Since initially discussing BNK Petroleum's (OTC:BNKPF or BKX on the TSX Venture) emerging light oil (shale) resource play in the Caney Formation in May 2013, I have been watching the company's operational progress with keen interest. I would refer readers to my prior article (linked here) for background on the play. This week BKX released test results from its latest well, Hartgraves 5-3H, which flowed at an average rate of 1,200 boepd (585 boe of that is light oil). This latest test result shows me exactly what I want to see in an emerging resource play; namely, a consistent increase in flow rates as a company refines drilling and completions techniques over time.
To best summarize the data from BKX's Caney project, I have included data from the three existing "true" Caney wells (I have ignored the first well, Barnes 6-2H in the play as it was more of a test of concept... shorter horizontal, small fracs, and not focused on any one zone). The well-by-well improvements are readily apparent.
Table 1: Reported Tishomingo Field Caney Test Rates
Current well economics are still a bit of an unknown, so I will be keenly interested to see updated type curves from an independent engineering firm once more production history is available. It is sufficient to say that my impression from the data released thus far is positive.
XTO Energy (now an Exxon (XOM) subsidiary) remains active in the area and BNK Petroleum shows no signs of slowing down its activity. Based on its June 30, 2013 net cash balance of $90 million and accounting for $22 million in well costs (2 wells at $11 million each) plus G&A of $3 million since then, my best guess would put BKX's current cash balance in the $65 million range. I will be watching to see an updated cash balance the next time the company reports its Q3 financials, most likely in the first half of November. BKX reports that current well costs are in the $11 million range, but over time I would expect the company to drive those costs well under $10 million, perhaps into the $7-8 million range under a full development scenario. In these initial stages, I would rather see BKX optimize resource recovery and flow rates in order to demonstrate what is possible from the Caney in terms of productivity. Once ideal well designs and completion methods are determined, I would look for optimization measures to add more meat to the bottom line.
One question remaining is whether or not BKX will be able to build up a production base fast enough to enable the company to internally fund its Caney delineation/development program without the need for equity dilution. Only more production history and the establishment of production type curves will answer this question, but the early signs are encouraging. The company is also currently debt free, which allows for additional financial flexibility as the Caney play is evaluated further. Having said all that, if the well economics prove to be positive, I'm not sure BKX will make it to a "full development" scenario before being snapped up by a larger player. Time, as always, will tell.
My thesis on BNK Petroleum remains the same. If individual well economics prove to be favorable, I could see Caney lands eventually rivaling Eagle Ford (or similar shale play) acreage in terms of value per acre. If BKX is able to demonstrate prospectivity (through widely spaced drilling) over its entire 13,600 acre Caney land base, I calculate $340 million in potential value using $25,000 per acre (a number which I believe is reasonable for "good" Eagle Ford based on recent industry transactions). That would equate to about $2.40/share for BKX, which is around 70% upside from current levels. Investors still get a "free look" at the company's tight gas projects in Europe, particularly Poland. Some may scoff at this "free option" (disappointment with respect to Polish tight gas plays to date abounds), but I remember a time not too long ago when it appeared that the vast majority of BKX's market cap was supported by the Polish shale gas project. One good data point (in terms of a positive well test) from that project could add a whole new dimension to the story in a hurry, but in the meantime the Caney is more than enough to hold my interest.