Scenarios for AMEP’s Future—2007 and Beyond
By the end of 2007, American Energy Production, Inc., will not be the company it is today. Dramatic changes are in store. Current and potential investors would be wise to examine the several possible outcomes for the company. Here, I have outlined my personal potential scenarios. They are decidedly my own. They should not be the basis for anyone’s investment in the company. For my own personal consideration, and to help me continue make profitable decisions about the company, I’ve outlined all of the reasonably potential outcomes I can foresee for AMEP in 2007 and beyond.
--A New Beginning Beyond the BDC--
With the imminent resolution of the SEC-contested business development company (BDC) organization of AMEP and its holdings, the company’s corporate assets will become fully known to the investment world. Presently, they are not. There is no doubt that AMEP owns drilling lease rights to over 7,000 acres on the universally productive Barnett Shale in Texas. Furthermore, AMEP holds these drilling rights unshared with other companies. Therefore, oil and natural gas (O&NG) revenues accrued from these lease holdings will be diluted only by standard landowner royalties and taxes. Those are not inconsequential, but they do not approach the fractional revenue split among multiple corporate entities on wells jointly owned or operated.
In short, AMEP has full net working interests in virtually all of the wells it will drill, and those wells will all be on the vaunted Barnett Shale and other productive geological strata above the shale. From my standpoint, neither of these factors have been entered into any official AMEP Net Asset Valuation (NAV), accounting in part for the currently low (Dec. 06) share price.
--The New Padgett Well--
With the recently filed application to drill a new AMEP well near the completed Padgett Ranch #11 well, there is evidence that the Padgett #11 will be very productive. High closed-in pressures are known to be a factor in the completed #11, but any real production results have not been announced. But inasmuch as AMEP has thousands of acres of other lease rights upon which to drill its next well, the only sensible reason to install the new one just a hundred yards or so from #11 would be because #11 is known to be a great producer.
If the two wells on the Padgett Ranch are highly productive, others owned by AMEP will be drilled there in coming months. The assets of these wells have not entered into any publicly-announced NAV.
--Two Drilling Rigs – Insufficient Current NAV--
Secondly, AMEP owns two functioning drilling rigs, along with other ancillary drilling equipment and supplies. Investors will discover that vast acreages of the Barnett Shale sit undrilled-upon for lack of drilling rigs. Many O&NG companies own drilling rights over the Barnett Shale, but own no drilling rigs themselves. Rigs are in short supply and are rented out at high day-rates. AMEP does not have to stand at the end of a long line of small O&NG companies attempting to arrange favorable drilling rents or schedules. With their two wholly-owned rigs, AMEP can drill in-house, with no additional costs or delayed scheduling. This is a major corporate asset, as yet also not factored into any realistic public NAV.
Altogether, I am fully convinced that the current share price (less than 10 cents) is only a fraction of the company’s dissolution value. Others who are current on the issue have speculated that a sale of the company’s drilling leases alone are worth something in the range of 7 cents a share or more. The ability to drill on the company’s own leases with its own two drilling rigs is as yet unaccounted for in the daily share price.
As I mentioned, the company also owns additional drilling, storage, and transport equipment, all of which will facilitate getting extracted product to market. A number of leases are adjacent to or under working NG transmission lines that will bring product conveniently to market.
Again, it is abundantly clear that the AMEP NAV is markedly higher than reflected in its current low share price. The general market is ignorant of AMEP’s total corporate assets.
But all of that is supporting background material, not a reasonable estimation of any future worth, the real purpose of this article. What, then, might be some reasonable, evidence-based projections for AMEP in 2007 and the ensuing years? Let’s get started.
--Worst Possible Projection--
I will start with what I imagine would be a worst possible outcome, where everything imaginable turns out wrong. I’ll presume, for example, that neither the Padgett #11 nor any other AMEP well is able to produce any profit. I’ll presume that all of the wells to be drilled in 2007, for whatever reason (hard to imagine) turn out to be moderate, low-yield wells.
This will presume that by December 2007, try as hard as it might, AMEP was not able to generate any significant operating funds, that corporate revenues continued to be negligible or absent. The share price result? AMEP would be worth somewhere just under a dime a share. In folding, the company would sell off its two major assets, its drilling rigs and associated equipment, and also its rights to drill on 7000 acres of the Barnett Shale.
That’s the first scenario, the worst—and least likely. Even if it were to happen, I would more than double my early investment in AMEP. In two years I have acquired over 2.6 million shares, at an average cost of 3.3 cents each. A close-out sale at 7 to 10 cents would be very profitable—but I don’t think this is a reasonable outcome. Other potential investors will have to make their own decisions on this.
There is every reason—geological, engineering, oil field experience, and many others—to believe that AMEP’s new wells are and will be highly productive. All ensuing projections merely set out potential well completions and production numbers. From those, round ballpark production and revenue yields can be calculated. Here are the factors I’ve used to come up with in my projections.
--The Two Central Success Factors--
The first question is how many wells can the two AMEP rigs and their crews complete in 2007 and beyond. The second question is how many production dollars will flow to the company from each well. I’ve created a spreadsheet with both of these factors, and the numbers—even at the lowest production levels—are orders of magnitude beyond the current sub-dime share price.
How many wells might the AMEP crews drill in 2007? Of course, it depends upon how quickly they can drill each single well. For my projections, I created a possible well-completion range. At the lowest, where each well requires six weeks to complete and bring on line, two drilling rigs and crews could complete 17 wells. (I’m presuming a 50-week operating year in all calculations.)
I understand, however, that Barnett Shale wells should never take this length of time to complete. For the shortest drilling times, I’ve presumed a typical well could come on line after just 3 weeks of drilling time. Two rigs punching wells at 3-wk. intervals could complete 33 in a year.
So, at the low end, we could expect AMEP to have 17 new wells at the end of December, 2007, or at the high end, a total of 33.
The next factoring question is how many dollars of revenue will accrue to the company from each of its wells. Using existing wells over the Barnett Shale for guidance, it appears that virtually all of them produce some oil or natural gas. It could be presumed that poor Barnett wells would yield one or two million dollars annually. But there is every indication from the Padgett #11 that this will not be the case. If it were, why would the experienced people running AMEP deliberately choose to put their second well as close to the #11 as legally allowed? And because few other known Barnett Shale wells are poor producers, I’ve elected to discard the one to two million dollar yields/well. There is no evidence whatsoever to support such low numbers.
--Production Projections--
Consequently, I’m starting my low-end production numbers at $3 million per well per year. Like other “monster” Barnett wells, the Padgett #11 could easily be two or more times as productive. It could yield anywhere from five to eight million dollars of revenues in its first years of production.
Production from the Padgett #11 will not indicate what the adjacent new Padgett #12 will yield. I didn’t mention that the new well is authorized for horizontal drilling, sending a shaft sideways deep into the producing stratum. The #11 was only a short vertical puncturing of the local pay zone, taking O&NG from a single short column of hydrocarbon-bearing strata. The new Padgett well will turn sideways deeply into the pay zone. Consequently, it must yield some multiple of the #11.
At the high end, I’m presuming an annual production yield of $5 million per well. Both of the Padgett wells may be much higher, but just to be conservatively safe, I’ll presume a $5 million high average. If this can be realized—and it’s not totally unreasonable—the results for investors will be stunning.
So what are calculated projections at various well numbers and production results? They are these.
--Total Projected Results--
At the lowest end I have presumed AMEP will be able to complete and bring online only 15 wells in all of 2007. Additionally I presume that the average revenue yield to AMEP will be just $3 million per well. That’s a gross corporate revenue stream of $45 million. There is every reason to believe that AMEP’s gross revenues for 2007 will be at least at these levels or higher.
Now at the high end, should everything go forth perfectly, the numbers are these. In this case, I’ve presumed that AMEP drills and rigs completed wells in just 3 weeks each, yielding 33 for the year. But for simplification, let’s presume a round 30 new wells in 2007.
Let’s also presume that average well revenues coming to the company will be $5 million per well. That’s a total gross revenues sum of $150 million. (These are no longer “mom and pop” numbers.)
On the lowest end, I’m seeing corporate revenues of $45 million, with $150 millions at the highest end.
--The Mid-range Projection--
I don’t think either one of these will be accurate. If I had to make a single bet, I’d toss my dice at a, say, 60 to 80 million dollar range, right in the middle.
The results for AMEP shareholders at any of these amounts, high, low, or medium, will be rewarding. What might AMEP share prices be toward the end of 2007? Let’s take a look.
--2007 Share Price Projections--
Let’s start at the high end. Share prices depend primarily (but not exclusively) on two things, the number of outstanding shares to which dividends would be distributed, and current Price to Earnings or P/E ratios. AMEP is authorized to issue up to 500 million shares. The current number of shares is somewhere in the 480s, I believe. For convenience and simplicity, I’ll presume that all 500 million shares are outstanding and being traded.
With a gross corporate income of $150 million, divided among 500 million shares, the maximum possible dividend would be 30 cents. Of course, because of operating costs, royalties, taxes, and other factors, any dividend would not be at this level. But that’s not a concern as AMEP is not likely to issue dividends in 2007 anyway. It would be best to retain all free revenues to invest in new leases, drilling equipment, or other projects that would enhance future shareholder values.
But let’s presume the 30 cent earnings per share number. At a low P/E of 10:1, that would yield a share price at the end of 2007 of three bucks. But a P/E of 10:1 is likely to be low. I think a 15:1 ratio is possible, even reasonable. That would result in an AMEP share price of $4.50.
Most investors would question either of these elevated projections, and rightfully so. Everything has to go just so for these to be realized in 2007.
What are the numbers down at the low end? A corporate revenue stream of $45 million divides into earnings of about 9 cents per outstanding share. At a P/E of 10:1 the end-of-year share price should be around 90 cents. At a 15:1 P/E the share price will be $1.35.
That’s at the very reasonable low end of projections. In the middle, at say $60 million dollars of revenues, the 10:1 P/E will be $1.20, with the 15:1 ratio being $1.80.
In summary, my year-away share price projections range from $0.90 to $4.50. Both the low and the high numbers are possible. If I’m way short, by a factor of two on the low end, a year-end share price in 2007 of only $0.45 would still be an almost 9x gain over the late December 2006 share price. A mid-range share price of $1.20 will be an approximate 20x gain for the year.
--Investing in AMEP for the Long Term--
Anyone who invests in AMEP only with the thought of selling out at the end of 2007 is essentially a trader, not an investor. Nowhere here have I projected new wells and their revenues out into 2008 and 2009. With two drills and crews it is impossible to saturate AMEP’s 7000 acres in one year. AMEP will be drilling new wells for the next several years. When they saturate their own leases, they can cost- and revenue-share new wells on lands leased by other companies who don’t own their own rigs. In all cases, AMEP revenues can be projected to ramp upward for the foreseeable future. My projections have been only for 2007. I intend to sell very, very few (if any) of my shares in the coming year.
AMEP share prices toward the end of the decade and into the next are likely to approach or exceed $10 per share. But those numbers are too far in the future. Astute investors should focus presently on 2007. It will be a remarkable year for those who decide to purchase at the current low prices.
Again, I caution that these are figures I determined for my own consideration. I present them only as a prompt for others to undertake their own detailed due diligence. No one, regardless of the grand potential of AMEP presented here should invest with anything other than thoroughly discretionary funds, the ones that might otherwise have been discarded on a tropical vacation, a hobby sports car, or any other similarly peripheral or non-essential expenditure.
For those of us who have held AMEP shares for the long term, for two years or more, the trek to the edge of financial greatness for this company has been slow and fitful. All of us would have presumed more rapid progress. But the time has arrived. Now, with the impending reorganization, with the dumping of the BDC status, and with the new wells being drilled and completed, 2007 will be the first year of reward with this company. There will be many more in the future, I believe.
--Falconer66a
