Things Are Just Getting Started for END (Endeavour Petroleum)

Mar.12.07 | About: Endeavour International (END)

As a rule, I don't buy single-digit-midget stocks. Single digit stocks tend to either: 1) Stay that way slowly wasting away in your portfolio for years, or 2) Pop up quickly, convincing you how smart you really are (in which case you hold it forever thinking you will get even "smarter"). Then, after you've doubled down and told all your friends about it, the bottom generally falls out of the stock, and you have to find a whole new set of drinking buddies.

The reason for this phenomenon is that most micro-caps lack one or both of the following: 1) strong (disciplined and experienced) management, and 2) a plan and the wherewithal (money and physical assets) to carry it out (which kind of gets back to #1).

Enter Endeavour International, Endeavor International Corp. (NYSE:END) on the Amex. Not your typical $2 player.

END is a relatively new, pure North Sea E&P [exploration & production] player transitioning from startup to self sustaining concern.

Management:

Bill Transier -- former CFO at Ocean Energy which gobbled up Seagull in 1999 and then was itself consumed by Devon Energy Corp. (NYSE:DVN) in 2003. That's a lot of big player offshore expertise. I've sat across the table from Bill and Jim Hackett when they ran Ocean, and they're what you'd call serious oil men. No glitz. Very savvy. Everything by the numbers. Mr. Hackett left Devon to run Anadarko Petroleum Corp. (NYSE:APC). Mr. Transier went to END.

Management also contains seasoned professionals from APC and Seagull, so the team is strong and has lots of offshore experience.

The Plan:

The concept isn't new: Fish where the majors don't care to, and exploit their old finds while doing a little step-out exploration. END was formed with that specific purpose in mind, unlike other E&Ps who now participate in the North Sea as a sideline business.

Organic production growth is just over the horizon...

2007 will show a big jump in production (200+%) from acquisitions made in 2006. That's not the interesting part, as it's basically just acquired volumes.

However, the 2008 to 2010 period will begin to show the fruits of exploratory and development drilling building upon those acquisitions as production again grows roughly 50% from discoveries that have already been made. They are about to drill another significant exploratory test, with results expected during 2Q07, giving a potential near term catalyst to the story.

Production Base:

  • Norway: Two fields. END holds small interests in two Norwegian offshore fields: Njord and Brage -- 4Q06 production (~ 1,400 boepd [Barrels of Oil Equivalent Per Day])
  • Central North Sea
Bought seven producing fields and associated non-producing assets, the "Talisman purchase," for $414 million during 4Q06.
  • producing 8,800 boepd at close of acquisition in October.
  • 18 mm boe proven reserves as of YE05.
  • Rochelle discovery (55.6% interest) -- see below.
  • On the surface the ~ $23/barrel purchase price seems pretty high. The Rochelle discovery (net 2.7 mm boe) and the other non-producing assets must have added significantly to the bid (net 2.7 mm bls), probably 3,000 boepd net by late 2009

Total current production ~ 10,000 boepd (as of March 6, 2007)

Full-year guidance is 8,800 to 9,200 boepd. Note the expected decline is pretty steep as they're currently producing 10 mboepd and they just bought roughly 90% of that last fall.

Reserves:

  • 2006: 29.6 mm boe (via drill bit: 2 exploratory discoveries and the "Talisman purchase"). Up nearly five-fold from 6.3 mm boe at the end of 2005.
  • F&D [Finding and Development]: pretty high for my book. Last year's straight line acquisition F&D was $23/barrel.

Exploration has been pretty fruitful so far:

2006: END was 2.5 for 3

Cygnus -- shallow water (65?) gas discovery, 12.5% working interest

  • 3 fault blocks [FB] -- 40 Bcf [Billion Cubic Feet] net P50 total (6.7 mm boe)
  • Company estimates discovery fault block one yields 10 mmcfgpd net (1,666 boepd) by mid 2008. Additional 2 FBs could boost production by an incremental net 2,000+ boepd by 2010.
  • Plan one development well by end 2007.

Columbus -- gas discovery, 25% WI [Water Injection], the well encountered a liquids rich gas column that tested 17.5 mmcfgpd and 1,060 barrels of condensate per day (994 boepd net before royalties).

  • Appraisal well scheduled for later this year.

Bacchus -- 10%, not definitive, not P&A'd [Plug and Abandon] either (this is the half).

2007: The company operates a test of the Balgownie Prospect set to spud 2Q07. END has a 60% interest (although that may dilute a bit prior to drilling) in this:

  • 4 way dip closure with gross estimated reserves of 57 mm boe (if it works out to its full potential the net reserves would be obviously substantial given the END's current reserves of 29 mm boe).
  • Good quality 2D and 3D over the structure,
  • High porosity and permeability exist in the targeted sand (Fulmar) in multiple nearby fields,
  • where hydrocarbon columns in excess of 900 feet have been found.
  • This should spud around the end of March 2007 and take about a month to reach TD (so we will probably know something mid-to-late April).
  • There's a second, smaller prospect (Cullen) on the east part of the that probably gets more attention if Balgownie is successful.

Development:

  • Rochelle -- (a discovery that was never developed and was acquired in the Talisman purchase), 55.6% WI, plan to drill a development well and tie back to an existing FSU in late 2008. On a net basis it probably adds about 3,000 Boepd.

Production Growth Chart (theirs, not mine)

END Production 12 03 2007

If a picture is worth a thousand words I don't need to write too much about the preceding table. It pretty much tells the story out through 2010.

Note the yellow wedge at the bottom that is END's Norwegian production. See how it creeps up over time. That's an expectation that their exploitation and workover activity will arrest field declines and ultimately revitalize production growth.

Note also that despite the fact that production declines of 10 to 20% per field will result in production falling to just over 8,000 boepd before the development of new discoveries drive production over 12,000 boepd.

The following are what I feel to be my best estimates with a strong leaning towards conservatism.

The production profile below incorporates my assumptions for reasonable estimates of field declines and the timing and rate of additions from sanctioned field developments from publicly available sources. It does not assume any exploratory success or additional acquisitions. It has not been sanctioned by the company, although it shadows the graphic above which is the company’s publicly disclosed production profile.

Production Profile:

END Production Profile 12 03 2007

Note: My 2007 production is within current guidance for 2007 of 8,800 to 9,200 boepd despite: 1) current production (early March 2007) of ~ 10,000 boepd and 2) Enoch field production of ~ 1,000 boepd scheduled to come on-line in the second quarter. I’d always rather be able to take numbers up than be forced to bring them down, and I’d like to see continued delivery on the promise of low decline rates for the acquired U.K. production base.

Hedges:

END Oil Hedges 12 03 2007

Note: Oil hedges include swaption volumes.

Summary:

Seasoned management team, improving production profile and thereby financials, and the potential to keep increasing reserves at double-digit rates. This is another one I plan to buy (around $2) and forget about for awhile. But of course there's no rush here; do your own due diligence -- I could be wrong.

It's moving in the right direction folks!

END Right Direction 12 03 2007

Street Coverage:

No coverage with clout at this point. Despite at least one bulge bracket firm and a handful of smaller brokerages, the shares have been dead money for months. At present 4 of the 6 covering firms have buys or strong buys on the shares.

Price Deck:

2007 and beyond: $60 and $6 index prices held flat. I think this is pretty conservative, especially on the out year gas price.

Endeavour Petroleum 12 03 2007