Aroway Energy: On Track to Double Production a Second Year in a Row

Aroway Energy is a junior oil producer that I closely follow. Last week, I caught up with Chris Cooper, President and CEO, to get an update on Aroway’s story as we close in on the end of the year. Last year when I interviewed Chris, the company was on its way to hit its 2011 exit guidance of 600 boepd. Just one year later, Aroway is gearing up its drilling program towards meeting 2012’s exit guidance of 1,200 boepd.

That’s 100% production growth in 1 year – no small feat for a junior producer.

The company has come a long way since its IPO in 2010. Production quickly grew from 0 to over 500 boepd within 12 months. Its core land base went from 4 to 96 sections during the same time period.

Today, Aroway has access to more than 123 sections in the Peace River Arch area of Northern Alberta. This geologically rich area is known for its prolific oil, liquids and dry gas potential from multi-stacked formations.

peace river arch alberta

Aroway’s prime acreage in the Peace River Arch area. click to enlarge.

It is important to highlight Aroway’s area of operations; having right sized assets is crucial for achieving production growth targets without breaking the bank. Aroway is not chasing a capital intensive resource play where each well costs millions of dollars like the Cardium or the Slave Point.

The company mainly targets oil and liquids rich reserves in the Leduc & Charlie Lake formations.

Leduc wells are about 2,100 meters deep and cost roughly $1.1 million to drill, complete and tie-in. Each well typically produces at 200-250 boepd for a few months before natural declines kick in. But every now and then you hit a bonus well that produces 2 or 3 times that amount. Chris hopes the latest oil pool discovery from the summer drilling program could potentially be one of those. He promised to provide more information in an operational update come November.

Charlie Lake wells are about 1,400 meters deep and cost around $0.5 million to drill and case, and an additional $150k to equip and tie-in depending on its proximity to existing infrastructure. Each well produces at 120-180 bopd for about 4-5 months before natural declines kick in. Production subsequently settles around 80 bopd for the next 2 years.

The economics on these wells are fantastic; it costs the company about $5,000 to bring a barrel of oil online. The payout period (recovery of capital) is measured in months, not years. If the targeted formation turns out to be uneconomic, the well isn’t written off as a total loss. It becomes a recompletion candidate for another prospective zone.

Following a 55 square Km 3D seismic program earlier this year, Aroway and its partner assembled an inventory of approximately 75-85 drilling prospects. The company enjoys ample running room thanks to its multi-year drilling inventory.

The upcoming winter drilling program is expected to begin in the next 2-3 weeks. It includes drilling 2 wells targeting light oil from the Ellerslie formation in the Kirkpatrick Lake area. The property (1.25 net sections) was recently acquired at 100% working interest.

This constitutes more than a second core area for Aroway as it will assume operatorship for the first time – a development Mr. Market usually looks favorably upon. Operatorship means having the ability to adjust drilling and capital expenditures as a company sees fit. Aroway is planning to expand its acreage through land sales and acquisitions.

By the end of the year, Aroway would have crossed 2 important milestones in its history: the first one is growing production above the 1,000 boepd threshold and the second one is operating its own production.

Financially, doubling production will not imperil the balance sheet. The company will exit 2012 at less than 0.4x debt to cash flow – an enviable financial position. This is why right sized assets are important for a junior producer; the company can grow its production without sinking heavily into debt.

The annualized cash flow for 1,200 boepd (85% oil) is more than $13 million assuming an average realized price of $85 Edmonton Par and $3.30/mcf AECO gas in 2013. That’s $0.25 in CFPS (cash flow per share.) That’s also 4 times the reported cash flow for fiscal 2012 at $3.2 million!

The stock is currently trading at less than 2x CFPS multiple.

On an EV/BOED basis, AROWAY ARW.V 0.265 [-0.02] is trading at around $23,000/boepd. That’s very cheap when compared to peers considering more than 85% of production is weighted to oil & liquids. I believe the upside potential is huge but contingent to a successful conclusion of the winter drilling program.

Chris is confident the 1,200 boepd guidance will be met. The company has about 250 boepd of natural gas production that can be back online once prices settle around the $3.50/mcf mark.

I have been following Aroway for about 2 years and I believe Chris will deliver yet again. I am betting on his track record of setting and meeting goals since Aroway’s early days. Having skin in the game maintains a high level of commitment as insiders own 22% of the stock on a fully diluted basis. Their interest is perfectly aligned with that of shareholders including me.

Disclaimer: I own 20,000 shares of AROWAY ENERGY. AROWAY ENERGY is a sponsor of BeatingTheIndex. This is not an invitation to buy or sell Aroway Energy shares, please do your own due diligence before taking an investment decision.

14 comments to Aroway Energy: On Track to Double Production a Second Year in a Row

  • green

    Great article. Very bold from Aroway CEO to maintain 1200boe/d target, and I believe he can do it.

  • Lee Roth

    Mich, your article is really good but I have few points to note:

    1) The pbv is very high for a junior producer in my opinion.
    pbv=3+ for ARW.

    2) EV= C$25M + C$2,6M (bank debt)= C$27,6M.

    Divide this with the 650 boepd current production, I get a 44,000 $/boepd. The 250 boepd nat gas have not been tied into the system yet as the company says.

    3) The market cap is also 8x the 2012 FFO annualized. This is another high metric.

    All that being said, ARW has to deliver first in my opinion. The investors have to see that ARW hits the 1,200 boepd before they step into it imo.

    Cheers!

    • Mich

      Thanks Lee,

      The trading metrics are based on 1,200 boepd to show what the upside is if the company meets its target (in less than 2 months).

      I am obviously bullish on the company meeting its targets which is why I built my position under $0.50.

      Cheers,

      Mich

  • Engineer Denis

    Mich- I enjoy reading your blog this company does not excite me. 2P reserves are low at only 369,500 boe. My simple metric of share price per 2P reserve per share is very high at C$71. I start looking at company’s below $20. Exert from the annual reserve report below does’t inspire confidence

    ‘The Company owns between 18.2% and 50% working interest in 17 gas wells and 18 oil wells. 14 of these wells have been drilled by the companies’ joint venture partner. The majority of the remaining wells were acquired in a recent acquisition. Most of the gas wells are shut-in due to low gas prices. Currently only one gas well is
    producing. Seven of the oil wells are currently producing and two recently drilled wells are waiting to be tied into the company’s joint venture partner’s facility. The majority of the remaining shut-in oil wells require recompletions in the upper Triassic zones. ‘

    Regards

    • Mich

      Denis,

      Thank you for chipping in.
      The 2P reserve metric is high indeed, the average EV/2P for about a dozen junior companies I follow is $29. The story might be different next year now that they’re stepping out into 100% WI assets.

      The play here is on momentum, will the market reward them for hitting their guidance? last year, it did. Back then reserves where half of what they are today.

      In 2 months, they will most likely be at 1,200 boepd, there’s a good chance Mr Market will revalue the stock at a higher EV/BOED. That’s the bet.

      Cheers,

      Mich

  • Nice article. I’m pulling for this company and for you. The prospects look good.

  • Barto

    Brad Nichol the CEO of EDE.V is part of the management team at Aroway. Just curious about any thoughts on Edge Resources. They are adding what is hoped to be some decent oil production to their portfolio with some new wells coming on line.

    • Mich

      Hey Barto,

      Edge seems to have a neat story but when it comes to comparison ARW has higher netbacks and negligible debt relative to EDGE.

      Cheers,

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