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Saratoga Resources Management Discusses Q1 2013 Results - Earnings Call Transcript
I have been rereading the q1 transcript, the q1 report, and the q4 report, and playing with the numbers. I have concluded that SARA's drop in production is not explainable by mechanical and maintenance issues alone. I infer that the drop is due to letting go of gas wells.
Saratoga Energy was producing 3,500 BOE per day in mid 2012 with plans to grow production to 5,000 BOE by the end of 2012, which they fell far short of at 3365. They project 3,300 BOE daily for mid-2013.
During 2012 Saratoga did 11 successful recompletions (of 12) and 16 workovers
plus completing 3 development wells, the Jupiter well in Grand Bay Field, the North Tiger well in Breton Sound 18 Field and the Mesa Verde well in Vermilion 16 Field. Despite the production added by 11 successful recompletions, 16 workovers, and 3 wells, at the end of the year, production was DOWN, at 3,365 BOE per day, which was blamed on shut-ins from Hurrican Isaac, problems in Main Pass, and other maintenance issues.
So then we move forward to May 13, 2013 with all the Isaac issues said to be resolved, and the Main Pass issues mostly resolved, plus the successful Buddy well (I am not counting the Roux Toux as it is not yet tied in), and production was down again, at about 3,000 BOE daily as of May 13, with projections that it will rise to 3,300 at mid year, "when everything's up and running." As of mid-year we are told all of the Isaac shut ins and the Main Pass and QQ24 issues should have been resolved.
(I am assuming that they include Buddy but not Roux Toux in the projected 3,300 for mid-year. Since Roux Toux tested net 509 boe per day, it could raise the 3000 by a fair amount. They said they were in the process of tying it in on May 13.)
Saratoga will have gone from 3,500 daily BOE in mid 2012 to a projected 3,300 BOE in mid 2013 -- down 200 BOE per day from 12 months earlier, despite 4 development wells, and all the recompletions and workovers!
I can get to 3365 BOE daily on Dec 31, 2012 by starting with mid-2012 production of 3,500 BOE daily and add somewhere around 300 BOE daily from all the recompletions and 3 wells, then subtract 300 for Main Pass and QQ24, and then subtract another 135 for lingering Isaac issues and some compressors and whatnot down for maintenance: 3500 + 300 -300 -135 = 3365.
To get to the projected 3300 BOE daily at mid-2013, I add back 300 and 135 for the resolution of all the mechanical and Isaac issues plus another 200 for the Buddy well. But 3365 (end of 2012) +300 +135 +200 = 4000. I get 4000 BOE daily instead of the 3,300 BOE per day they project. So somewhere in q1 we lost 700 BOE daily that is not accounted for by Main Pass or an additional loss of 135 BOE daily for maintenance.
So I do not think the mechanical issues that they blame (Main Pass, compressors, gas lift, etc) account for the bulk of the missing production because my numbers do not add up.
The analysts at times seem to fear that the shortfall is due to natural decline.
I thought about that and I do not believe it. These are NOT fracked wells in tight rock with rapid decline rates (Saratoga has no fracked wells), but old fashioned wells in porous soil that should have slow decline rates. I do not see how you get an abrupt natural decline of over 20% occurring in the first quarter 2013 in these types of well.
I think the answer is that they are giving up gas production and focusing on oil. I have three reasons for theorizing that this is what they are doing and what accounts for the big reductions in production:
1) their revenues from q4 2012 to q1 2013 did not decline as much (16%) as the large drop in production (24%).
-- Oil and gas revenues of $22.9 million for fourth quarter 2012
-- Oil and gas revenues of $19.26 million for Q1 2013, down 16% from Q4 2012 (very close to $19.34 million for Q1 2012)
2) they are hedging only oil, and have no hedges on natural gas, and
3) they said so in the q1 conference call transcript: "the drop in overall BOEs was due to a drop in natural gas production."
In the Q & A of the q1 transcript they make it sound as if the drop in production just happened as a result of the mechanical problems, but the numbers they give for the effects of Isaac, Main Pass, and QQ24 add up to less than half of the reduction in overall BOEs.
I have long suspected that the actual cost of producing natural gas is somewhere between $4 or $5 Mcf, so this would make sense to me.
I think they do not want to admit it, as so many investors hold the stock for the deep gas well potential. Of course the economics for a high volume gas well are much better at $4 mcf than their low production wells with deferred and perhaps costly maintenance issues.
Does anyone think I am wrong and that such an abrupt and large natural decline could be happening in their type of wells? Or that too long deferred maintenance could lose the production through shut-ins screwing up the pressure or some such?
To me the evidence seems to point to their letting the natural gas wells go based on economics, and turning to oil, but I would love to hear other theories.
Letting go of gas wells creates a large drop in reported BOEs because of the bogus 6 to 1 equivalency, but has a much smaller effect on revenue and even less on net income.
As long as they can add oil production through development wells, the revenues will hold up even if the overall BOEs decline. However, revenues for q1 2013 are virtually the same as revenues for q1 2012. Not good, unless revenue can be increased through retubing and Rocky, as may well happen.
It must be said that the plan to raise production and revenues by CAPEX limited to cash flow alone has not worked over the last 15 months despite 5 successful development wells. Saratoga needs a JV or better financing. Hopefully the findings of the field review and a successful Rocky will spark some interest among potential partners.
In my experience, when an energy company is this undervalued in terms of reserves, the money is found. Someone comes forward. If all else fails, SARA will be sold and the price should be well above $4 even in dire circumstances.
I would love to know how other people account for the missing BOEs. I have it as 700 BOE per day, but you can get it down to 500 BOE by tinkering with the numbers. I think it is due to letting go of natural gas, but what do people think about any lasting effect of shut ins on production, natural decline, etc.?
May 19, 2013. 07:44 AM
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Saratoga Resources Management Discusses Q1 2013 Results - Earnings Call Transcript
Monday, May 13, 2013
The report and the conference call transcript all look good to me. Although the production for Q1 was only 2563 BOE per day, Cooke said that production was already back up to 3,000 BOE daily as of May 13, 2013, due to the resolution of the Main Pass and the QQ24 well issues. But current production remains lower than production for the fourth quarter of 2012, which was about 3,365 BOE.
I think this is what is worrying the analysts. If 4th quarter average production was at 3,365 BOE WITH the Main Pass problems and shut-ins plus some lingering effects of the hurricane still reducing production back then, why is production only 3,000 as of May 13, 2013 with all these problems said to be resolved? I think that they are worried that today's production figure represents ongoing decline, or that wells being brought back are not recovering their former levels of production due to having been shut in.
Cook & Clifford strenuously denied this, saying that the reductions in production are due to continuing mechanical problems, not decline. Whenever they use the word "decline" they stop and present the production reductions in different words. They insist that the reductions are due to mechanical problems.
As for the tubing replacements, Cook said,
"We expect to begin seeing results in the form of production adds before the end of the second quarter and have targeted completion of the program by mid-third." That would be about 4 months from now.
They said that the Rocky well would be spudded around June 1 and should be completed in about a month, which means that we should know something there in 7 or 8 weeks. They are guessing 663 BOE per day for Rocky.
They gave average realized price for oil as $110.92 for the quarter and $4.22 per Mcf for gas, and said their hedging program is currently $1.9 million in the money.
Deep prospects and the Gulf leases will not be drilled this year, but they should have plenty of drilling prospects in Grand Bay.
To me it looks good. I think production could be 3300 BOE per day by mid year, and 4000 by year end. The problem here is that 3300 would still be below the fourth quarter with all its problems and shut ins. The analysts probably fear that the low $7 million capex figure for this quarter will be followed by reduced capex for the second quarter due to cash flow problems stemming from production remaining low.
I can see why investors would want to wait 2 months to see what happens with Rocky, or 4 months to see how the tubing replacement works out, but I think that Saratoga is extremely undervalued.
I am taking Cook and Clifford at their word, that the lowered production is due to mechanical problems which are fixable, and that they will have the cash to move forward with Rocky and the Grand Bay prospects. They obviously believe this themselves or they would not have done the new hires: 2 reservoir engineers, a geophysicist, and a land man.
Of course, if they get drilling partners, the stock will really move. Another thing that would move SARA would be better financing, which I would think would be possible if the Main Pass changes, the tubing replacements, and Rocky bring production up and improve cash flow. So I am pleased with today's reports.
I would love to hear the negative case, as I certainly did not anticipate Saratoga going to $2.10. So let me know the bear case.
May 14, 2013. 03:38 PM
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