Subscribers often suggest companies to include in my portfolio. I tell them: convince me. So while I am on vacation for a good part of the summer, I am publishing several, occasional company write-ups by subscribers who are following my format. By definition of being published here, I am not long (i.e. it is not an OGIB portfolio stock) and the subscriber is. The company profiled has not paid for this and this is not to be construed as any kind of recommendation. All investors should do their own research to confirm any figures in this article.
NOVUS ENERGY – NVS:TSXV
By Scott McLeod
Novus Energy is a junior oil and gas company exploiting the light oil in the Viking formation of the Dodsland area in West Saskatchewan. Novus has been busy acquiring small companies in their core areas, raising capital through bought deal financings and drilling up a 35 well, short horizontal, program.
Novus’ CEO, Hugh Ross, is the former CEO of Gentry Petroleum. Mr. Ross grew Gentry from the ground up and eventually merged with Crew Energy for an estimated $300M in enterprise value. Mr. Ross and his team increased Gentry production 336%, company reserves 202% and shareholder value 818% in his 8 year tenure (from 2000 – 2008 Production is already up from 300 to 825 boe/d (current) and a 2010 exit rate of over 2200 boe/d (a 266% increase from current levels in 6 months).
Novus Energy is the former Regal Energy which was recapitalized in March of 2009 with new management (Ross’ team) appointed and a revised Board of Directors. Novus’ core area in the Dodsland continues to grow with recent acquisitions including Ammonite Energy ($22.5M in common Novus shares), a private company’s assets for $3.8M and 3rd private company for $17M in common shares.
Through active management and continued consolidation, Novus Energy has a total 6 acquisitions since the recapitalization. Major players in the area include Devon, Nexen, Penn West and West Fire Energy (another junior Viking producer making headlines). With all the excitement seen in the past 9 months for the Cardium oil play in Alberta, could the Viking light oil play be next? Early re-evaluations of the Viking are showing early signs of huge upside in the Viking – see Figure 1.
Figure 1. Original Oil in Place (After Mackie Research Capital, Spotlight on the Viking 11 Feb 2010)
Trading Symbol: NVS:TSXV
Share Price: 0.89 (June 25th Close)
52 Week: 0.52 – 1.20
Current Production: 875 boe/d
Shares Outstanding: 165M
Market Cap: 147M
Net CASH: $34 million
POSITIVES
- large undeveloped land position (over 70 net Viking sections) in proven, low cost play
- balance sheet – $34M cash with no debt
- management has a proven success record
- aggressive drilling program
- resource play with potentially over 200 horizontal well locations
NEGATIVES
- large share float;
- horizontal drilling is relatively early days in the Viking; uncertain oil production declines
PROPERTIES
Novus Energy has properties in both Alberta and Saskatchewan. These include Wembley, Wapiti and Garrington in Alberta and Dodsland, Roncott and Rocanville in Saskatchewan. However the company has made it clear that the most important property for their Viking oil resource play is the Greater Dodsland (which includes Dodsland, Flaxcombe and Forgan) property.
Novus has a total of 70.5 net sections of Viking lands in their Greater Dodsland area (which includes Dodsland, Flaxcombe and Forgan properties). The company has over 230 horizontal Viking well locations with the potential to add over 9,000 boe/d of future production.
Dodsland, Viking Oil
Dodsland is Novus’ focus area for the Viking and as of April 2010, has 11.5 sections (a section is 1 square mile, or 640 acres) of Viking property with over 46 potential drilling locations (assuming 4 wells/section). 6 wells (3 net) were drilled in the last quarter of 2009 averaging 60 boe/d with 11 (10.75 net) wells drilled in the 1st and 2nd quarter of 2010 and awaiting on completion results. Novus also notes that 15 of its 16 Viking wells have been drilled but plans to drill a minimum of 35 wells in the Dodsland area.
To date, Novus has drilled around 23 (6 in 2009 and 17 to date in 2010) wells in their Dodsland area with varying success. They are assuming first year production to be around 50 boe/d–giving around 70,000 boe’s in reserves. A recent news release by West Fire Energy showed their wells averaged initial production (1 Month) of 80 bbls/d in Q1 2010. That’s up from around 60 bbls/d in Q3 2009. With varying completion techniques, Novus has the opportunity to continually increase production well over well on each completion.
On May 6th, 2010 Novus announced a farm-in agreement on 16.25 sections of land. They have agreed to drill 13 wells by April 30th, 2011 with a rolling agreement option.
Reece Energy (recently acquired by Penn West in May 2009) had Viking success between 30 – 122 bbls/d. Baytex Energy shows success between 15 – 65 bbls/d while Crescent Point shows smaller production at 31 – 33 bbl/d.
Flaxcombe, Viking Oil
19.5 sections and 48 drilling locations. In the first 6 months of 2010, 2 net wells to be drilled. Recently acquired a 12 sq mile 3D seismic survey and acquired a 50% partner interest.
Forgan, Viking Oil
13 sections and 52 drilling. Recently acquired a 3.5 sq mile 3D Seismic Survey in Q1 2010
Roncott, Bakken Oil
This is Novus’ second core area with a modest interest of 7.3 sections (50% WI). Although modest, competitor activity in the area has picked recently. There is also a planned 3D seismic survey for 2010.
Cenovus Energy and Atikwa have both been targeting the Bakken in the Roncott area with more and more wells being licensed.
FINANCIALS
- Approximately $34M in cash and no bank debt
- unused lines of credit
- a CAPEX program of $39MM this year
- A bought deal financing on April 27th, 2010 of $25M at $1.10 per share
VALUATION
Novus typically makes an IRR (internal rate of return) of 57% on each well at $70 oil, with NPV’s on these wells valuing $2.2M Novus assumes each well costs are around $1.2M with 1st year decline rates around 60% and 2nd year decline rates around 25%. They also assume that ultimate recovery is around 75,000 boe’s. See their well economics below.
Figure 2. Novus Well Economics (After Novus Corporate Presentation, April 2010)
Using simple valuations, it’s not hard to get an idea of what the share price should be trading at. Using only base production we can get to 0.35/sh:
Proved: 825 boe/d x $70,000/flowing boe / 165,200,000 shares = 0.35/sh
Keep in mind this is only assuming production value. Assuming the base case (above), Viking success at around 80% COS (chance of success), the same per flowing barrel valuation of $70,000, and 70.5 net sections at 2 wells per section one can calculate a theoretical valuation of $1.85/sh. Note that downspacing to 3 and 4 wells/section is more likely, which only increases valuations.
Proved: = 825 boe/d x $70,000/flowing boe
= $57,750,000 / 165,200,000 shares
= 0.35/sh
Potential Upside: = 45,130 acres x 0.8 COS /640 acres/sec x 2 wells/sec x 2.2M NPV/well
= $248,160,000 / 165,200,000 shares
= 1.50/sh
Proved + Potential Upside = $1.85/sh
CONCLUSION
Novus’ management team has proven success at taking companies from < 1000 boe/d to over 5,000 boe/d. Management is aggressive with their drill and continue to prove up their success organically; through the drill bit. Although they are acquiring small, private companies, they are building a big land position and bought early into the play.
Novus is proving that it’s not all about enormous IP (initial production) rates but rather the scales of economics. Being able to drill, complete and tie in a well for less than $700k allows for flexibility in IP’s. Management will continue to tweak their completion techniques to always allow for the greatest IP but are still returning NPV’s (net present value) of over $2.2M per well on an IP of 60 boe/d generating an IRR over 57% (see Fig2 above).
The Cardium in Alberta (depending on where your land position is) can be at depths 2 or even 3 times the Viking on Novus lands. Horizontals are twice, sometimes 3 times as long which leads to costs of drilling, completing and tying in to be in the order of 2 or 3 times Novus’. Don’t let IP’s drive your investment decision. Each play will be different and Novus seems to bring high NPV’s for each well drilled, completed and tied in.
Management continues to provide year-end production guidance of around 2200 boe/d (up from 300 boe/d in early 2009). That’s over 700% in production growth in less than 2 years.
ANALYST COVERAGE AND PRICE TARGETS
GMP Securities $1.45
Cormark Securities $1.50
Haywood Securities $1.60
Raymond James $1.30
Canaccord Adams $1.25
Jennings Capital $1.20
Clarus Securities $1.60
Scott owns 5000 shares at 91 cents.
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