On March 26th, Lucas Energy (LEI) announced a farm out deal on 400 acres in Karnes County. Lucas will receive upfront payments totaling $1 million. The unnamed operator of the deal will receive a 75% working interest (WI) in the first well. Lucas Energy will have the remaining 25% and the operator will carry this interest. Lucas retains a non-operated 75% WI on the remainder of the acreage.
I have written many articles on Lucas, both positive and negative. Lucas is one of those companies where you must be willing to change your opinion when the facts change. This type of deal is what Lucas definitely needed to right the ship. My last article discussed the operational failures of Lucas to boost production.
The upfront money along with the additional money received for selling the 8% interest in the Madison County drilling unit should sustain LEI until the Eagle Ford well can be drilled in June. Last quarter's cash burn was $345,000 which included elevated workover activity in an attempt to boost production. With the $250,000 a month from the operator, I think LEI can maintain a neutral cash position until the Eagle Ford well is drilled.
The question all along had been how was LEI going to be able to drill any of the Eagle Ford acreage. We received part of that answer today. Finally, a third party is putting up money to develop some of the Lucas Eagle Ford acreage. The acreage held by LEI in Karnes County is right on the border shared with Gonzales County. Texas Railroad Commission data shows a wide range of IP data on Eagle Ford wells in the area. EOG has some 3,500 BOPD IPs in the area and there are also some 200 BOPD IPs around. In general but not always, newer wells appear to have larger IPs. I think an IP of 800 BOPD would not be out of the question in this area. With a 25% royalty, that type of well would double the net production of LEI and put them solidly into positive cashflow. Also, we don't know the exact boundaries of the LEI acreage or where the new well is planned, but EOG has four recently permitted (Jan 2014) locations that appear to be right near the lease lines of LEI. This is good news, however, these wells are obviously not drilled yet.
Another plus to this transaction is that Lucas is not operating. They don't appear to be capable of effectively operating oil wells. A non-operated position is probably for the best. It is too bad the company did not initiate a transaction of this type sooner; however, better late than never.
I believe management needs to continue to put together deals of this nature. Let's not bet the whole company on a single well again like what happened with the Austin Chalk lateral. This situation is a little bit different, but diversification is a must. The company can't be afraid to give up large percentages to put deals together. "A man in need can't have greed."
Management needs to continue to cut LOE. While LOE is still a little bit high, it is not as high as G&A. The company needs to seriously look at the situation and have an honest conversation on whether or not the G&A spend is appropriate for the number of wells they operate and the production associated with those wells. Seeing some insider buys would be a big plus as well. The stock is pretty much at five year lows. Show us you believe in what you are doing. Show us you believe in the asset rich story and the value of this upcoming Eagle Ford well. Let's see management put their money where their mouth is.
Overall, this transaction is something that could finally turn this company around. The added production and (hopefully) additional deals will give the company the opportunity to jump out of the rut it is in. Due to this Eagle Ford deal, I have again taken a long position again in LEI. Given the past history, I remain cautious but optimistic. I may change my position at any time due to the dynamic situation of this company. Please do your own due diligence. Good luck.
Disclosure: I am long LEI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.