AEZ - BEXP well is 8 miles from AEZ property. The new AEZ well is drilling and result will be published in 45-90 days. I am holding my breath as it could be a gusher and put AEZ on the map.
Here are some cut and paste comments from a recent report:
Highlights
We are reiterating our BUY rating on AEZ shares and raising our price target to $6.00 per share from $5.00. Our target is based on our revised risked NAV valuation for AEZ.
•
Last night, Brigham (BEXP-$14.43-NR) announced a very impressive 3,807 boe/d 24-hour rate on its State 36-1 #1H well in the Bakken Shale play. The well is in Williams County, ND and is the closest recent well completed near AEZ’s Goliath project.
•
No more than 8 miles away. We have spoken with AEZ management today and they estimate that the well is only about 8 miles away from the southwest edge of Goliath.
•
The size of the BEXP well and its proximity to AEZ’s acreage combine to further increase our comfort with the prospectivity at Goliath. As a result, we are nudging up our credit (chances for success) for Goliath acreage in our RNAV to 30% from 25%. We are also increasing our per-well EUR (expected ultimate recovery) assumption to 500,000 boe from our prior 415,000. In particular, the fact that BEXP has been able to achieve increasing well results the closer it gets to Goliath increases the chances, in our view, that AEZ’s acreage will work.
•
Completion techniques vs. geology. The State 36-1 #1H was completed using 30 frac stages. The well also exceeds the 2,240 boe/d average of BEXP’s recent long-lateral, high-frac wells, although most of them have somewhat fewer stages. At the current time, it is difficult to ascertain how much of BEXP’s improving performance stems from its use of steadily increasing frac stages, and how much can be attributed to the geological trend at the well location. However, since the geology is clearly sufficient to generate wells far above the assumptions we have used in our past RNAV, we consider the new well to be a sign that our valuation to date has been conservative.
•
The Company’s own well, the Tong Trust 1-20H, is on schedule. Management indicates that drilling has gone smoothly to date. Given the 30-45 days expected drilling time, plus the 2-4 weeks of expected completion time, results could be available sometime from early February to early March 2010, assuming no external issues like severe weather intervene.
Reiterating BUY Rating and Raising Price Target
We are reiterating our BUY rating on AEZ shares and raising our price target to $6.00 per share from $5.00. Our target is based on our revised risked NAV valuation for AEZ of $6.10 per share.
Two Levers to Our Valuation Shift – Potential Well Size and Chances for Success
In our RNAV calculation, we are nudging up our assumption for the chances of success in AEZ’s Goliath acreage to 30% from 25%. We are also increasing our per-well EUR (expected ultimate recovery) assumption to 500,000 boe from the 415,000 figure that we have used for AEZ over the last three years. (We note that our RNAV does not yet incorporate AEZ’s most recent 16,100 net acre acquisition of Bakken acreage to the north of its original Goliath position.)
Big Brigham Well Near AEZ’s Acreage
Last night, Brigham Exploration (BEXP-$14.43-NR) announced a very impressive 3,807 boe/d 24-hour rate on its State 36-1 #1H well in the Bakken Shale play. The well is in Williams County, ND and is the closest recent well completed near AEZ’s Goliath project.
Our Conclusion – No Guarantees, but an Encouraging Sign
While we cannot say for certain that AEZ’s wells at Goliath will be successful until a new well is actually completed there, the BEXP State well gives us more breathing room to contemplate upside. The key takeaway is that the State well makes it easier for us to envision EUR upside to what we believe is our conservative valuation of AEZ’s Bakken potential.
Possible Implications of the New Well
Closest Well Drilled to Goliath So Far that Uses Current Completion Techniques
•
No more than 8 miles away. We have spoken with AEZ management today and the Company estimates that the well is only about 8 miles away from the southwest edge of Goliath. It is also about 15 miles away from AEZ’s next planned drilling location in the play, which is the Ron Viall 1-25H well. Last night’s BEXP well is somewhat further west than the current test well AEZ is drilling, which is the Tong Trust 1-20H.
•
We are not geologists, but our perception is that the State 36-1 #1H well takes off the table a decent-sized piece of the uncertainty of Goliath’s potential. Historically, the Nesson Anticline, a geological feature running north/south to the east of Goliath, has been the focus of production in the legacy Bakken oil play, which was drilled vertically. Not surprisingly, the industry’s recent attempts to prove up the Bakken’s horizontal potential have stuck fairly close to the Anticline, which occupies only a relatively small area within the enormous Williston Basin, which covers more than half of the state of North Dakota and a good slice of Montana as well.
By our reasoning, with hundreds of wells of legacy production along the Anticline (to the east of Goliath), and now a very large IP rate at the State 36-1 #1H (to the southwest), the likelihood of at least some part of Goliath, in which AEZ holds a 102,000 gross acre position, being able to produce wells that exceed or at least meet our model assumptions (previously 415,000 boe/well) seems to be increasing.
•
Completion techniques vs. geology. The State 36-1 #1H was completed using 30 stages. The well also exceeds the 2,240 boe/d average of BEXP’s recent long-lateral, high-frac wells, although most of them have used somewhat fewer stages (roughly 6-10 less). At the current time, it is difficult to ascertain how much of BEXP’s improving performance stems from its use of steadily increasing frac stages, and how much can be attributed to the geological trend at the well location.
AEZ’s Tong Trust Well Is Currently Drilling – the Ron Viall Well Is Next Expected Location
The Company’s own well, the Tong Trust 1-20H, is on schedule. Management indicates that drilling has gone smoothly to date. Given the 30-45 days of expected drilling time, plus the 2-4 weeks of expected completion time, results could be available sometime from early February to early March 2010, assuming no external issues like severe weather intervene.
Ladenburg
The Big Picture
In the event that AEZ’s Goliath acreage turns out to be largely successful, it cannot be overemphasized how important it is that the Company has been able to not only retain so much of its Bakken acreage, but increase it during 2009. AEZ bought out two smaller partners’ share in the play last year, netting AEZ about 28,000 incremental net acres. In addition, it also last year acquired about 16,100 new net acres to the north of Goliath in what the Company is calling the Titan area. At present, AEZ’s gross acreage position stands at 102,000 and should be about 68,500 net after Halliburton (HAL-$31.65-NR) earns 7,500 net acres in return for drilling and completing the Tong Trust well. Importantly for its future control over developing the play, we believe that AEZ has also retained operatorship over a solid majority of its acreage, as well.
Other Bakken Drilling
As a reminder, drilling in Williams County by other operators includes activity to the west, where Newfield (NFX-$50.65-NR) has planned to drill the Heidi 1-4H,
at the western edge of Goliath. AEZ has a small working interest in the well and plans to participate when it goes forward. To the north, St. Mary (SM-$36.77-NR) and several private companies are also drilling.
Fetter Update on the Way
As a reminder, Halliburton has a 5-well recompletion deal with AEZ in Fetter field. To date, 2 of the 5 wells have been announced, and had 80 boe/d and 563 boe/d IP-s (mostly oil) from the Niobrara. We anticipate that the Company will have additional updates on its Fetter results fairly soon.
Primary Risks
We Are Quick To Remind Investors that AEZ Is Still a Very Early-Stage Company
There is no assurance that the next well drilled in any of its plays will give results so conclusive that they will significantly clarify the aggregate play’s value.
The primary risks of an investment in AEZ shares include (but are not limited to) the following:
Like any E&P, weakening commodity pricing is a significant risk factor; other risk factors include poor drilling results; difficulty in controlling service costs or in securing service and/or infrastructure availability; difficulty in marketing crude oil and natural gas produced; the possibility of dilution from future offerings of equity; difficulty accessing the credit markets in the future; difficulty in closing intended divestment transactions; and, further difficulty in converting short-term investments such as auction-rate securities into cash. See Appendix A for additional risk factors.
