Stock of the Week Aurora Oil & Gas (AUT)


Aurora Oil & Gas (AUT) is an oil and gas exploration, development and production company operating in North America since early 2005.  With a market capitalization of almost $300 million, it is a small cap hot stock, outside of the ASX 200.

The plan for the development of the company’s oil and gas interests is focused on the US, where large markets and existing infrastructure provides the opportunity for attractive economic returns.

Maiden revenue is expected in the 4Q10. AUT boasts a sound balance sheet with no debt and US$40 million in cash on hand.

The company has the potential to deliver production and profit growth for many years from its existing assets, which are already benefitting from a strengthening commodity market.

2010 is expected to represent a significant year of value creation for AUT from activities that will include drilling, testing, production and land acquisition across the portfolio.

The company is well funded for its existing activities and is well positioned to pursue new oil and gas opportunities.

More about the Business

AUT is focused on onshore US in the south east Texas Eagle Ford shale / Austin Chalk, known as the Sugarkane Gas & Condensate Field.

The company has embraced low-risk development assets, with a drilling inventory in excess of 500 well locations and a very significant production growth profile.

The Sugarkane Field involved an initial acreage acquisition in 2006. Farmin is nearing completion, giving excellent results, with drilling times and costs being reduced dramatically.

Sugarkane consists of a high quality Austin Chalk reservoir, directly overlaying an organic, rich and calcareous regional Eagle Ford shale.

The field has been delineated by more than 25 wells, with consistent reservoir and hydrocarbons from all penetrations.

A Liquids Story

AUT calls itself a “liquids story”, being invested heavily in oil as liquids are more valuable than gas.

AUT is highly leveraged to oil prices. High condensate yields and rich gas significantly increase gross revenue for each mscf produced.

The Eagle Ford is a liquids rich trend. The relative energy differential (BTU) for oil/gas is approximately 6:1. The value ratio of oil/gas has been trending up in recent years.

The Eagle Ford is a premium US shale play, with large US and multinational companies having invested significantly to enter.

These companies include BP, Shell, ConocoPhillips, Exxon/Mobil and Anadarko, amongst others.

An active drilling program is delivering best in trend results. Eagle Ford drilling activity continues to grow rapidly, with some 50 new wells drilled and completed along the trend to the end of 2009, with a dramatic ramp up in 2010.

AUT currently estimates there are 80 rigs operating in the trend.

Eagle Ford drilling has demonstrated improved initial production rates, a decrease in early decline rates and a substantial reduction in costs.

Activity Forecast

AUT’s acreage boasts more than 500 drilling locations. Under current field rules, each gas well holds around 1,320 acres and oil wells of 320 acres.

The group’s drilling plan through 2011 is focused on securing land by production.  Revenues from carry wells are expected in the 4Q10.

AUT’s maiden independent reserves report was released in mid-August. The following reserve allocations were made, with an effective date of 1 July 2010:

1P (Proved) – 1,523,000 bbls, 8.3 Bcf and NPV(10) US$70.2 million;

2P (Proved plus Probable) – 4,317,000 bbls, 24.9 Bcf and NPV(10) US$190.1 million;

3P (Proved plus Probable plus Possible) – 33,207,000 bbls, 138.0 Bcf and NPV(10) US$986.2 million.

Company chairman Jon Stewart noted that the maiden reserve statement provides independent verification of the value proposition for AUT and the rapid de-risking that has resulted from the drilling program to date.

Looking Ahead

AUT have a clear and agreed drilling plan going forward, for which the group is already funded, which will see the majority of the possible reserves moved into the proved and probable categories through the next 12 – 18 months.

Significant increases in production and cash flow to AUT from the development of this world class on-shore asset will continue to grow shareholder value for some time.

Preliminary results indicate robust economics, with Eagle Ford looking to be one of the best shale plays in the US.

AUT’s initial well results are excellent, the group boasts a high liquids ratio, good flow rates and a low reliance on gas prices.

AUT is the largest Sugarkane participator of listed juniors, has no debt and US$40 million in cash.

The company boasts huge growth potential, with project maturity through continuous drilling to deliver production and profit growth for years to come and is one of the stocks to watch.

Australian share price for AUT last closed up 2.3% to 67 cents.

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