Material Change Report / TIER III Portfolio
Beginning Cash Component 35,167.72
Tusk Energy
Strong Buy $3.76
Purchased 1,200 shares $4,512.00
12-Month Target Price $5.60
Tusk is growing via the drill bit and acquisitions. With the upcoming fourth quarter results, the company will be reporting 12 consecutive quarters of record production.
TUSK’s production was 5,026 Boed during the third quarter, up 125% and 15% from last year and last quarter. The production increase was largely due to the acquisition of Sunfire Energy at the end of the second quarter. Sunfire added roughly 1,500 boed. However, that increase was partially offset with a six week shut in of 1,300-1,400 boed of Shane production.
Seventy percent (70%) of TUSK's production during the third quarter came from 6 properties. Shane (gas & NGL) represented 18% of total production and Hartaven (oil) represented 17% of quarterly production. Saddle Lake (gas) (10%), Thorhild/Radway (gas) (10%), Blackfoot (gas & oil) (10%) and Whitefish Lake (gas) (5%) were the other key producers.
Current production is in the vicinity of 5,900 Boed and there is an additional 800 Boed behind pipe waiting tie in which is expected by the end of the first quarter.
I anticipate TUSK will average 4,700 boed for 2003 and exit the year at 6,000 boed. I anticipate average 2004 production to increase roughly 40% over 2003, amounting to 6,600 boed with exit production exceeding 7,000 boed.
TUSK’s capital expenditure program during the third quarter totaled $12.2 million. During the third quarter, TUSK drilled 19 gross (9.9 net) wells for a 74% (84% net) success rate. Of the 19 wells, 11 (5.9 net) were gas wells, 3 (2.4 net) were oil wells and 5 (1.6 net) were dry holes.
Field Activities
Saddle/Whitefish Lake
Three shallow gas wells were drilled at Saddle Lake during the quarter and encountered gas in 15 total zones and defined a number of new gas pools. Production of approximately 500 Boed is expected to be tied-in by March following construction of new compression and gathering facilities.
Two successful natural gas wells were also drilled at Whitefish Lake, with six development wells planned between the two areas to further develop TUSK’s 80 sections over the winter.
Gage
TUSK drilled a 100% working interest new pool oil discovery at Gage during the quarter. The well has been completed but the results have been kept confidential for competitive reasons. Additional drilling is planned for this winter and further success could materially impact production numbers and enhance the reserve value of their reserves.
Upcoming High-Impact Exploration
TUSK has up to five high-impact Slave Point exploration prospects it plans to drill over the winter, with various working interests between 28% and 54%. TUSK will be targeting gross natural gas reserves in each of these prospects in the 15 to 50 Bcf range. A positive result from any of these wells has the potential to materially impact both TUSK’s operating and financial results.
On Decenmber 4, the company updated their drilling progress. Since the start of the fourth quarter, TUSK has participated in the drilling of 7 gross wells (3.4 net wells). Two (1.0 net) have been cased as dual zone gas wells, three (1.7 net) are oil wells and two (0.65 net) are currently drilling. One of the drilling wells (0.16 net) is evaluating a Slave Point gas prospect, the first of five high reward reef prospects that TUSK expects to drill during the winter drilling season.
TUSK will participate in the drilling of up to 12 more wells, all operated by TUSK, prior to the end of the year. Seven (5.0 net) will target shallow gas in 4 separate areas and two (2.0 net) will evaluate exploratory oil prospects developed by TUSK. Other exploratory wells will target two more (1.0 net) of the high reward gas targets to be drilled this winter. One is expected to be down prior to the end of the year while the second will likely spud late in December.
TUSK has developed into a strong operating company over the past three years as a result of complementing a shallow gas and oil drilling program in their core areas of Saddle lake, Whitefish, Radway and Lodgepole, with timely acquisitions. The company will continue to evaluate acquisitions. However, they are now focused on the drilling bit over the winter drilling season. Further development of existing acreage coupled with the drilling potential from TUSK’s high-impact deep gas exploration program, puts the company in an excellent position for continued success at the next higher level.
Cash flow for 2003 is forecasted at $1.50/Share or, resulting in a 2.5X trailing cash flow/price ratio. Annualizing anticipated fourth cash flow results in a forward projection of $1.60 for 2004 or, a forward looking 2.35X cash flow/share price ratio.
Net debt to cash flow is forecasted at 1.3X 2003 cash flow. TUSK had bank debt of $55.0 million in addition to $2.5 million in working capital deficiency ending the third quarter. Their bank facility is $60.0 million.
On December 4, the company closed 2,225,000 flow-through common shares at an issue price of $4.50 per share for gross proceeds of $10,012,500. With this offering, TUSK has approximately 32.5 million shares issued and outstanding.
In the third quarter, TUSK reported depletion costs of $15.21/boe in comparison to $8.98 last year and $8.99 the previous quarter. The market reacted negatively to the news. Management has stated that the higher cost was a result of the Del Roca and Sunfire acquisitions and that these costs will trend lower in the fourth quarter in the $10.00 range.
I believe this news, coupled with the recent equity offering, have negatively affected the value of their shares in the marketplace. As a result, shares at the current level present an outstanding value investment with the rare ingredient of upside potential that exists with their exploration and development program.
Ending Cash Component $30,655.72 |
