Reasons Aurora Oil & Gas Is Confident About The Eagle Ford Shale

Oct.23.13 | About: Aurora Oil (AAGLF)

Aurora Oil & Gas Limited (OTCPK:AAGLF) is a Perth- and Houston-based oil and liquids company with operations in the Eagle Ford Shale trend of South Texas. Aurora has 88,800 gross (22,000 net) acres in the "tri-county" area of Karnes, Live Oak and Atascosa Counties, Texas.

Many U.S. investors may not know Aurora was a very early entrant and first mover into the Eagle Ford in 2005. Three members of Aurora came to the U.S. looking at this area in South Texas (at that time identified as the "new chalk"). After a series of events, Aurora remained involved with the asset which was later operated by KKR and Hilcorp - and then later sold to Marathon Oil (NYSE:MRO) for $3.5 billion in 2011. Aurora kept its non-operated working interests in the tri-county area, and has since additionally purchased its own operated acreage.

The Eagle Ford has truly become Aurora's high growth asset. Here are a few observations:

  1. Numbers don't lie. Over the last seven quarters, Aurora Oil & Gas has reported sequential quarterly growth in: Operating Profit (CQGR: 34%), EBITDA (CQGR: 37%), Production (CQGR: 29%), and Cash Margin (CQGR: 25%).
  2. From Q2'12 to Q2'13, the company grew net production to more than 15,000 BOEPD at a CQGR of 25% and EBITDAX to $80.4 million at a CQGR of 26%.
  3. Aurora's asset intensity, or amount of cash flow needed to keep production flat, is 15%, implying the company could reinvest 85% of its cash flow to grow production. Aurora's asset intensity level is lower than Sanchez Energy (28%), Clayton Williams (76%), SM Energy (53%), Pioneer Natural Resources (55%), and EOG Resources (78%) - to name a few.
  4. The Eagle Ford is a cash machine. Over the trailing twelve months, Aurora has generated a cash margin of $48.90 per barrel - the 10th highest out of EnerCom's U.S. database of 85 E&P companies.

    Company

    TTM Cash Margin/BOE

    VAALCO Energy

    $77.88

    Evolution Petroleum

    $60.96

    Gulfport Energy

    $59.58

    Denbury Resources

    $54.78

    Oasis Petroleum

    $54.24

    Sanchez Energy

    $53.40

    Kodiak Oil & Gas

    $51.90

    Northern Oil & Gas

    $51.84

    Continental Resources

    $49.74

    Click to enlarge
  5. Knowledge is power. After participating in more than 250 gross wells with Marathon Oil, in February 2013, Aurora made its first foray into operatorship by purchasing 100% working interest in 2,700 net HBP acres for $117.5 million in the tri-county area. The company plans to drill 14 to 19 net wells on 40 acre spacing during 2013. Initial results are expected during its Q3'13 earnings call.
  6. Aurora will participate in the drilling of an additional 30 to 32 non-operated wells with Marathon. Between the non-operated and operated programs, Aurora's expected to exit 2013 with a net production rate of approximately 17,000 BOEPD to 19,000 BOEPD.
  7. The company has additional reserve potential in the Sugarkane field. Aurora said it has positive preliminary Austin Chalk results from 4 pilot wells and will continue to evaluate Wilcox and Pearsall. On its Q2'13 conference call, Doug Brooks, CEO at Aurora said out of the more than 335 Eagle Ford wells they've drilled in the play, the company received a good look at the shallower Austin Chalk and Wilcox formations every time.
  8. Full field development in the Eagle Ford is still unknown. Many operators believe 40-acre spacing will work on a 2D basis, e.g. two wells in the same formation. However, companies now have to experiment with spacing on a 3D basis since they are bringing other zones into play such as the Austin Chalk (see slide here). Increased density and Austin Chalk updates are expected to be discussed at Marathon Oil's analyst day on December 11.
  9. During Q2'13, the company reported a liquidity position of US$165 million in cash and $200 million from an undrawn credit facility.
  10. As of October 18, 2013, Aurora's debt-to-market cap ratio was 44% - lower than other Eagle Ford peers such as Carrizo Oil & Gas (49%), Clayton Williams (78%), Forest Oil (241%), Goodrich Petroleum (48%), and Penn Virginia (223%). OAG360 notes that EOG Resources, Pioneer Natural Resources, SM Energy and Sanchez Energy have debt-to-market cap ratios of 13%, 9%, 28% and 29%, respectively.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Oil & Gas 360® did not receive compensation for the publishing of this company note. Although Aurora Oil & Gas Limited pays Oil & Gas 360® a monthly fee to be a profiled company on the website, Oil & Gas 360® reserves the right to publish notes and observations on any company that is sees fit to distribute.