Update-Aroway Energy Inc (ARW-tsxv) featured in J. Taylor's Gold, Energy & Tech Stocks-New Buy Recommendation?
Jay Taylor, Gold, Energy & Tech Stocks (6/29/12) "Aroway Energy Inc. is a still small but rapidly growing company that has a number of advantages, which in conjunction with its low price make it very attractive, in my view, for purchase at this time. Those two major positive points are: 1.) Its dominant land position in the Peace River Arch and its close proximity to tie into a pipeline and 2.) Its pipeline access as well as gas gathering and compression infrastructure owned by the partner, in the proximity of the company's existing and future wells. Access has been gained through the company's 50% joint venture partner. Aroway is one of the fastest growing juniors in the area starting from a small four-section (2,560 acres) farm-in land base in September 2010, to its current rolling option on a contiguous land base of 121 sections (77,440 acres)."
Business: Oil and gas production and exploration in
Northern Alberta
Traded TSX: ARW
USOTC: ARWJF
Shares Outstanding: 54.3 million
Management Ownership: 22%
Price 6/29/12: US$0.486
Market Cap: $26.4 million
9 Month EPS: $0.06
Cash @ 3/31/12: $2 million
Progress Rating: A1
Telephone –
Judy-Ann Pottinger: 604-617-5290
Web Site: www.arowayenergy.com
Aroway Energy Inc. is an oil-focused, Canadian-based exploration, acquisition, and production company
developing its core area consisting of light oil within the prolific Peace River Arch region of northern Alberta,
Canada. The company was founded in September 2010 with a goal oriented and highly focused approach to build
shareholder value by pursuing 3D seismically-defined conventional targets combined with significant strategic
emerging resource plays in the company’s core area.
In its very short history, Aroway has grown from a four-section farm-in deal totaling 2,560 gross acres in Dec. 2010
to a current 77,440 gross acre now, or 121 gross sections. The company has raised more than $10 million for its
exploration and development program. Aroway attracted early funding by way of private placements from some of
Canada’s most respected institutional funds, including Sprott Asset Management, Alpha North Partners, Cypress
Capital, and Matrix Funds.
In 2011, Aroway drilled and completed ten wells, and the company is ahead of its 2011 guidance exit target at 669
boe/d, of which 75% was oil. And, the company’s performance thus far this year has been stellar with very
substantial growth in oil and gas production, albeit from a still small base. Aroway is currently producing at the
equivalent of 850 barrels of oil equivalent per day (BOE); 200 of the 850 BOE were comprised of natural gas,
which has been shut in for sales at higher prices in the future. Through nine months of the current fiscal year, which
ends on June 30, the company reported earnings of $2.9 million, or $0.06 per share. Management plans to exit the
year producing 1,200 BOE.
That should lead to higher earnings for the next fiscal year beginning July 1, 2012. And this still small, but rapidly
growing company has a number of advantages, which in conjunction with its low price make it very attractive, in
my view, for purchase at this time. Those two major positive points are:
Its dominant land position in the Peace River Arch, which is shown in the illustration below and is in close
proximity to tie into a pipeline; and
Its pipeline access as well as gas gathering and compression infrastructure owned by the partner, in the proximity of the company’s existing and future wells. Access has been gained through the company’s Joint Venture Partner.
Aroway is one of the fastest growing juniors in the area starting from a small four-section (2,560 acres) farm-in land
base in September 2010, to its current rolling option on a contiguous land base of 121 sections (77,440 acres). The
illustration below, which displays the company’s claims in green, shows the company’s dominant position in the
Peace River Arch Area in northern Alberta.
But there are other advantages too.
The company enjoys a competitive cost structure with operating costs under $10/bbl for oil and $1.35/mcf
for gas.
The company enjoys high net backs, which are greater than $45/bbl of oil for oil, $80/bbl of liquids and
$1.10/mcf of gas (based on $95 bbl oil price, $99/bbl condensate price and $2.50/mcf gas price).
Low finding and development costs: $9/boe (based on 50% chance of success) on target zones, but does not account for any by-pass potential).
This is a development field and production is conventional. 75% of its 121 sections of land have been
targeted by 3D seismic work and are located close to the pipeline.
All wells have three target zones, namely, the Cretaceous, Triassic, and Devonian zones.
The company is also engaged in an ongoing program of low risk recompletion on existing and recently
acquired well bores.
A large percentage of the company’s production is oil and not gas, which is an advantage, given current oil
and natural gas pricing metrics. However, the company should be able to sell past gas production when
prices return to more normal levels.
The company’s land package is surrounded by five major producers in the Peace River, those being heavy
weights such as Birchcliff Energy Ltd., Crescent Point Energy Corp., Canadian Natural Resources Limited,
and Shell Canada, all surrounding Aroway’s land base.
As the company plans to move forward this year, it is planning to drill nine multi-zone Leduc and Triassic
locations as part of its conventional exploration program comprising of 8 oil targets and a possible new resource
exploitation well. In addition, the company is engaged in an ongoing recompletion program involving extensive
work overs of recently acquired well bores. And as noted above, management expects to exit 2012 virtually
doubling production this year that allowed it to earn $0.06 through the first nine months of production.
MANAGEMENT
You can always check out the biographies of management, and what you see on paper is one thing. What you learn
intuitively is best discerned when you meet management in person. Early this month when we were in Vancouver,
Mrs. Taylor and I met with the company’s president and CEO as well as the company’s director of communications,
Ms Judy-Ann Pottinger. I was impressed with Mr. Cooper’s desire to run the company in a fiscally responsible
manner and his plan to grow organically and to use only very short-term debt for the purpose of acquisitions or
short-term working capital needs. More importantly I felt management, at least in the persons of Mr. Cooper and
Ms. Pottinger, who is his right hand assistant, bring with them a high level of ethics, which is most important. And
the fact that Mrs. Taylor, who has much better intuition than I have, volunteered her positive thoughts along those
same lines added to my confidence in the character of management. A brief background of the technical skills of
management follows.
Christopher (Chris) Cooper - BBA, MBA, President & CEO - Mr. Cooper has over fifteen years of oil and gas
management and finance experience and has founded several successful junior oil and gas companies. Mr. Cooper
earned a Bachelor of Business Administration degree from Hofstra University and a Master of Business
Administration in Business from Dowling College.
Daryn Gordon - C.A., CFO, Director - Mr. Gordon is a chartered accountant with over twelve years of finance and
accounting experience with publicly traded companies. He obtained his Chartered Accountant designation at an
international accounting firm in Calgary, where he gained extensive audit, corporate reporting and financial control
analysis experience. As a manager with a national accounting firm, Mr. Gordon acquired a high level of experience
with junior energy companies.
Desmond Balakrishnan - B.A., LL.B, Director - Partner, McMillan LLP - Mr. Balakrishnan has been a partner
with McMillan LLP since 2004. He is also a member of McMillan’s Corporate Finance/Securities Law Group. His
current areas of focus include mergers, acquisitions, listed company maintenance, international public listings,
gaming and entertainment law. Mr. Balakrishnan was called to the Bar in 1998.
Brad Nichol - P.Eng, MBA, Director - Mr. Nichol is currently the President and CEO of Edge Resources a junior
oil and gas exploration and Production Company focusing on shallow gas formations in Central Alberta, Canada.
His experiences are in private and public startups, takeovers and turnarounds. Mr. Nichol is a Professional Engineer
(Mechanical) and earned his MBA, with honours, from the London Business School.
Mike Veldhuis - B.A., MBA, Director - Mr. Veldhuis has assisted both private and public companies in structuring
and obtaining debt and equity facilities since 2003. Mr. Veldhuis previously worked for GE Capital Solutions, a
division of GE Capital, where he specialized in providing structured asset based lending facilities to companies
operating in the mining, forestry and construction industries. Mr. Veldhuis is currently a director of Upton Capital
Corp., a privately held Mortgage Investment Corporation that specializes in residential mortgages in Western
Canada.
Dave Contrada - Manager of Engineering - Mr. Contrada brings over 10 years’ experience in exploitation,
production, operations and facilities engineering, identifying and evaluating property acquisitions, development
strategies, production optimization, engineering reports and budgeting. Mr. Contrada received his Bachelor of
Science in Mechanical Engineering from the University of Calgary. He began his career with Altagas as an
operations engineer and has held production & exploitation engineering positions with Cedar Energy Partnership,
Husky Energy Inc., and most recently served as Engineering Manager for Alberta Oilsands Inc.
SUMMARY
It may simply be a sign of a global bear market in equities, but I believe these shares are very reasonably priced for
purchase, at least based on current production and cash flow levels. Both should increase this year, although if we
are entering the next leg down in a major bear market, natural gas prices could remain low and oil prices could slide
considerably lower. That’s the downside for this company as I see it.
However, growth prospects should protect investors against the downside share price risk from current levels, at
least to a degree. One possibility for this company’s future as it grows would be to combine with the private partner,
at which time the size of this junior may become very attractive to those major oil and gas companies surrounding
the Aroway claims. Strong and rapidly growing cash flow from which to grow organically, combined with its
current low share price, makes this company very attractive for purchase at this time. The upside target form my
viewpoint should be a factor of 3 to 5 times from this company’s current share price. I view this as a relatively safe
way to add some oil and gas exposure to your portfolio in contrast to our other riskier exposure in Nigeria.
