Superior Oil &Gas Company (fka SIOR)

[geopressure]

Valuation Link:

http://www.tulsaworld.com/business/article.aspx?subjectid=49&articleid=20110924_49_e1_cutlin919814

Bear in mind that the "hit or miss" quote in the article is a statement made by the operator in an effort to keep lease rates from skyrocketing. The industry learned their lesson when Haynesville Shale leases reached $30,000/acre because operators were boasting that the play was a 'sure-thing' with no chance of a dry hole.

By definition, a resource play is a 'sure-thing' so long as you can afford a competent directional driller. The bounds of the Mississippian Lime Play are known. Sure, there are sweet-spots with high concentrations of natural fractures which increase the storage capacity of the targeted formation and also enhance permeability - making 'big' wells. Enhanced permeability ensures that oil molecules from remote or distant pockets within a given well's drainage basin will be able to find a pathway to the well-bore. As this play continues to develop, technology will improve and operators will perfect their fracking/completion techniques for this play, as they have with Bakken, Haynesville, or Bossier plays. Eventually operators will be able to sufficiently enhance the permeability anywhere in the play to that equal to the 'sweet-spots'. This means that the longer SIOR waits to drill, the higher the initial production rates will be and the flatter the decline curve will be.

SIOR is an exploration company, I don't see them as being a 'land-bank, etc.' Until we hear more from management (which has been promised to update us in a week or so) we don't really have any details as to how or where the company get capital to lease these minerals. We do know that the company was struggling to the point of bankruptcy & couldn't get financing to re-enter/ horizontally sidetrack their Lincoln-Lewis#1 well. Then everything changed when the Mississippian Lime Play was announced & lease rates exploded after a transition that Sandridge was involved with. All of the sudden, the minerals that SIOR already had leased were worth 20 times what they were before, giving SIOR collateral for financing. This is purely speculation (but makes the most sense from a financial standpoint), but I assume that SIOR obtained financing and rather than drill the Lincoln-Lewis#1 well, they made the decision to use the capital to expand their footprint in the play. As development of this play moves forward, the more acreage SIOR controls, the more power they will have.

Generally smaller E&P companies like SIOR grab as many leases as possible, as cheap as possible & wait. Soon enough, the bigger players come along, wanting to increase their reserves. They will want to buy SIOR's leases for cash, but smaller oil & gas companies don't want $15 for each barrel in the ground, they want $85 for each barrel sold to the pipeline company. A joint venture is normally drawn up with the larger company taking the role of the operator. The larger company will pay for 100% cost of field development (drilling, completing, production equipment, & pipelines) in exchange for a majority of the working-rights as drawn up in each individual lease. The larger the position SIOR can put together before such a joint venture takes place, the more influence they will have in the negotiations. Generally, the more minerals they control, the higher their percentage of the working rights will be. Drilling cost are known to be cheap in this play compared to the Bakken or Eagleford Shales, so this will lower the leverage of the operating company, also giving SIOR a better chance of retaining a high percentage of the working rights.

For those who don't know what 'working rights' are:

Total Production - Royalties = 100% working interest (working rights)

Royalties are most commonly 1/8 (12.5%) of working rights, but in larger plays can climb to 3/16 (18.75%) or even 1/4 (25%) of the total production.

Should SIOR eventually own 40% working interest of a 1000 barrel per day well with a 3/16's royalty outlined in the lease, then (0.4)(1-0.1875)(1000 bbl/day) yields 325 barrels per day would be SIOR's to do with as they see fit.

SIOR currently has 13 sections (8320 acres) leased within the play (though we believe they closed another lease last week for an unknown number of acres). As for now, the State of OK has mandated 360 acre well spacing (but they plan to reduce to 180 acre spacing in the future). This means that SIOR currently has 26 potential wells (52 ultimately). Many wells are producing 2000 barrels per day, but if SIOR's 26 wells only produced 1000 barrels per day after drilling SIOR would see 9100 barrels per day using the numbers from above (40% working interest & 3/16th's royalty). Selling this oil to a pipeline company for $85 per barrel will put $773,500.00 per day into SIOR's pocket. This equates to $23,205,000.00 per month, or $282,327,500.00 per year. You should note that this revenue would be achieved with zero additional financing, cost, or expenditure on the part of SOIR.

When the state of OK allows for down-spacing to 180 acres per well, this revenue would double. Also, the valuation above does not consider the leases that were closed last week (if in fact any were closed last week).

I really don't know how much production, but I do know that SIOR has current production, providing a stream of income. When you call their office, they answer "pumping office" which indicates to me that they have enough pumpers to justify having someone to oversee them.

This current production would come from traditional vertical wells probably drilled into sands or fractured cherty formations that overly the Mississippian Lime/Shale source rocks.