administrative matters. Accounting matters in the US,
including accounts payable and receivable, are handled by a Denver-based accounting firm. All
data are subject to a full audit in the UK.
Strategy: Redevelopment projects and shale oil play
In seeking development projects, Nighthawk/RFP has focused on abandoned oil/gas fields and
prospective zones in mature petroleum producing provinces. Particularly important of late in this
regard has been the appraisal and development of what appears to be a substantial shale oil play
in eastern Colorado. The rationale behind the ‘vulture’ strategy practised by Nighthawk/RFP is that
the upward trend in oil and gas prices in recent years combined with technological advances in
seismic and production technology has provided redevelopment opportunities or in the case of
shale plays has opened up completely new development prospects. The Mid-Continent offers
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potentially rich pickings for a ‘vulture’ strategy given the availability of shale plays, the existence of
mature petroleum producing provinces, the ready access to infrastructure and oilfield services and,
until recently at least, a lack of interest in the region by the majors and large independents.
In the first instance the strategic objective behind Nighthawk’s development activity is to establish a
solid indication of resource at each of its key projects, provided they have critical-mass. Once the
resource potential has been established, the project can then either be offered for sale to a third
party or retained for commercial production. The market for petroleum assets is very well
developed in the US and many medium to large scale independent E&P companies are
headquartered in the Mid-Continent. Denver itself is home to several mid-tier independents such as
Bill Barrett Corporation (BBG-NYSE) and Cimarex Energy Co (XEC-NYSE) as well as the AMEXlisted junior, American Oil & Gas (AEZ).
Headcount and general and administrative overhead
Reflecting the outsourcing of operations to RFP, Nighthawk’s headcount and general and
administrative overhead are both modest, given the scale of its projects. Including non-executive
directors, the headcount in 2009 was seven. The head office is located in Bristol and there are two
small executive offices in London and Englewood, on the south side of Denver. General and
administrative expense for the year ended June 2009 was $2.5m. For 2010 general and
administrative overhead is expected to be similar to the previous year.
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Resources and production
Resources: Sizeable oil-in-place
In our view, Nighthawk is well placed to establish a large-scale recoverable reserve base at Jolly
Ranch and Revere over the next two or three years in a move that could propel the company into
the ranks of the US mid-tier independents. We would define mid-tier in terms of market
capitalisations of over $1bn.
The focus of development activity is currently and, indeed, will be for the foreseeable future, the
Revere project in Kansas/Missouri and particularly the Jolly Ranch shale oil play in Colorado. This
reflects the far greater potential scale of these than the other two projects. In 2009 Schlumberger
estimated the P50 oil-in-place at Jolly Ranch at 1.46bnbbl gross or 730mmbbl net to Nighthawk.
Further development work is required here to identify the recoverable reserves but we believe
there is a distinct possibility that there could potentially be around 150mmbbl net or even in excess
of 200mm. It should also be noted that reserves in this context refer to highly prized, light, lowsulphur oil.
At the Revere project the scale of the resource base is considerably less than at Jolly Ranch but is
nevertheless highly significant. Furthermore, there is plenty of scope for upside. The oil-in-place at
Revere has so far been independently assessed by Oilfield Production Consultants at 219mm
gross or an estimated 123mmbbl net on a P50 basis. Once all zones within Revere have been
evaluated we believe the oil-in-place could increase to over 400mmboe gross. This would suggest
recoverable reserves of perhaps 90mmboe gross and around 50mm net to Nighthawk.
Based on the above, a very tentative estimate of the recoverable reserve potential across
Nighthawk’s three main projects could be around 225mmboe on an un-risked basis. Risked, the
reserve base could approximate to 125mmboe.
Exhibit 1: Project locations
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Source: Nighthawk Energy Investor Presentation
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Production: Gathering momentum
Nighthawk’s production since inception has been nominal and has largely related to well testing
operations. Currently, we believe production is running at about 360boe/d gross or approaching
200boe/d net. A sharp increase in production is anticipated in the coming months. This reflects
intensifying well test and development work at Jolly Ranch and Revere. We believe that it is
possible that gross production across the joint-venture could be running at about 1,250boe/d by
end 2010 and perhaps around 1,800boe/d by late 2011.
Any production forecasts and particularly those after 2011 must be considered highly tentative at
this juncture. If reserves, particularly at Jolly Ranch, turn out to be as large as expected there is
scope for a quantum increase in production post 2011/12. Very tentatively, production could reach
over 2,000boe/d gross in 2012 and maybe 5,000boe/d gross in 2013. Over the following five years
we believe 10,000boe/d gross is a possibility, although we would not expect Nighthawk/RFP to be
the owner of the assets in these circumstances.
Exhibit 2: Nighthawk/RFP gross production scenario boe/d
Note: Gas has been converted to barrels of oil on the basis of 1 barrel=6,000 cubic feet.
Project
Jolly Ranch
Revere
Total
Revere: Oil
Natural gas
Net production
Source: Edison Investment Research
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End Jan
2010e
150
180
330
80
100
182
End
2010e
1,000
240
1,240
110
130
645
End
2011e
1,500
290
1,790
160
130
924
End
2012e
2,000
310
2,310
180
130
1,178
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Project review
Overview: Four projects
Nighthawk’s four development projects are Jolly Ranch in Colorado, Revere in Kansas/Missouri,
Cisco Springs in Utah and Cliffs in Illinois. It has working interests of 50% in Jolly Ranch and Cisco
Springs, between 50% and 80%, depending on the zone, in Revere and 80% in Cliffs. The
balancing equity stakes are owned by RFP. Nighthawk has indicated its intention to concentrate
development expenditure on the Jolly Ranch and Revere projects reflecting their potentially far
greater scale in terms of reserves than the other two. The disposal of Cliffs, an early stage New
Albany Shale gas play located about 175 miles south of Chicago, is under review.
Jolly Ranch: Major shale oil play
Location, geology and project profile
Jolly Ranch is shaping up as a major shale oil project and offers the greatest potential of the four
projects in terms of reserves and production. It could well prove a company maker. We have
recently had the opportunity to visit the Jolly Ranch property and to discuss with the managements
of Nighthawk and RFP the status of the project.
Shale plays relate to petroleum generating systems based on organic-rich source rocks that
typically, in the absence of natural fractures, are characterised by low or ultra-low permeability.
Owing to this characteristic, along with what is often a complex shale matrix, the oil is usually difficult
to extract. However, shale plays are typically laterally continuous over very large areas and contain
substantial quantities of oil-in-place. For this reason they are often referred to as resource plays.
Jolly Ranch is located in the Denver Basin about 115 miles south-east of the city of Denver and
approximately 25 miles south of Interstate Highway I-70 at the settlement of Limon. The Denver
Basin is a large sedimentary zone covering about 70,000 square miles in north-eastern Colorado,
south-eastern Wyoming and parts of Nebraska, Kansas and South Dakota. It is bounded on the
west by the Rocky Mountain Front Range and in the south-east and the north-east by the
structural highs of the Las Animas and Chadron Arches respectively.
Exhibit 3: Jolly Ranch project location
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The Denver Basin is asymmetric with a steeply dipping western and a more moderately dipping
eastern flank. The strata are extremely thick in the west at around 15,000 ft but thin to the east.
Jolly Ranch is located on the westward dipping eastern flank about a quarter of the way across the
Basin moving east to west. The rocks in the Basin range in age from the Cambrian to the Tertiary.
Historically, significant quantities of oil have been obtained in the Denver Basin from conventional
reservoirs in Cretaceous formations but some production has also been obtained from
considerably older and deeper Pennsylvanian or Upper Carboniferous Marmaton sandstones and
Cherokee and Atoka shales. The shales are interbedded with carbonates and are typically organic
rich. Where mature, they provide the source rock for expelling hydrocarbons the short distance into
the adjacent conventional reservoirs. Alternatively, the shales can themselves constitute both the
source rock and unconventional reservoirs. The Marmaton sandstone is associated with
conventional reservoirs.
Exhibit 4: Denver Basin location and extent
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Source: Nighthawk Energy
Exhibit 5: Denver Basin west-east geological cross section
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Source: Nighthawk Energy
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Exhibit 6: Jolly ranch simplified stratigraphic column
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The Jolly Ranch property itself covers a very large land area of around 370,600 gross acres, a
scale that is more typical of the properties owned by a large independent or even a major. Jolly
Ranch contains three oilfields, while in close proximity in Lincoln County there are a further eight.
Wells were drilled at Jolly Ranch in the 1980s and 1990s by Mull Drilling Co, BHP Petroleum and
Anschultz Exploration. The first two produced oil from the Cherokee and the last mentioned from
the Atoka formation. Production was abandoned after short durations due to uneconomic prices
and possibly poor well completion practices. Data from these wells, however, assisted RFP in
concluding that Jolly Ranch contained sizeable resources. Currently in Lincoln County, WeipkingFullerton is producing oil from the Cherokee formation while Newfield, Citation Oil & Gas and
Ritchie Oil & Gas are producing from the Marmaton. Weipking-Fullerton is understood to be
producing about 1,500b/d from its operations about 20 miles north of Nighthawk’s well sites.
Significantly, much of the acreage on the north-east side of Jolly Ranch is owned by one of the
largest independents, Anadarko Petroleum. So far, Anadarko has not undertaken any exploration
or appraisal work.
Exhibit 7: Jolly Ranch overview
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RFP commenced a multi-hole drilling programme in March 2008 in two core areas of a 50,000 acre
zone towards the south of the Jolly Ranch property. Subsequently, 15 vertical wells and one
horizontal offset well have been drilled. The key targets have been the Marmaton, Cherokee and
Atoka formations at depths of 7,500 to 9,000 ft. The results have been positive with all
encountering multiple pay zones. Well tests have also confirmed economic production rates. Craig
4-4, for example, has been consistently producing at about 70b/d since July 2009 and for shorter
periods production rates of up to 200b/d have been achieved. Significantly, all wells, other than
those which have been allocated for water disposal, have been cased as producers. The oil
produced has been of high quality with an API ranging from 32 to 39 degrees and commands a
premium to WTI by virtue of this characteristic together with the low sulphur content.
To begin the resource definition process, Schlumberger was commissioned in July 2009 to assess
the oil-in-place (OIP) covering 246,000 acres in the Marmaton, Cherokee and Atoka formations.
The Schlumberger study estimated a P50 or most likely OIP of 1.462bnbbl. The more mature
Atoka formation, not surprisingly perhaps, had the highest value of organic rich shale accounting
for almost 15% of total rock volume. Schlumberger also undertook an assessment of the OIP
across a larger 885,000 acres in the Denver Basin of eastern Colorado. The P50 OIP here was
estimated at 5.258bnbbl. Furthermore, the shales were assessed to be laterally continuous in the
south-east of the Denver Basin which has very significant implications for the total Jolly Ranch
resource base.
Exhibit 8: Schlumberger Jolly Ranch assessment area
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The key issue now concerning Jolly Ranch is the potential recovery rate. Owing to low porosity and
permeability characteristics, shale oil primary recovery rates are notoriously low without enhanced
recovery. Until recently at least, rates of 5% to 15% would probably have been considered good.
This compares with 30% to 35% for typical conventional reservoirs. Even a recovery rate of 10%
would, however, suggest reserves across the 246,000 acres assessed by Schlumberger of
146mmbbl gross or 73m net before royalty entitlements, a significant reserve for a junior from one
property. Pro-rated for the full extent of the Jolly Ranch acreage, recoverable reserves would
increase to 220m gross or 110m net.
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The ability to economically enhance shale oil recovery rates has improved radically over the past 10
or so years reflecting the advent of horizontal drilling and multi-stage, high pressure hydraulic
fracturing. The former allows maximum exposure to the reservoir while the latter facilitates oil flow
along the wellbore following the creation of large fractures in the reservoir material. Operators in the
Bakken shale oil play using the latest iteration of horizontal drilling and hydraulic fracturing
technology are now pointing to previously unheard of recovery rates of over 20%. Based on a 20%
recovery rate and the Schlumberger estimate of OIP across the 246,000 acres assessed,
Nighthawk would have a highly significant recoverable reserve base of 146mmbbl net of light
crude. Pro-rated for the full extent of the Jolly Ranch acreage and we could be looking at
220mmbbl.
Analogy to the Bakken
Excluding Jolly Ranch, there are currently three other tight shale oil plays in the Mid-Continent.
These are:
•
the Bakken formation in the Williston Basin of Montana, and North Dakota in the US and
Saskatchewan in Canada,
•
the Barnett Combo shale in north Texas, and
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the Niobrara formation in the Powder River Basin of Wyoming.
Out of the three, the Bakken formation is by far the most important in terms of production.
Elsewhere, oil output is gathering momentum in the Barnett Combo, while in the case of the
Niobrara, production is still marginal. There are also shale oil plays in the Rockies and California,
but these tend to be based on hybrid petroleum systems associated with conventional reservoirs.
Nighthawk/RFP believes that the closest analogy to the Jolly Ranch shale oil play is the Bakken
formation. The Bakken covers about 200,000 square miles and comprises sediments of late
Devonian and early Mississippian age. At an age of about 360m years these are around 50 million
years older than the Jolly Ranch shales. The Bakken formation comprises three zones with the
upper and lower consisting of organic rich shales while the middle consists of sandstones,
siltstones, dolomite and limestone. All three have been targeted for drilling, although the primary
objective has usually been the middle member. Recently, a new deeper Devonian shale play called
the Sarnish-Three Forks formation in North Dakota has attracted attention. Generally, the Bakken
formation occurs at greater depths than the Jolly Ranch shales, with the former typically occurring
at more than 9,000 ft below the surface against 7,000 ft to 7,500 ft in the case of the latter.
The maximum thickness of the Bakken formation is around 150 ft which is considerably thinner
than the Jolly Ranch shales where the mean thickness appears to be at least 300 ft. Porosities and
permeabilities in the Bakken are very low compared with conventional reservoirs and average 5%
and 0.04 millidarcy (mD) respectively. For comparison, conventional reservoir porosity and
permeability are typically around 10% and over 1mD respectively. Bakken oil is generally light and
at about 42 degrees and has a slightly higher API than that for Jolly Ranch. However, it has a
higher sulphur content and therefore sells at a slight discount to WTI rather than the premium for
Jolly Ranch oil.
The Bakken was first discovered in 1951 and production commenced on a small scale in 1961.
Production gathered momentum in the 1990s and has taken-off since 2000 with the advent of
large-scale multi-stage hydraulic fracturing in horizontal wells. Compared with a high of around
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14,000b/d in the early 1990s production in the US sector of the Bakken averaged 118,000b/d in
2008 and in March 2009 was approaching 200,000b/d, 4% of production in the Lower 48. In
Saskatchewan, Bakken production is believed to have been running at over 50,000b/d in 2009.
The largest field in the Bakken so far is the Elm Coulee in Montana which was discovered in 2000.
Production here has been running at 50,000b/d to 55,000b/d.
The Bakken is emerging as a world class light crude oil resource base. It could indeed become one
of the largest sources of crude in North America after the Athabasca tar sands. Technically
recoverable, undiscovered reserves in the US section of the Bakken were estimated by the US
Geological Society (USGS) in 2008 at 3.65bnbbl on a mean basis. Including known reserves, total
technically recoverable reserves in the US sector alone could be over 4bnbbl. A further 1bnbbl plus
of recoverable oil may exist in Saskatchewan.
Early exploration work in the Bakken was undertaken by maverick operators and small scale
independents. In more recent years several of the larger US independents such as Continental
Resources, EOG Resources, Hess, Marathon and XTO Energy have become heavily involved in the
Bakken. Continental, in fact, with 650,000 acres net now has the largest land position in the US
Bakken and is also a significant producer in the zone with output of around 12,500b/d. The two
largest producers in the Bakken are XTO Energy and EOG Resources. Interestingly, through its
acquisition of XTO, Exxon will have a major presence in the Bakken in the coming years. In
Saskatchewan production only commenced on a large scale in 2004 and is dominated by the midtier TSX-listed independents, PetroBakken and Crescent Point Energy. Bakken sourced production
from these two producers in 2009 was running at around 26,000b/d and 27,000b/d, respectively.
Development programme
Nighthawk/RFP’s drilling programme at Jolly Ranch over the past two years would appear to have
largely eliminated exploration risk. The key technical issues now centre on determining the
sustainability of production, identifying the most prospective intervals for production and
broadening the potential scope of the project for drilling purposes. The first factor is particularly
important given the tendency for shale oil projects to experience steep production decline rates of
perhaps 20% to 60% per year within two years of a short-lived peak. After declining sharply there
may then be a very long period of low production rates. Advances in technology have alleviated the
problem of sharply declining production rates but have not eliminated it altogether. A further
intensive drilling and testing programme is therefore likely to be required over the next year or two
to gain a more complete understanding of recovery rates and hence the potential scale of the
reserve base. There should also be scope to boost the estimate of the OIP. We believe that
Nighthawk is likely to be in a position to provide a firm indication of recoverable reserves over part
of the Jolly Ranch project by 2011. By extrapolation, a broader estimate for the entire property
should also be possible.
Nighthawk/RFP continues to implement an aggressive development programme at Jolly Ranch.
The key features include drilling perhaps a further 10 wells, the construction of oil storage and
production facilities and the acquisition of 3D seismic. As of late January 2010, seismic was being
shot towards the north of the property and later will be shot at locations close to the existing well
sites. Results from the first seismic shoot should be known by March. Drilling operations under the
current programme may well extend into 2011. Each vertical well completed to 8,000 ft as a
=
=
=
producer costs about $1m gross and takes 14 to 20 days while fracture stimulation adds another
$50,000 to $75,000 per well.
Production
So far, production at Jolly Ranch has been modest but is gaining momentum reflecting intensifying
testing and development activity. We believe production could increase from around 150b/d
currently to about 1,000b/d gross over the coming months. Any forecasts of production post 2010
are of necessity highly tentative at this stage and of course contingent on the success of the
development programme. Conceivably, production could be running at 1,500b/d gross by end
2011. Assuming that recoverable reserves are indeed over 200mmbbl, as seems possible,
production may have the potential to trend up to 10,000b/d gross over the following five years.
Jolly Ranch’s production is currently sold to a marketing company at the site from where it is
trucked to a collection point about 150 miles to the east in Kansas. Subsequently it is delivered by
pipeline to the WTI tank farm at Cushing, approximately 40 miles west of Tulsa, Oklahoma. Given
conceivable production rates at Jolly Ranch, trucking is likely to remain adequate for shipping
purposes for the foreseeable future. Long term and assuming very high production rates, rail might
provide an alternative given that the Burlington Northern Railroad runs through the north of the Jolly
Ranch property. This would entail construction of a pipeline gathering facility on the property and a
load-out facility at Limon. The Suncor refinery in Denver is situated about 120 miles to the
northwest of Jolly Ranch while there are three refineries in Kansas between 400 and 500 miles to
the south-east.
Economics
Jolly Ranch has the potential to be a highly lucrative project. This primarily reflects high quality oil
and likely modest lifting and logistics costs. Based on price realisations in line with the late January
2010 WTI quote of around $75/bbl, the pre-tax netback could be in the region of $50/bbl after
allowing for royalty payments, severance costs (state production tax) and the cost of logistics and
lifting. Assuming a cost per vertical well of $1m and production per well of 100b/d, the pre-tax
payback period would be 200 days. Allowing for state and federal tax the payback would be 333
days.
Clearly, the critical factors in the calculation are realisations and the production rate. In terms of the
latter, rates of 100b/d are normal in the Bakken. PetroBakken has, indeed, reported rates
considerably higher at 250-350b/d. Assuming finding and development costs broadly in line with
the $10/bbl or so experienced in the Bakken, WTI would probably have to fall below $35/bbl before
a prospective Jolly Ranch project would hit approximate fully accounted break-even. On a variable
cost basis, break-even might be around $25/bbl. Lifting costs of $10/bbl in the netback calculation
assume high volume production. Initially, costs may well be substantially above this level.
Exhibit 9: Jolly Ranch netback calculation ($/bbl)
Price realisations
Royalty 12%
Colorado severance tax 3.5%
Lifting costs
Logistical costs
Total
=
75.0
(9.0)
(2.6)
(10.0)
(3.0)
50.4
=
=
Revere: Low capital cost waterflood project
Location, geology and project profile
Revere is an advanced-stage waterflood project covering over 40,000 acres and located on either
side of the Kansas/Missouri state border. There are three distinct properties, the 80% owned
Devon oilfield in Kansas, the 50% owned Buchanan and Worden project in Missouri and the 50%
owned Xenia project in Kansas. Devon is located about 80 miles south-west of Kansas City and
130 miles north north-east of Tulsa, Oklahoma. Xenia lies about 10 miles north-west of Devon while
Buchanan is situated around 50 miles to the east of the latter. Worden is located about 5 miles
south-east of Buchanan.
All three projects lie within the Cherokee Basin, a prolific shallow oil and gas producing province in
Oklahoma and Kansas. Production is from Pennsylvanian, Mississippian and Ordovician
conventional reservoirs. By far the most important formation in terms of oil production is the
Pennsylvanian Bartlesville Sandstone which stretches from north-eastern Oklahoma into Kansas
and Missouri. In Oklahoma the Bartlesville Sandstone has generated in excess of 1.6bnbbl of oil
over the past 100 or so years and provided the foundation for Phillips Petroleum in the 1920s.
Other key oil producing formations are the Pennsylvanian McClouth Sandstones and the
Mississippian Arbuckle limestone. The USGS has estimated that the Cherokee Basin contains
between 1.8bnbbl and 8bnbbl OIP.
Interestingly, the Devon project first arose as a result of RFP drilling for coal-bed-methane on the
property. Significant oil shows were encountered in the Bartlesville Sandstone. The Buchanan and
Worden projects target the same Bartlesville Sandstones as Devon and are located in an area
where several companies are active in water and steam flood projects. These include Mega West
Energy, the Calgary-based heavy oil and enhanced recovery specialist. The Xenia project was
abandoned in 1990s due to uneconomic prices but at the time of acquisition in September 2008
still included production and storage facilities. Since then, considerable development work has
been undertaken at Xenia. In addition to the Bartlesville Sandstones, the drilling targets at Xenia are
the Riverton Coal and Excello Shale formations with the former being a source of coal bed methane
(CBM).
Importantly, the Bartlesville formation on the Revere properties occurs at shallow depths of less
than 800 ft. This feature results in very low drilling costs per vertical well of approximately $50,000.
Against this, reservoir pressure in the Bartlesville Sandstone tends to be low, resulting in the need
for water injection. Water injection is the most common and inexpensive form of enhanced
recovery. It involves the use of injector wells to introduce large volumes of water under pressure
into the reservoir which has the effect of sweeping the oil to the well bore. At the surface the oil is
separated and the water re-injected. Recovery rates at Revere using waterflooding have been
estimated by the independent consultants Oilfield Production Consultants (OPC) at 15% to 25%.
OPC has indicated that production rates of 5 to 20 b/d per well are possible. The capital cost of a
vertical well plus four water injectors and the related infrastructure is modest at around $250,000.
=
=
=
Exhibit 10: Revere location
=
Exhibit 11: Revere, simplified stratigraphic column
=
OIP and resources
OPC’s initial estimates for the OIP at Revere point to the potential for a significant oilfield. So far a
gross P50 OIP of 218.5mmbbl has been estimated for the Devon, Buchanan and Xenia sectors
based on data from the area most intensively drilled using Schlumberger 3-D modelling and Monte
Carlo probabilistic calculations. This estimate is expected to be significantly upgraded once data
from the outlying areas is included. Furthermore, the gas in place at Xenia has yet to be
determined. Significantly in the case of Devon, OPC has indicated that the main reservoir is
geologically continuous across the property. All told, it would not be surprising if the Revere oil and
gas in place exceeds 400mmboe. This would suggest gross recoverable reserves of over
80mmboe using a 20% recovery rate.
Development and production
Significant field and infrastructural development work has already been undertaken at Revere and
production is underway. Currently there are 140 production wells on 10 acre spacings plus another
67 wells cased for production. Water injection projects have commenced at Devon and Buchanan,
while oil storage facilities and a 16 mile 5mmcf/d gas tie-in linking Xenia with the 50% Nighthawk
owned Bourbon County pipeline have been installed. The 24 mile Bourbon County pipeline is
operated by RFP and links into the Southern Star Interstate transfer system. Nighthawk’s interest in
=
=
=
the Bourbon County pipeline was acquired from Admiral Bay Resources in November 2009 for
$0.5m.
Production in the fourth quarter of 2009 was running at over 150boe/d gross for oil and gas. Gas
production from Xenia commenced in November 2009 and we believe is currently around 500,000
to 600,000 cf/d or 90boe/d. The oil is of medium quality with an API of 25 to 26 degrees and sells
at about a 12% discount to WTI. Significantly, both oil and gas production is on a rising trajectory
reflecting the lagged impact of water injection and development drilling. Oil is currently being
trucked to a nearby processing facility while gas is sold to Southern Star. There are up to three
major refineries in Kansas and Oklahoma within easy trucking distance of Revere. Historically in
south-east Kansas, gas has sold for between $0.25-1.00/mcf less than NYMEX reflecting the ready
availability of supply in the region. Price realisations were marginal during the third quarter when the
NYMEX quote dropped to about $2.9/mcf but subsequently the situation has improved driven by
favourable seasonal influences with NYMEX trading at around $5.2/mcf at end January 2010.
Development activity is scheduled to be maintained at a high level in 2010/11. Current plans call for
numerous wells to be drilled on the Devon and Buchanan properties over this period. Permitting
has already been obtained for 111 wells here and a further 22 on the Xenia property. Assuming a
similar drilling success rate to that achieved historically, it would not be surprising to see production
up to around 300boe/d gross by end 2010 and perhaps 400boe/d by end 2011.
Economics
Variable production economics at Revere are likely to be less favourable than at Jolly Ranch, largely
reflecting lower quality oil. Based on a 12% discount to WTI, realisations would be around $60/bbl
at late January 2010 status. Given shallow wells, lifting costs should however be relatively low at
about $10/bbl once high volume production has been reached. Based on this plus a royalty of
12%, Kansas state production tax of 6.6% and logistical costs of $3/bbl, the pre-tax netback
would be $40.7/bbl, assuming price realisations of $66/bbl. Given well production of 5 b/d and
capital costs of $250,000, the pre-tax payback period is 3.4 years. Break-even variable costs at
Revere are expected to be about $25/bbl. Owing to low capital costs, fully accounted break-even
might well be less than $30/bbl. As far as Xenia is concerned, we believe variable costs, including
pipeline connections, are no more than $3/mcf which leaves plenty of headroom in relation to
prices in the Kansas region presently of about $5/mcf.
Exhibit 12: Revere oil netback calculation $/bbl
Note: Severance tax in Missouri is 0%.
Price realisations
Royalty 12%
Kansas severance tax 6.6%
Lifting costs
Logistical costs
Total
66.0
(7.9)
(4.4)
(10.0)
(3.0)
40.7
Cisco Springs: Established oil and gas production infrastructure
Location geology and project profile
Cisco Springs is Nighthawk’s most mature project with defined reserves and established
production and logistical infrastructure. The project covers approximately 24,000 acres and is
located on the Uncompahgre Uplift, which is the boundary between the Uinta, Piceance and
=
=
=
Paradox Basins of north-west Colorado and eastern Utah. These three basins are all major
producers of hydrocarbons and hold some of the largest accumulations of natural gas in North
America. The Cisco Springs property is characterised by high plains desert terrain and lies at an
average altitude of around 4,700 ft close to I-70 in eastern Utah. It is situated approximately 225
miles west of Denver and 200 miles south-east of Salt Lake City.
Cisco Springs’ geology is dominated by Lower Jurassic and Cretaceous sediments overlaying
igneous, metamorphic Pre-Cambrian rocks. There are six relatively shallow hydrocarbon-bearing
sandstone reservoirs lying between 600 ft and about 3,400 ft below the surface. Production is
mainly from the Jurassic Salt Wash and Brushy Basin and the Cretaceous Buckhorn and Dakota
horizons. Capping the Dakota Sandstone is the Cretaceous Mancos Shale which outcrops in the
vicinity of the property.
Reserves
Cisco Springs has a significant reserve base. According to a study made by OPC in 2008, 2P
reserves were put at 144bcfe or 24mm boe net to Nighthawk. Cisco’s reserves are orientated to
gas with 84% deriving from this source and 16% from crude oil. The four primary sandstone
horizons account for 88% of the reserves leaving the balance for the Mancos Shale.
Development and production
The Cisco Springs gas field was discovered in the 1950s. Between the mid 1980s and its purchase
by RFP in 2005 the field produced about 18bcf of gas and 1mmbbl of oil. This would imply about
550boe/d on average. Since 2005, the Cisco Springs property has been roughly tripled in size and
considerable development work has been undertaken. The latter has included a major drilling
programme, installation of two compressors and desulphurisation equipment and the
commissioning of a high capacity tie-in to the Northwest Pipeline. This connects gas fields in New
Mexico, Colorado, Utah and Wyoming with markets in the Pacific North West. Through connector
pipelines Californian markets can also be accessed. So far, RFP/Nighthawk has drilled 32 wells of
which 30 have been discoveries. The property also contains 70 historic wells that have been
successfully re-entered and evaluated by wireline log analysis. At under $200,000 per well, drilling
costs are relatively low at Cisco Springs, reflecting the desert terrain and shallow wells.
Based on two compressors the gas processing capacity is 3.5mmcf/d while oil production capacity
is around 100b/d gross. This translates into about 680boe/d. There is an opportunity to boost gas
production capacity to over 5mmcf/d with the installation of a third compressor while there is the
potential to expand the resource base particularly on the north-west side of the property. Cisco
Springs, however, is not a high priority at this juncture given the strategic focus on Jolly Ranch and
Revere which offer considerably greater potential.
Significantly, the Cisco Springs gas is of high calorific value at around 1,000Btu while the oil is light
with an API in the low to mid 30 degrees. Sales of gas are made through an agent. Gas is metered
prior to entering the Northwest Pipeline and sold on the basis of the price prevailing at the Opal,
Wyoming hub. RFP receives payment for gas with a lag of about three weeks. Crude oil is sold
directly to refiners with delivery by truck. Payment takes place on collection based on a price of
WTI less $4/bbl. Highway connections are excellent. Deliveries can easily be made to either the five
refineries in the vicinity of Salt Lake City or the Suncor refineries in Denver.
=
=
=
Production at Cisco Springs has been marginal since 2007 and is currently running at about
20boe/d gross. Initially the key constraint was facility upgrading work, but for much of 2008/09 was
depressed gas prices in the US in general and the Rockies in particular. Recently some
compressor maintenance work has also been required. After hitting a low of under $3/mm Btu in
the third quarter of 2009 the price of gas at the Opal hub has subsequently rebounded to over
$5.4/mm Btu reflecting a combination of economic recovery, seasonally low temperatures and the
completion in November of the Rockies Express East (REX) pipeline. This links the gas fields of
Wyoming to the heavy gas consuming regions of the Midwest and Eastern Seaboard. Significantly,
the traditional hefty Opal discount to the benchmark Henry Hub, Louisiana price has been
considerably narrowed following the opening of REX. With gas prices at Opal now well above the
break-even level of around $3/mm Btu and given the continuing buoyancy in the WTI quote, Cisco
Springs would appear to have attractive economics currently. At this juncture, however, the focus
of development activity is on Jolly Ranch which has far greater potential for the generation of
reserves and ultimately production.
=
=
=
Sensitivities
Development and appraisal risk
A degree of development risk clearly remains at Jolly Ranch and Revere despite exploration risk
being minimal. Schlumberger’s report on the hydrocarbons in place at Jolly Ranch points to a very
substantial resource base and furthermore it appears to be laterally continuous. However, more
development work is required at Jolly Ranch and Revere to determine the sustainability of
production rates and hence recovery rates and the scale of the reserves.
Operator risk
Nighthawk subcontracts all operations to RFP, a privately owned company. It is therefore
dependent on a third party for all appraisal and development work . The relationship between
Nighthawk and RFP, however, has worked very well to date both technically and financially.
Furthermore, their interests are aligned through joint ownership of the projects and the RFP
personnel are experienced and well motivated. It might also be noted that Nighthawk would be
subject to considerable risk if it owned and managed its own drilling organisation.
Oil and gas price risk
Like all oil and gas projects, commodity prices are of critical importance in determining viability. For
Nighthawk the key price variables are WTI, Cushing, Oklahoma in the case of oil and the Opal,
Wyoming hub for natural gas. On a variable cost basis, break-even prices would appear to be $2530/bbl and under $3/mcf respectively. As of late January 2010 there is plenty of headroom vis-a-vis
these benchmarks with the WTI and Opal hub quotes trading at about $74/bbl and $5/mcf,
respectively.
Project cost inflation
The economics of Nighthawk’s projects could be adversely affected in the event of an escalation of
costs. A key factor in this context is steel pipe. At the present time steel prices are not a concern.
Financial risk
Nighthawk is engaged in major development programmes at Jolly Ranch and Revere. Before these
have been completed and the potential, particularly at Jolly Ranch, for recoverable reserves,
established to the satisfaction of a buyer or in determine production rates, significant capital outlays
may well be required.
=
=
=
Valuation
Share price performance: Lagging the AIM Oil & Gas Index
Nighthawk was floated on AIM through an IPO at 25p/share on 12 March 2007. In the 16 months
following the IPO the stock performed strongly but subsequently performance has been lacklustre.
Nighthawk peaked in May 2008 when it hit 115p/share reflecting some very bullish drilling news
concerning the Jolly Ranch, Devon and Buchanan/Worden properties. The stock was inevitably
heavily impacted by the stock market maelstrom in the second half of 2008 which led to its fall to a
low of 22p/share in October. There was a strong rebound between March and May 2009 with the
stock rising to a recent high of 59p/share on 27 May. This partly reflected positive oil and gas
sector influences and partly a bullish interpretation of the agreement with San Severina, a Swiss
investment company, to take a 20% working interest in a 50,000 acre zone of the Jolly Ranch
project. For Nighthawk the transaction was valued at $39.98m. The termination of the agreement
with San Severina resulted in a sharp setback for the share price with a fall to 29p in late June
2009. The deal was aborted due to the inability of San Severina to raise the necessary finance.
Exhibit 13: Nighthawk vs AIM Oil & Gas
250
200
150
100
50
Nighthawk
Jan/10
Jan/10
Dec/09
Dec/09
Nov/09
Dec/09
Nov/09
Oct/09
Oct/09
Sep/09
Aug/09
Sep/09
Jul/09
Aug/09
Jul/09
Jul/09
Jun/09
Jun/09
May/09
Apr/09
May/09
Apr/09
Mar/09
Feb/09
Mar/09
Jan/09
Feb/09
Jan/09
Jan/09
0
Aim Oil & Gas
=
Source: Thomson Datastream
Since July 2009, Nighthawk has traded between about 27p and 48p/share. Trading at around
36p/share in the second week of January 2010, Nighthawk was up by about 33% from a depressed
base at the end of 2008. This was a major underperformance compared with the approximate 122%
gain in the AIM Oil & Gas Price Index over the same period. The weak performance over the past
year or so, we believe, largely reflects heavy cash calls combined with disappointment at the pace of
bringing production on-stream and defining the reserve base. Oilfield development, however, is a
time consuming and costly task even in a favourable operating environment and requires patience.
Given that production will probably gain momentum in the coming months, investor perceptions
could turn considerably more positive during 2010. Ultimately we believe that a decisive change in
perceptions will require evidence of a substantial reserve base, as indicated earlier. When this
happens or arguably somewhat before, the larger independents are likely to become increasingly
interested in Nighthawk/RFP or in particular assets owned by the joint-venture.
Valuation: Largely under-pinned by Cisco, scope for upside
We believe that the most valid metric for assessing the valuation of an advanced stage oil and gas
development play, such as Nighthawk, is the price per barrel of oil equivalent of potentially
recoverable reserves for the peer group. Nighthawk’s peers for valuation purposes are the US and
Canadian mid-tier E&P plays, preferably with assets in the Mid-Continent and Rockies. Interestingly,
=
=
=
the Denver-based junior American Oil & Gas has some similarities with Nighthawk reflecting its focus
on three large resource plays in the Powder River Basin of Wyoming and the Bakken in North
Dakota. It has a market capitalisation of about $253m and a net acreage position about 30% greater
than that of Nighthawk. As far as we are aware, however, it has no defined reserves.
Looking at some of the more obvious comparators such as the Bakken-focused Canadian plays,
PetroBakken and Crescent Point Energy and Houston-based Continental Resources, the 1P and
2P valuations appear high by industry standards at around $40/boe and around $25/boe
respectively. Including low-risk potential reserves, the quasi 2P/3P valuations drop to a more
normal $10/boe. Interestingly, Exxon recently agreed to pay $8.8/boe for XTO Energy’s 2P
reserves (proven plus low-risk upside resources) and $5.5/boe for 3P resources. The 3P valuation
is very close to the $5.6/boe implied by Total’s recent $2.25bn deal to buy 25% of Chesapeake’s
Barnet Shale resources (400mmboe) in Texas.
Based on our assessment of risk-adjusted reserves of 122mmboe, we believe a Nighthawk
valuation of $488m or £313m can be justified. This translates into 95p/share based on 329.64m
shares outstanding and an exchange rate of $1.56/£. In arriving at this valuation we have applied a
price of $4/boe across the risk-adjusted recoverable reserves for Nighthawk’s three key projects
Cisco Springs, Jolly Ranch and Revere. The valuation discount to the peers and recent M&A
transactions reflects the absence so far of defined reserves other than at Cisco Springs, only
marginal production and the need for more development work. Assuming that Nighthawk
continues to de-risk the Jolly Ranch and Revere projects and establishes a reserve base with
critical-mass, we see scope in due course for a considerably higher valuation than that indicated
above. Based on our current estimate of un-risked reserves of 220mmboe, the valuation would be
$1.32bn or £846m (£2.57/share) using $6/bbl. It should be noted in this context that the bulk of
Nighthawk’s potential reserves relate to high grade light oil. In principle, such reserves should be
able to command a significant valuation premium to those of gas.
Interestingly, Nighthawk’s current market capitalisation of about £91m is in large part under pinned
by the Cisco Springs project plus the investment portfolio alone. The independently assessed 2P
reserves of 24mmboe, along with the installed production and logistical infrastructure, should be
worth at least $5/boe based on sector data. This would imply a Cisco Springs valuation of $120m
or £77m. Allowing another, say, £2m for the portfolio and the implied valuation for the other
projects is a mere £12m.
Exhibit 14: US mid-tier E&P valuations
Note: Exchange rates: US$1.56/£, C$1.07/US$; All prices are at 10 February 2010.
Stock
Bill Barrett Corp
Continental Resources
Crescent Point Energy
EOG Resources
PetroBakken Energy
Pioneer Natural Res
Plains Exploration & Prod
Nighthawk Energy
Price
$30.72
$38.16
C$37.86
$88.27
C$27.38
$45.48
$31.74
27.5p
Market cap
(US$m)
$1,397
$6,482
$7,385
$22,243
$4,397
$5,245
$4,421
$141
Bakken
exposure
No
Yes
Yes
Yes
Yes
No
No
No
Production
boe/d (000)
41
36
57
353
37
118
82
Resources (mmboe)
3P
2P
1P % oil/ liquids
483
415
136
5
639
159
67
773
292
197
89
1,448
44
178
109
95
960
48
1,650
1,400
351
62
24
16
Source: Thomson Reuters Datastream and company reports and presentations
=
Valuation ($/boe)
2P
1P
3.4
10.3
10.1
40.8
9.6
25.3
37.5
15.4
24.7
40.3
5.5
2.7
3.2
12.6
5.9
3P
2.9
=
=
Financials
Earnings: Scope for a reported profit in 2009/10
In common with most E&P juniors, Nighthawk has generated little revenue and has consequently
incurred losses since the IPO in March 2007. For the years ending 30 June 2007, 2008 and 2009
operating losses came in at $1.85m, $3.45m and $2.01m respectively. The reduction in the loss
between 2008 and 2009 reflected a combination of a gain in revenue from $0.14m to $0.54m, a
sharp drop in general and administrative expense and the non-recurrence of a $0.32m charge for
unsuccessful exploration costs. At the pre-tax level from continuing operations, losses in 2008 and
2009 were somewhat lower at $2.49m and $1.69m respectively, reflecting financial income from
cash balances and dividends from the equity portfolio. In the latter year, after allowing for a gain on
the disposal of the Centurion project in Kansas, the pre-tax loss was reduced to $1.30m.
Revenues were boosted on average in 2008 and 2009 by about $50,000 owing to royalty income.
At minimum, we see scope for a significant narrowing of pre-tax losses in the year to June 2010.
Break-even or better is, in fact, a very real possibility assuming that all development costs, lifting
costs, logistical costs, royalties and state production costs are capitalised. The key issue is, of
course, the speed at which production increases in the second half of the year. Based on our
production forecast of 140 boe/d, we look for revenue of about $3.1m in the 12 months to June 30
with a pronounced skewing to the second half. This should be capable of more than covering G&A
overhead which we anticipate will be around $2.6m. We believe a reported pre-tax profit of about
$0.5m would be consistent with a modest EBITDA loss on the assumption that all variable costs
are booked to revenues rather than capitalised. At this early stage in Nighthawk’s development
projects, it should be noted that lifting and logistical costs per unit are probably running above
those likely to prevail once production has reached full capacity.
Assuming that production grows broadly in line with our scenario, the Nighthawk financial outlook
would appear positive for 2011 and 2012. Using our production forecasts of 785 boe/d and 1,057
boe/d respectively we would expect the company to be comfortably profitable in both years at the
EBITDA and probably the pre-tax levels.
Cash flow and balance sheet: Adequate cash position
As an E&P development company with little by way of revenue, Nighthawk’s net cash flow has
inevitably been negative since the IPO. Furthermore, it is likely to remain so in the near future. For
the year ended June 2009 there was an outflow from operations including development activity of
$36.2m. Around $2m was accounted for by operating activity with the balance representing
development outlays and expenditure on capital equipment. The operating outflow was partially
offset by $6.1m of disposals and financial income with the key item in this context being the $5.0m
raised on the sale of the Centurion project in Kansas. The net operational outflow of $30.1m was
financed by share issues which raised $16.8m and a $13.3m draw-down of the 30 June 2008
cash balance. At end June 2009 Nighthawk had a cash balance of $5.9m and no debt.
In August 2009 Nighthawk raised another $37m through a share placing. The company therefore
started the current year in good shape from a balance sheet perspective. As of end January 2010
we believe the cash position was around $17m and the company remained debt free. Nighthawk
has adequate financial resources for its current development programme.
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=
=
Exhibit 15: Financials
Year end 30 June
PROFIT & LOSS
Revenue
Cost of Sales
Gross Profit
EBITDA
Operating Profit (before GW and except.)
Intangible Amortisation
Exceptionals
Other
Operating Profit
Net Interest
Profit Before Tax (norm)
Profit Before Tax (FRS 3)
Tax
Profit After Tax (norm)
Profit After Tax (FRS 3)
$'000
2007
IFRS
2008
IFRS
2009
IFRS
2010e
IFRS
132
0
132
(1,829)
(1,855)
0
(397)
27
(2,224)
344
(1,511)
(1,880)
0
(1,483)
(1,880)
139
(316)
(177)
(3,372)
(3,450)
0
0
(26)
(3,477)
985
(2,465)
(2,491)
0
(2,491)
(2,491)
498
0
498
(1,997)
(2,013)
0
0
(20)
(2,033)
338
(1,675)
(1,695)
0
(1,297)
(1,695)
3,097
0
3,097
314
297
0
0
0
297
200
497
497
0
497
497
Average Number of Shares Outstanding (m)
EPS - normalised (c)
EPS - FRS 3 (c)
Dividend per share (c)
112.9
(1.3)
(1.7)
0.0
186.0
(1.3)
(1.3)
0.0
234.5
(0.6)
(0.7)
0.0
329.6
0.2
0.2
0.0
Gross Margin (%)
EBITDA Margin (%)
Operating Margin (before GW and except.) (%)
100.0
N/A
N/A
N/A
N/A
N/A
100.0
N/A
N/A
100.0
N/A
N/A
17,440
14,716
680
2,043
23,009
0
398
22,612
(925)
(925)
0
0
0
0
39,524
47,001
41,499
2,196
3,306
21,202
0
135
21,067
(2,295)
(2,295)
0
0
0
0
65,908
75,178
61,911
11,769
1,498
6,112
0
180
5,932
(2,866)
(2,866)
0
0
0
0
78,424
111,169
92,100
17,569
1,500
6,557
144
324
6,089
(3,009)
(3,009)
0
0
0
0
114,717
(2,277)
321
0
(14,714)
(2,502)
38,274
0
19,101
(3,176)
0
334
(22,612)
(609)
887
0
(28,194)
(1,351)
27,811
0
(1,455)
(22,612)
0
(89)
(21,067)
(1,991)
200
0
(34,208)
5,561
16,791
138
(13,509)
(21,067)
0
(1,626)
(5,932)
317
200
0
(36,000)
(500)
36,000
140
157
(5,932)
0
0
(6,089)
BALANCE SHEET
Fixed Assets
Intangible Assets
Tangible Assets
Investments
Current Assets
Stocks
Debtors
Cash
Current Liabilities
Creditors
Short term borrowings
Long Term Liabilities
Long term borrowings
Other long term liabilities
Net Assets
CASH FLOW
Operating Cash Flow
Net Interest
Tax
Capex
Acquisitions/disposals
Financing
Dividends
Net Cash Flow
Opening net debt/(cash)
HP finance leases initiated
Other
Closing net debt/(cash)
Source: Company accounts/Edison Investment Research
=
=
=
Growth
Profitability
N/A
Sensitivities evaluation
25,000
Net cash (US$'000s)
N/A
Balance sheet strength
20,000
15,000
Litigation/regulatory
{
Pensions
{
Currency

Stock overhang
{
Interest rates
{
Oil/commodity prices
z
10,000
5,000
0
2007
Growth metrics
EPS CAGR 06-10e
%
N/A
Profitability metrics
ROCE 09
%
N/A
2008
2009
2010e
Balance sheet metrics
Company details
Gearing 09
N/A
Address:
EPS CAGR 08-10e
N/A
Avg ROCE 06-10e
N/A
Interest cover 09
N/A
EBITDA CAGR 06-10e
N/A
ROE 09
N/A
CA/CL 09
2.1
Castlemead, Lower Castle
Street, Bristol, BS1 3AG
EBITDA CAGR 08-10e
N/A
Gross margin 09
100
Stock turn 09
N/A
Phone
(0117) 917 5204
Sales CAGR 06-10e
N/A
Operating margin 09
N/A
Debtor days 09
132
Fax
(0117) 917 5005
Sales CAGR 08-10e
372
Gr mgn / Op mgn 09
N/A
Creditor days 09
N/A
www.nighthawkenergy.net
Principal shareholders
%
Management team
Scottish Widows Investment Partnership
6.9
CEO: David Bramhill
Blackrock Investment Mgt (UK) Ltd
3.0
Insight Investment Mgt (Global) Ltd
2.3
Carmignac Gestion
2.0
David R Bramhill
1.7
David Bramhill, an engineer by profession and founder of
Nighthawk, has over 35 years’ experience of the natural resources
sector. He has directed and managed several energy companies
and was the former MD of Oil Quest Resources plc. For over 20
years he worked in an engineering capacity for Rotork on projects
for energy companies including BP, Shell and Exxon.
Joe B. O’Farrell
1.4
Executive Chairman: Michael Thomsen
JP Morgan Asset Mgt UK Ltd
1.1
Mike Thomsen is a geologist and has had over 30 years’
experience in natural resources. He has worked in a geological
capacity for Freeport-McMoRan, Goldfields and Newport Mining.
His last position at the last mentioned was director of international
exploration. He oversees the US operations.
Forthcoming announcements/catalysts
Date
Interim results
25 March 2010
Final results
7 October 2010
AGM
12 November 2010
EDISON INVESTMENT RESEARCH LIMITED
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