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Summary

  • Emerald reported excellent second quarter results.
  • Production was up 51% from Q1 and 168% Y/Y.
  • Acquired 31,500 new acres from Liberty Resources II in the Williston Basin.
  • Analysts are extremely positive on the company.

Emerald Oil (NYSEMKT:EOX) reported second quarter results on August 4th and the results were excellent. Both operationally and financially, the quarter was a home run.

McAndrew Rudisill, Emerald's CEO, had this to say on the conference call:

This is the best financial and operational quarter for Emerald since inception and we expect continued high rate growth."

Some of the financial highlights included revenue from oil & gas sales increasing 196% from last year and 64% from Q1 to $31.3M. EBITDA came in at $17.4M compared to $2.8 million in Q2 13, and net income came in at $7.6M compared to a net loss of $7.6M the last year.

Operations continued to look extremely good with total production of 340,320 boe during the quarter, an average of 3,781 boe/d. This 3,781 average is a 51% increase from Q1 and 8% more than what the company had forecasted for Q2.

On August 1st, the company made an agreement with Liberty Resources II to acquire 31,500 acres in relation to current properties. The total estimated value of the transaction will be about $110 million but the sale is only $78.4 million cash. A land swap will make up the rest of the transaction. 4,175 acres of Emerald's land located in Williams county will be given to Liberty. The new land is already producing about 400 boe/d but that amount is offset by about the same as a loss from the Williams county properties. The new land does have 2 MMboe proved reserves and adds 157 new drilling locations bringing the total number of drilling locations the company has to about 850.

Rudisill affirmed in the call that the 4th rig will be brought online in mid Q3 most likely to begin drilling in the Richland county properties. These 850 potential drilling locations will keep the company extremely busy for a long time, but the 4th rig will help accelerate the process.

(click to enlarge) (Source: Emerald website)

The new land bumps the company's holdings to 93% in ND and 7% in MT. 75% of total land is operated and 25% is non-op as the company still continues to transition more and more to operated.

(Source: Emerald website)

With the closing of the sale expected at the end of August, Emerald will hold a total of 120,400 net acres in a great, more consolidated position. Dumping the Easy Rider land in Williams county allows Emerald to have a more focused and tight knit land position concentrated mainly in McKenzie county at its Lewis and Clark position. With already great production growth at current acreage, the company expects the new land to add nicely to production growth in future. Rudisill expects development of the new land to most likely begin in early 2015 as the company needs to prepare, and acquire permits first.

The company has plans for a redetermination of reserves and of the borrowing base in late October which McAndrew and Ron were both confident that they will be increased again. On the call there was lots of talk about the company tapping into the debt market in early 2015. McAndrew commented that Emerald expects to issue a bond in the first half of 2015 at a minimum size of $215 million. The company is currently well funded through the rest of 2014 and into early 2015, and this $215 million will ultimately secure financial position for pretty much all of 2015 which is good news.

Following quarter 2 results, many analysts became even more bullish on the company. Howard Weil raised its price target from $11 to $13, and Brean Capital raised its price target from $10 to $11. The average price target is about $11 which points to an upside of over 35% from current levels. 10 analysts currently rate the company a buy and 1 has a hold rating. Estimates have been revised for the 3rd quarter and the average is now EPS of 8 cents, while the FY estimate was also raised to EPS of 17 cents.

In a previous article of mine and many other pieces, I've read on Emerald a big point has been the fact that the company's enterprise value per acre ($/acre) is significantly less than its peers. Emerald's $/acre is even less now with the newest acquisition, with it currently about $3,222. The average between the peers in the area is more than double that, which shows just how undervalued Emerald's land position is.

(click to enlarge) (Source: Emerald website)

Production is set to continue to increase nicely, especially with the 4th rig being added. For Q3 the company is forecasting an average of 4,200 boe/d and expect an exit rate of 4,900 boe/d at year end but I would not be surprised in the slightest if it exceeds this goal.

In conclusion, the second quarter results were great. The company continues to move in the right direction and growth is looking fantastic. It is clear that the company remains undervalued, especially with the new acquisition. Upside potential is huge and I think the shares are headed much higher.

Source: Emerald Oil Is Headed Higher

Additional disclosure: Always do your own research before investing.