Credo Petroleum: Worth a Look

Feb.14.11 | About: Forestar Group (FOR)

Credo Petroleum (NYSEARCA:CRED) could be a turnaround story of the year. Looking at the company's chart, there is a very interesting dynamic. Since 2006, this stock has seen a steady downturn, from a high of $30 to a low of a little over $7. On December 27 of last year, Credo's stock price took flight and flew through the 50-day moving average. The results of Credo's third Bakken well was the reason for the excitement as detailed here.

With acres in the Fort Berthold Indian Reservation going for more than $10,000 per acre, companies like Credo can make some serious cash for its shareholders.

Credo seems to have a lot going for it. It rode natural gas in impressive fashion starting in 1996. This run took Credo's stock from a penny stock to a significant exploration and production company in a little over a decade. This company has earned several awards in recent years:

  • Top Performing Colorado Energy Stock for 2008 (Denver Post, January 1,2009)
  • Top Performing 25 Stocks of the Past 25 Years (USA Today)
  • 200 Best Small Companies (Forbes, 2001, 2004, 2006, 2008)
  • 100 Fastest Growing Small Companies (Fortune, 2003, 2004, 2005, 2006)
  • Profitability per Unit of Production(Worldwide Oil and Gas, 2002, 2003, 2004)
  • Finding and Development Costs (Three-Year Average U.S., 2003, 2004)

Although Credo has been heading in the wrong direction, this may be a good time to take a closer look. 2009 was the first year Credo reported oil revenues higher than those of natural gas. This is important, as the 20:1 price multiple will generate considerably more by way of profits. Oil reserves started to make a large impact in 2006, and this revenue has steadily increased since.

Credo has two main properties with respect to oil production. The first is its Kansas property, for which it has a 3-D seismic. Credo has a 45% success rate in this area. This rate has steadily increased as it has gotten the feel of the area. The excellent economics have resulted in 53 wells drilled to date. Credo has 150,000 gross acres in Western Kansas and the Central Kansas Uplift. The strategic counties in Kansas are Graham, Barton and Lane. All three counties have seen a 25% improvement with respect to production growth. The Central Kansas Uplift has some interesting metrics, and in most optimistic net operating income the internal rate of return is 48%.

The second property of interest, and the most important to its recent share price spike, is the Bakken. Credo's current acreage is much lower here at 7,200 acres, but it has had three well successes, and the production rate is increasing. Neighbors are big names like Marathon (NYSE:MRO), Continental (NYSE:CLR), Conoco (NYSE:COP), HESS (NYSE:HES), Whiting (NYSE:WLL), Kodiak (NYSE:KOG), and EOG Resources (NYSE:EOG). Credo believes it will be able to turn its 7,200 acres into 50+ locations. This number does seem quite high, but Brigham (BEXP) has utilized 160-acre spacing with offset drilling techniques, which could create spacing close to this approximation. Drilling economics in the Bakken would translate to an internal rate of return of 32% at the high side of discounted net operating income.

It may be possible that the current oil production will create growth for Credo until natural gas prices improve. Credo has 70,000 gross acres of Western Oklahoma and Texas Panhandle leases, which it will continue to drill once natural gas prices rebound. This area also has possible oil production.

Partnering with Chesapeake (NYSE:CHK) it recently had success. This well is of particular interest, as it was on a 320-acre spacing with a 7,600-foot vertical depth, with a 4,400-foot lateral. It was fracture stimulated in 11 stages, using four million pounds of sand and 100,000 barrels of frac fluid. This particular find seems significant, given the size of this company and the possibility of further finds in this vicinity. Interest in this area runs from very small to 100%, depending on well spacing. Credo currently operates 12 vertical wells in Lipscomb and Hemphill counties.

Credo has plenty of natural gas opportunities. It seems much of this is being left dormant until natural gas prices improve. Credo also has Calliope, a patented natural gas recovery technology. This low cost recovery method allows Credo to drill and still make profits even in today's pricing environment. When natural gas prices recover, Credo has stated it will be able to increase natural gas production significantly.

In summary, Credo may be able to recover from the vast changes its business has had to realize over the past few years. It has two premier oil plays to increase oil production, with other oil prospects in the Texas panhandle. It has shown the ability to change its company dynamic by doubling oil production in 2009. It plans to drill another 100 wells in the Central Kansas Uplift. It is working to continue the success in the Bakken/Three Forks area. Credo has stated it would like to add another oil play if possible.

I do not believe the last pop in stock price is the last we will hear from this company. Credo has made an impressive change in its business, and it looks to continue in to the future.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CRED over the next 72 hours.