zman’s Energy Brain

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Archive for March 8th, 2007

Endeavour Petroleum – One Interesting Little Minnow

Posted by zmann on March 8, 2007

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 story 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 experiened) 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, END on the Amex. Not Your Typical $2 Player.

END is a relatively new, pure North Sea E&P 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 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. Mr Transier went to END.

John Seitz – former CEO, COO, President of Anadarko. Now heading up the geology team co-founder and vice-chairman of the board of END.

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

32 geologists, geophysicists, and engineers as of year end 2006.

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)
  • 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 proved 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: 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 – 40 Bcf 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, 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 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 during May 2007 and take about 35 days to reach TD. (so we probably know something mid to late June). Note: I had originally penciled this one in as a March end spud and April TD but it got pushed back to due to rig availability.
    • There’s a second, smaller prospect (Cullen) on the east part of the that probably gets more attention if Balgownie is succesful.

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 tieback to an existing FSU in late 2008. On a net basis it probably adds about 3,000 Boepd.

Production Growth Chart

end-production-profile.JPGIf 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 Norweigian production. See how it creeps up over time. That’s an expectation that their exploitation and workover activity will arrest field declines and ultimately revitalized 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.

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 a time) and forget about for awhile but of course, there’s no rush here; do your own DD, I could be wrong.

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.


Posted in Uncategorized | 13 Comments »

Thursday Morning – Oil Review / Natural Gas Preview

Posted by zmann on March 8, 2007

EIA posts bigger than expected withdrawals of crude, distillate, and gasoline and prices run wild. Given the size of the inventory declines it’s clear that the recent “fog out” at the Houston Ship Channel is responsible for a majority of the break between estimates and reality. Next week we are likely to see a sizable build in crude inventories. Oil and gasoline prices spiked up on the unexpectedly large withdrawals.

  • Crude: down 4.8 mm barrels. I thought is would be closer to the high end of the range which was a build as I had thought the backlog of tankers at the HSC had been worked through. According to the EIA:
Due, in part, to delays at the Houston Ship Channel, U.S. crude oil imports
averaged less than 8.9 million barrels per day last week, down 650,000 barrels
per day from the previous week. 
    • 0.65 mm bopd X 7 days = 4.55 mm barrels. It’s not gone. It didn’t sink in the GOM. It has been worked through and will show up as a surge next week.
    • So I missed by a “country mile.” Of course so did the guys who get paid $MM to do this. By the way, some of the suggestions I got via flaming emails last night are not anatomically possible. Jeeze.
  • Gasoline: down 3.8 mm barrels. Refinery capacity actually fell 0.2% to 85.8% and according to the EIA the mix of gasoline vs distillates also weighed on inventory levels.

gasoline-030707.JPG

The EIA estimated yesterday that gas prices will rise another $0.40 between now and the beginning of the driving season. My thoughts is that gasoline prices have already had an extra-seasonal rally that will mute the normal run up towards the driving season (unless things stay broken and imports continue to fall- which I really doubt).

  • Distillate: down 1.3 mm barrels. And really ceasing to matter much given the time of year(unless you drive a diesel or ship things from place to place, then it’s not so good).

On to the natural gas inventory numbers:

  • My expectation: 75 Bcf withdrawal. Last week was a very normal week as temperatures go this time of year. Gas-weighted HDDs of 170 were 2 above normal and 2 below the comparable week a year ago. We got a pull of 85 Bcf then but supply and demand were both still pretty hinky from Katrina. Also, the east was a lot colder in the year ago week than it was last week.

zeb-estimate-table-030807.JPG

A 75 Bcf withdrawal would leave storage at 1,662 Bcf for the end of February, down 229 Bcf from a year ago still pretty full (4th highest on record for a Feb. month end) as shown below:

feb-07-end-storage.JPG

Consensus expectation: ??? Bcf withdrawal. I’ll let you know when I see it on CNBC. I think it’ll take a number below 80 Bcf to move gas out of its current $7.25 to $7.50 trading range and to make a serious run on $7. Conversely, a number of 100 Bcf or higher would probably move my estimate of the Spring floor price up to the $6 to $6.50 range.

Odds & Ends

Analyst Watch: nada

Opec Watch: All of the talk from Opec ministers seems to indicate no further production cut will occur at the March 15th meeting.

Holdings Watch: Getting Ready To Make Further Short Moves. The broader market is called up strongly this morning after yesterday’s Beige Book showed a broad slowing in the economy’s growth rate. Odds of a rate cut by July have increased further this morning as jobless claims seem to confirm what the Fed has been saying. With the market going one way (up) at least for the time being (I think we’ve got more correcting to do) and oil and natural gas looking toppy (at least to me) I’ll be looking at adding to current and entering new put positions later in the day (after natural gas inventories come out). But I’ll be very selective and chintzy with my bids.

Snafu Watch: Northstar back online. From Upstream – Oil giant BP has resumed production at its offshore Northstar oilfield in Alaska, three weeks after a pipeline leak prompted the field’s shutdown. Comment: That’s 47, 000 bopd off the snafu list…let’s see if anyone notices.

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