American Eagle (AMZG) -- Divide County, Thought to Be "Fringy" For Bakken/Three Forks, Actually More Economic Than Core
Initiating Coverage on AMZG with a
Buy Rating and $3 Target
What's Incremental
Initiating with a Buy rating. We believe AMZG is attractively valued at
current levels and are initiating coverage with a Buy rating. Our rating is
underpinned by: 1) our proprietary work showing wells have generated
stronger IRRs than the Williston Basin average, better than commonly
believed; 2) our view that shares will outperform as institutional investors
become more familiar with this under-covered and under-owned company;
and 3) catalysts including an operations/reserve update later this month,
earnings and a potential guidance revisit in March and key delineation wells
around mid-year.
Setting price target at $3. We are initiating coverage on AMZG with $3 price
target, which applies a 5.5x multiple to our 2015 CFPS estimate of $0.54. We
believe AMZG warrants a slight premium to the 5.25x Williston Basin median
target multiple owing to a modestly deeper inventory. With over 60% upside
to our target, we initiate with a Buy rating.
Williston Basin pure play. American Eagle Energy is a Littleton, Coloradobased
oil and gas company focused on the northwest part of the Williston
Basin in Divide County. The company has drilled the Three Forks formation
extensively, has recently tested the Bakken with some success and is
extending the known productive limits of the play to the west. Interestingly,
American Eagle is essentially drilling these catalyst wells with other people’s
money via a carry agreement and farm-out agreement with its joint venture
partner, limiting its financial exposure.
Wells better than peers and broad expectations. Given the lower pressure
regime in this part of the Williston Basin, we believe there is the common
perception acreage this far north is “fringy.” However, our proprietary well
study included in this report shows American Eagle Three Forks wells have
actually generated stronger rates of return than peers, not weaker ones.
Specifically, we find a typical IRR of 28% for eight American Eagle Three
Forks wells with at least 12 months of production history versus the ~20%
average seen for four other peers in our December well study. American
Eagle’s wells do look different than those seen in the deepest part of the
basin. Whereas peer wells may cost $7.5-9 million and average 400-800
Boepd the first 30 days, American Eagle’s long-lateral wells cost $6.8 million
and average 275-400 Boepd the first 30 days. However, the early rates are
only part of the story as American Eagle wells decline less than those of
peers. The net effect of lower costs, initial rates and declines is a higher-than-average rate of return
for the sampled Three Forks wells.
Cleaning up acreage position. The company has amassed ~30,000 net acres, with an option to
acquire another ~8,250 net acres and 450 Boepd from its JV partner for $47 million by March 31.
American Eagle has multiple financing options but we conservatively assume the company funds the
acquisition with equity at $1.50/share. Note the interest rate on American Eagle’s debt is determined
in part by a loan-to-value ratio and could drop from 10.5% to as low as 5.5%, representing a
meaningful reduction in its cost of capital.
Under-covered and under-owned. Only five sell-side firms currently provide research on the
company, while institutions appear to represent less than 10% of ownership. We believe greater
investor interest, along with the catalysts mentioned below, will help propel shares higher.
Several catalysts ahead. In the second half of February, we expect American Eagle to provide
a reserve and operations update that should demonstrate the value of its position. With its March
earnings report, we anticipate American Eagle revisiting its 2014 guidance, possibly increasing its
well count and production outlook with the same capital program. This represents potential upside
to our current estimates. Finally, the company should complete its most westerly well, the Haugen,
in March and provide results around mid-year. Success could derisk western acreage and result in
multiple expansion.
Upside and downside risks. Cheaper well costs could drive efficiency, production and our
cash flow forecast higher, while additional acreage acquisitions could warrant a higher multiple.
Alternatively, downside risks to our target include lower productivity from Bakken wells and stepout
wells to the west. (We currently forecast 75% of American Eagle’s Divide County acreage is
prospective for the Bakken and Three Forks.) For a more complete review of risks, please see the
“Potential Outcomes” section on the next page.
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The above text is the first few pages of a report from SunTrust Robinson Humphrey, which can be downloaded here, /uploads/7638/files/STRH_AMZG_20140219.pdf
AMZG is presenting at Northland Capital on Wednesday and Howard Weil on 3/24.
Once more people see that this part of the Williston Basin is actually more economic than the core of the Bakken, the stock should appreciate considerably. Can U hear the table pounding???? |
