The Mississippi Lime: Reading Through Austex Results

Aug.21.12 | About: AusTex Oil (ATXDF)

Austex Oil (OTC:ATXDF) announced promising vertical Mississippian well results in Northwestern Kansas on August 13th. One well, targeting the Mississippian, tested at 100 barrels of oil per day, and the other, targeting the Arbuckle, tested at 16 barrels of oil per day (this may not sound great, but the company estimates a 100%+ IRR for this 16 bopd well, due to the low cost of drilling and completion). It took the market a few days to pick up on the significance of this for Austex (17,000 out of Austex's 22,500 net acres in the Mississippian are in the area), but in the last two trading sessions the stock has risen on much higher than average volume.

The obvious question is "what is Austex and why should I care." One reason to care is that Austex is a rapidly growing company, trading at a discount to its peers, with the most leverage to the Mississippian play on an enterprise value per acre metric.

Another reason is that Austex has two core Mississippian areas - one surrounded by Range Resources' (NYSE:RRC) position and the other surrounded by Apache (NYSE:APA). Austex, like many small cap Australian listed companies, provides granular detail on its well results, which helps provide transparency to investors in Austex stock. More importantly, for investors in Range and Apache, it gives some insight into the potential of the Mississippian positions held by those two companies.

Austex announced a 30 day rate for Balder #1-30N, a horizontal Mississippian well drilled by Range Resources, on June 20th. Range waited over a month to announce that information, which it did in an operational update on July 24th. Investors in Austex, a $50 million public company, knew the well result over a month before Range Resources investors who weren't paying attention to Austex's press releases. This was despite the fact that Austex only had a 14% working interest in the well, versus Range having a 86% working interest in the well.

And Apache investors don't have any publicly available well results for the hundreds of thousands of acres Apache just bought. But if they look at Austex's recent NW Kansas results, that should give them an idea, since Apache's position in NW Kansas surrounds Austex's.

Austex's results are less of a direct read through for Chesapeake (NYSE:CHK) and Sandridge (NYSE:SD), the two companies with the most acreage in the Mississippian. However, they are still meaningful, as they show good results from areas that had not been considered highly prospective for the Mississippian until relatively recently, particularly the NW Kansas area. This provides incremental positive data points for Sandridge's thesis that the Mississippian play extends further than had been thought, and a 100 bopd production test in NW Kansas is a good result.

In summary, Austex's results are positive and meaningful, both to Austex shareholders and potential shareholders, and to investors in other companies active in the Mississippian play in Oklahoma and Kansas. Austex should have more well results forthcoming, and will be drilling 2 wells a month until the end of the year. This drilling program should provide incremental production for Austex and data to help evaluate the Mississippian in the area.

Disclaimer - I have a position in Austex. Austex is a micro-cap E&P company, which is a risky investment. Risks to investing in micro-cap E&P companies include potential difficulty to obtain financing, a less liquid stock, less investment bank research coverage and other risks. Austex also primarily trades on the Australian stock exchange, which has different disclosure requirements than the US and is not regulated by the SEC.

Disclosure: I am long OTC:ATXDF.