Synergy Resources, Inc. OTC: SYRG.OB - $3.10
Independent Exploration and Production Oil & Gas
Synergy Resources continues an aggressive growth strategy to expand production
in the Denver Julesburg Basin with an initial focus on the Wattenberg Field.
With a 25 year history in the DJ Basin, drilling 350 wells and profitably selling two
operating companies, Synergy’s management is now seeking to exploit the revival
of the DJ Basin brought about by technological advances in fracture stimulation of
hydrocarbon deposits in shale. Existing wells can now be fracture stimulated multiple
times, resulting in improved flow rates sometimes exceeding original production, while
flattening the decline curve, increasing recoverable reserves and extending well life. In
addition, directional drilling allows for multiple in-fill wells to be drilled from one
platform, allowing for a fuller exploitation of reserves in built-up and developed areas.
This is particularly important in the Wattenberg Field, which lies under the I-25 urban
corridor north of Denver.
The company began FY 2010 with 2 productive wells and drilled another 22 during
the year. In Q1 FY 2011 another 14 wells were completed and 8 purchased and by
the end of December 2010, the company counted 50 gross wells (29 net). At the end
of Q1 FY 2011, the company had reserves of 661M Bbls of oil and 4.4BCF of gas. So
far in Q2, 11 of these wells have been fracture stimulated to open new production zones
resulting in increased production rates. This sequential “fracing” of production zones is
a strategy that is expected to maximize recovery.
With an $18.0m equity financing and a $5.6m lease sale during January combined
with $4.7m in cash at the end of the November 2010 quarter, the company has the
funds required to carry out a $27.0m capital spending program for fiscal 2011.
This is expected to include the acquisition of Petroleum Exploration and Management
(PEM) owned by company management which is under a non-binding letter of intent.
This purchase should increase the well count by 175% to 138 gross wells and lease
holdings by 40% to an estimated 15,000 net acres. The price is expected to be between
$14.0m to $17.0m in stock, cash and debt based upon a fairness opinion to be
determined by a third party. The company also has a letter of intent to issue 2.25m
shares to acquire leases on 110,000 acres in the eastern DJ Basin. Finally, the company
plans to spend $15.0m on its drilling and well re-fracturing program.
In Q1 the company posted $1.4m in revenues and generated $0.6m in earnings
before interest and non-cash charges. We expect revenues by the end of the year to
ramp to a $5.0m quarterly run rate and generating an EBITDA in excess of $2.0m.
These gains will come from a continuation of the drilling and “fracing” program, and
the addition of production from PEM wells.
We are initiating coverage with a Buy rating and a price target of $5.00 per share.
This is based upon the rising value of DJ Basin leaseholds and our estimate for the
company’s PV 10 Reserve value at year end to be in the $40.0m and command a
Price/Reserve multiple of 4.4x, which compares to a 7.5x ratio for its peers
