Seeking Alpha

HiddenValueInve...'s  Instablog

Send Message
Master of Arts Academic, Individual Investor
View HiddenValueInvestor's Instablogs on:
  • U.S. Energy Priced Way Too Low By Market

    The stock market has hammered small-cap oil stocks in recent weeks. The drop in oil prices from $100 to $80 has completely unnerved the market. The market fears the price of oil will create a big cut in 2015 drilling budgets. It also fears over-leveraged companies will have difficulty not only raising capital, but in some instances servicing their capital. Many stocks were trading at multiples that relied on continued growth rates of 20% to 30% for the next several years. In many instances the sell-off has been rationale and justified. But not all.

    Only one thing above applies to U.S. Energy (NASDAQ:USEG), its stock price got hammered. Consider the following:

    1. U.S. Energy never traded with a growth multiple. It barely and briefly traded to its year-end 2013 PV-10 Value. The very successful extension of their Buda discovery in 2014 should raise year-end PV-10 Values even with the drop in oil prices. Right now the stock may be trading at only 50% of year-end 2014 PV-10 Value.

    2. U.S. Energy's net debt position is only $4 million. By the end of 2014, unless they make an acquisition, their cash-flow over and above their drilling budget could bring their net debt down to $0.

    3. U.S. Energy's Bakken production is very mature and fairly stable. This portion of the companies production will not change much in 2015 without drilling a single Bakken well.

    4. Break-even prices for the Buda are far below $80. Assuming average well costs of $3 million, Buda oil wells need 54,000 barrels of oil to break-even. Contango estimates that their Buda wells have an average EUR of 100,000 BOE to 300,000 BOE. We already know the best Buda wells have already produced over 300,000 BOE.

    5. Contango's CEO Allan Keel stated at the Johnson Rice Energy Conference that they planned to keep a rig running in the Buda in 2015. Oil prices had already cracked below $90 when he made those comments.

    6. Contango has taken Buda production on its Booth-Tortuga lease from zero in the Spring of 2013 to 3,800 Boepd in August of 2014. U.S. Energy has a 30% working interest in the Booth-Tortuga lease.

    U.S. Energy is going to be a growth E&P company with no debt in 2015. It is currently priced like it may be a total bust in 2015. A lot of people are going to be kicking themselves for staring at this and hesitating to pull the trigger when the opportunity is gone.

    Tags: USEG, Commodities
    Oct 28 11:35 AM | Link | 3 Comments
  • U.S. Energy (USEG) Is By Far The Most Levered Way To Play The Buda Oil Discovery In South Texas

    Below this paragraph is the text of an article I wrote about new information uncovered on the Dan Hughes Buda discovery in south Texas. U.S. Energy (NASDAQ:USEG) is by far the most highly levered way for investors to play the Buda. U.S. energy has an enterprise value of $55 million and is the small oil company with a 30% working interest in the Booth-Tortuga lease mentioned below. Because Seeking Alpha uses a $100 million market cap to distinguish between small caps and micro caps U.S. Energy cannot be mentioned in one of their articles that is sent to their partners like Yahoo. After Contango's merger with Crimson Exploration it now has an enterprise value of approximately $950 million. The difference between the enterprise values and the working interests means a share of U.S. Energy gets around 10 times the amount of oil from the Buda as a share of Contango. And Contango is sitting on enough oil in the Buda to potentially have a PV-10 value of $800 million if they decide to run two full time rigs, go for the maximum number of infill wells, and assuming oil stays at an average price of $100. Noel Parks with Ladenburg Thalmann has a $2 price target on U.S. Energy. He stated he is waiting on results from the second well, and maybe the third well, to confirm the discovery before he upgrades the stock. He was unaware of the Dan Hughes wells before it was pointed out to him. The rest of the analysts are also waiting. Because of the Geology the second well is almost certain to be a success. And production from the first well has held up as the Beeler 2H reached full pay-out after three months in the middle of August. The third well which steps out to the west has a very good chance of being a success as well. U.S. Energy is sitting on 2 to 10 times their market cap in PV-10 oil just in the Buda. The 2 times is if the third well is a dud, because they have multiple wells to drill between their successful Beeler #2H well and the Dan Hughes wells. They will get a nice bump in PV-10 value from their petroleum reserve engineers based on the Buda wells they have participated in and the additional surrounding wells drilled by others by the end of the year. Their enterprise value is currently a few million below their existing PV-10 value without the Buda discovery. Those interested should read the links on Dan Hughes filing with the Texas Railroad Commission and the academic paper on the geology. Remember (this is my disclaimer), advice is worth what you paid for it and this advice comes to you for free.

    Excitement has been building in the oil patch in South Texas surrounding the recent Buda oil discovery by private oil company Dan A. Hughes. They discovered major natural fractures in the Buda oil formation along the Zavala and Dimmit County line in Texas. The Hughes Heitz 302 3H well has produced almost 300,000 barrels of light sweet crude oil in a little over a year and is still producing. Unlike Eagle Ford wells, Buda wells do not require fracture stimulation and the wells cost less than $4 million to drill and complete. In addition, the Heitz 3H well is producing fairly large quantities of very liquids rich natural gas.

    What makes this discovery so important for Contango Oil & Gas (NYSEMKT:MCF) is that they have a large lease bordering the western side of the Hughes lease called the Booth-Tortuga lease. This is because of Contango's recent acquisition of Crimson Exploration.

    Key information on this particular Buda sweet-spot is revealed by Dan A. Hughes Oil Company's filing with the Texas Railroad Commission at a hearing to observe field rules for the Buda formation in Zavala and Frio Counties in Texas. The hearing was observed by Black Brush O&G, LLC. In the filing, Dan A. Hughes reveals that "in support of its position it submitted a structural map for the Buda formation for the area surrounding its Heitz lease in Zavala County, Texas. The structural map indicates the Buda formation is contiguous throughout the region. It also shows that the Buda formation is thicker to the west of its lease."

    Contango Oil & Gas has a 50% working interest in 10,140 gross acres on the Booth-Tortuga lease, which neighbors the western side of the Hughes Oil Heitz lease. A small oil company has a 30% working interest in the Booth-Tortuga lease and the rest of the working interests are broken up amongst various entities.

    The real secret to unveiling Buda sweet-spots is unlocked in the hearing when Dan A. Hughes Company testifies that "faulting is present near the eastern boundary of the Zavala and Dimmit County line. Hughes seeks to drill wells near fault lines which create natural fractures due to faulting." Basically, the reason natural fractures occur in the Buda oil formation is because ancient earthquakes split the rocks and allow oil to flow naturally. The way to find natural fractures is to find fault lines. The bigger the better.

    It just so happens that the area Hughes and Contango are drilling in sits on top of ancient underground volcanoes with multiple fault lines. An academic paper by Truitt F. Mathews details the geology of the area. One aspect is a major fault line, known as the Zavala Syncline, runs very close to and potentially right under the Booth-Tortuga lease. The Zavala Syncline splits like a wishbone starting about 10 miles west of Frio County near the border of Zavala and Dimmit Counties. One leg runs due west just south of the Zavala County line and the other leg heads northwest up through Zavala County.

    Based on the well spacing information filed by Dan A. Hughes Oil Company, Contango could have approximately 40 to 80 horizontal drilling locations in the Buda formation due to the natural fractures created by the nearby fault lines. Hughes estimates there are 715,000 barrels of oil in place for every 152 net acres. Their current estimated recovery factor of 15% is for just one vertical well drilled on 152 net acres. But Hughes estimates three more in-fill wells can be drilled for a total of four vertical wells per 152 acres. This would significantly increase the recovery factor. Cotango could be sitting on top of 40 million to 50 million gross barrels of oil in the Buda formation on its Booth-Tortuga lease with a total recovery factor of potentially 30% to 50%.

    The opportunity for investors comes from the fact the information on the geology of Zavala county is obscure. And the documents on the Dan Hughes hearing in front of the Texas Railroad Commission are even more obscure. Contango has already drilled one Buda well that began producing in May and fully paid for itself during August. They have completed the second well and are currently drilling the third well. Right now the analysts following the companies near the Buda discovery are waiting for additional wells to confirm the discovery. They are unaware of the obscure geological information, or of the Dan Hughes filings with the Texas Railroad Commission. If they knew about this they wouldn't be waiting for more results because the first Contango well has been very successful. Results for the second Contango well could be out before the end of October. thirty day production results on the third well could be reported before the end of November.

    There are other publicly traded companies with acreage in the area. Matador Resources (NYSE:MTDR) is shooting 3D seismic and expects results in October. Chesapeake (NYSE:CHK) was the largest leaseholder in the area, but recently sold a lot of acreage to EXCO Resources (NYSE:XCO). Newfield Exploration (NYSE:NFX) owns a large portion of the leases on the western half of the Zavala and Dimmit County line right on top of one of the legs of the Zavala Syncline. Anadarko Petroleum (NYSE:APC) and Sanchez Energy (NYSE:SN) also lease acreage in the area.

    Most investors and oil people know a good Buda well requires finding an area with natural fractures. But they don't know where they occur, or why. They are waiting on someone else to drill near them to take the risk. This is how Contango stumbled into a fortune in the Buda thanks to Dan Hughes. What they should be doing is shooting 3D Seismic like Dan Hughes and Matador and looking for the fault lines. Finding the fault lines is the secret to a good Buda well. Because naturally fractured Buda wells recover their EUR's so quickly, Contango should put out a second full time rig and turn the Buda discovery into a windfall rather than an annuity.

    Disclosure: I am long USEG.

    Oct 09 3:49 PM | Link | 40 Comments
  • Buda Well Results On The Zavala/Dimmit Border Remain Compelling

    Evidence continues to grow showing some Buda wells drilled in a sweet spot on the Zavala/Dimmit County lines in South Texas have better drilling economics than Eagle Ford wells. Two previous articles discussed the newly discovered Buda sweet spot Some Buda Wells In South Texas Outperforming Eagle Ford Wells and 3 Stocks With Lots Of Upside From A New Oil Discovery Underneath The Eagle Ford. The Buda is a naturally fractured oil formation located approximately 100 feet below the Eagle Ford. While a typical Eagle Ford well costs $7 million to $8 million to drill and frack, a Buda well costs less than $4 million because it does not have to be fracked.

    The best Buda well drilled to date is the Heitz 302 3H well by private oil company Dan Hughes. According to the Texas Railroad Commission, the Heitz 302 3H well produced 236,011 barrels of light sweet crude oil during its first 11 months of production. In April of 2013, the well was still averaging 655 barrels per day of light sweet crude oil. Additionally, the well also produced 159,099 mcf of natural gas. Dan Hughes has drilled several very good Buda wells on the Zavala/Dimmit border north of Big Wells, Texas. Its success with the Buda formation in that area is being replicated by Sage Energy. The Sage Energy Mills 1H well has produced 42,540 barrels of light sweet crude oil during its first 2 1/2 months of production. In April, the well averaged 671 barrels of oil per day.

    Crimson Exploration (NASDAQ:CXPO) is the operator and has a 50% working interest in the Beeler 2H well. This well is an offset well and in very close proximity to both the Heitz 302 3H well and the Mills 1H well. According to Crimson, the well was successfully drilled and brought to full production in mid-May. Crimson plans to announce the results of the first 30 days of production for the Beeler 2H well sometime within the next couple of weeks. Crimson plans to spud another Buda well in July. Once Crimson's pending merger with Contango (NYSEMKT:MCF) is complete they plan to run a full time rig in the Buda. Crimson could have anywhere from 20 to 40 Buda wells to drill on its acreage next to the Dan Hughes discovery of a sweet spot in the Buda. U.S. Energy (NASDAQ:USEG) has a 30% working interest in all of the Crimson Buda wells in Zavala and Dimmit counties.

    Sanchez Energy (NYSE:SN) recently completed an acquisition from Hess for 43,000 net Eagle Ford acres, some of which is only a few miles from the Dan Hughes Buda discovery. According to Sanchez, the key to having a successful Buda well is to find natural fractures. While the Buda underlies almost all Eagle Ford acreage, natural fractures that allow the oil to flow freely do not. Crimson and their drilling partners indicated they did find natural fractures in the mud logs of the Beeler 2H well.

    Chesapeake Energy (NYSE:CHK) also has significant acreage near the Dan Hughes discovery, but much of it has been put up for sale as part of its Northern Eagle Ford package. Anadarko Petroleum (NYSE:APC) also has acreage in this area of Dimmit County. Unlike Chesapeake, they are in a much stronger financial position and are actively seeking to lease additional acreage. Matador Resources (NYSE:MTDR) also has some acreage a few miles from the Dan Hughes Buda discovery.

    What creates a compelling opportunity for investors is because Dan Hughes and Sage Energy are private companies they have not been disclosing to analysts and investors their results. They have not been making the rounds at Energy Investment Conferences held by Wall Street firms, nor issuing press releases. While the oil men is South Texas know about the Dan Hughes Buda sweet spot discovery, most Wall Street investors do not. That will all change when Crimson releases the results of their Beeler 2H well. Of course, a positive change in investor perceptions is dependent upon Crimson achieving comparable results to Dan Hughes and Sage Energy.



    Disclosure: I am long CXPO, USEG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: APC, CHK, MCF, MTDR, SN, CXPO, commodities
    Jun 05 4:08 PM | Link | 9 Comments
Full index of posts »
Latest Followers


More »

Latest Comments

Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.