Crimson Exploration Finds A Sweet Spot In The Woodbine

Jun.28.12 | About: Crimson Exploration (CXPO)

Crimson Exploration (NASDAQ:CXPO) is a smallcap oil and gas company that is on the verge of unlocking a premium asset in the Woodbine. The company has successfully drilled the Mosley #1H well in Madison County, Texas, with an initial 24 hour production test of 1,228 Boepd. To date, this well has outperformed expectations based on the 24 hour I.P. test by producing 104,000 Boe in its first 100 days. Crimson has 17,500 net acres in the area and is drilling 5 additional wells across its acreage position to prove-up the play. The Grace Hall #1H and the Vick Trust #1H are both flowing back in Madison and the Payne #1H is drilling. In Grimes County, Texas, the Yates #1H is currently being fracture stimulated and they plan to spud the Stuckey #1H in July. In addition to the Woodbine, Devon Energy (NYSE:DVN) has successfully drilled a nearby well in the Georgetown, the Mathis #2H, with an initial I.P. of 956 Boepd. This area of Texas is able to sell its oil with Gulf Coast pricing that is currently much closer to Brent pricing and at a premium to WTI. If Crimson is able to prove-up its acreage, it will have over 100 Woodbine drilling locations and over 100 Georgetown drilling locations.

Crimson also has potential upside in the Eagle Ford. The company has 6,550 net acres in the oil window in Zavala and Dimmit Counties. To date, Crimson has drilled the K.M. Ranch #1H, which hit water, allowing only half the well to be completed, and the Beeler #1H, using an electrical submersible pump completion technique with marginal success. But Chesapeake (NYSE:CHK) has successfully completed the Winterbotham #A-1 with a 24 hour I.P. of 1,487 Boepd right next to Crimson's acreage. Chesapeake has drilled several wells in the area with initial I.P.s over 1,000 Boepd. Crimson plans to complete the K.M. Ranch #2H with the same completion techniques used by Chesapeake. Crimson's joint-venture partner in the Zavala and Dimmit acreage is microcap U.S. Energy (NASDAQ:USEG), which has 4,136 net acres. Crimson will have almost 200 drilling locations on this acreage in the Eagle Ford. Additionally, the Dan Hughes Company has drilled three successful nearby wells in the Buda. If they achieve similar results to Chesapeake, this acreage offers a second premium asset in Crimson's portfolio with significant upside.

Crimson's other main assets include acreage in the liquids-rich James Lime and the dry gas Haynesville. Crimson has 46 million shares outstanding, and a $223 million in long-term debt. Crimson recently extended its bank line of credit through May of 2015 under improved terms. The company is conservatively drilling out of cashflow in 2012 while it proves up its opportunities in the Woodbine and the Eagle Ford. If both the Woodbine and the Eagle Ford acreage are proven, Crimson will have too many drilling locations to just drill out of cashflow. The company will need to raise additional capital, or sell some assets, or make the same decision as Brigham Exploration and place itself up for sale to the highest bidder.

Crimson is dependent on favorable oil and natural gas prices, and currently has limited capacity to take on a substantial amount of additional debt. The company also risks being unable to prove-up its acreage in the Woodbine or the Eagle Ford. Crimson should only be looked at by speculative accounts, or by highly diversified accounts. The company does offer the potential to unlock two separate premium assets in the near term, which could reward shareholders with significant upside potential.

Disclosure: I am long (USEG).