Argent Energy Trust is the third company to join the select cross border club of Canadian high yield income trusts. Argent operates oil and gas properties in South Texas and Oklahoma targeting the Eagle Ford, Austin Chalk and Wilcox formations. Just like Eagle Energy Trust, Argent pays a generous distribution of $0.0875 per share on a monthly basis. However, Argent stands out from its peers for its Eagle Ford shale Upside.
Argent Energy Trust AET-UN.TO 2.85 [-0.02] began trading last August following a $10/share IPO. The business plan is simple:
- Sustain the distribution by targeting an all in payout ratio of 100% or less
- Target production growth of 10% per year
- Acquire Proved Developed Producing (PDP) oil weighted assets
- Execute an active hedging program layered over the next 3 years to protect cash flow
Argent is already at its first acquisition announced earlier this month. The company is buying low decline oil properties covering approximately 4,030 net acres of land with 890 boe/d in Texas and Southern Oklahoma. This will be a first in series of acquisitions to come as opportunities present themselves.
Texas: No Spring Breakups and No Discounts!
There are a couple of advantages when you’re operating in Texas; one there’s no Spring Breakup (year-round operating conditions) and two the proximity to the Gulf Coast’s refinery markets translates into a premium price for oil. The company currently sells its oil at a premium of roughly $3 per barrel to WTI.
AET has an inventory of 147 locations including 95 locations in the deeper Eagle Ford shale oil acreage. Excluding the deep and expensive Eagle Ford wells, that’s still a multi-year inventory of low risk development.
Did I mention the significant development upside in the Eagle Ford formation?
The Eagle Ford formation is one of the hottest shale oil plays in the US. The play is 50 miles wide stretching 400 miles to the east with varying depth between 4,000 and 12,000 feet. Located in South Texas, it has attracted many oil companies due to its high liquids yield. BENTEK estimates liquids production growth from the Eagle Ford will increase 500% in 5 years rom 71,000 b/d in 2010 to 420,000 b/d in 2015.
Argent owns 25,000 net acres in the Eagle Ford shale oil play (theres a liquids and??gaseous??version as well) with 95 drilling locations. There have been more than 20 wells successfully drilled around AET’s acreage by the competition. Every one of these wells costs $6.5M to drill, complete and tie-in with an average IP30 rate of 610 boepd.
While this is not a typical asset for an income trust to hold and develop, it offers huge upside potential. That’s because the development opportunity may attract a JV partner which would carry part of the costs unlocking substantial value in reserves and production. Argent is currently drilling its first 2 Eagle Ford oil wells and will be announcing the results prior to year end.
Argent currently pays a juicy distribution but let’s see if that yield is sustainable. For 2013, let’s run the following scenario:
- 2013 Average annual production of 4,000 boepd (64% liquids)
- Average realized natural gas price $3.50/mcf NYMEX
- Average realized price $90/barrel for oil (~$87 WTI)
- Capital expenditures of $36.5 million
The basic payout ratio comes out to 61% while the sustainability ratio ends up at ~120%. There has been no mention of DRIP since it just launched. In theory, the company would need a 35% DRIP participation rate to bring the sustainability ratio below 100%. A sustainability ratio of 120% results roughly in a $12 million deficit. The amount can be absorbed easily because the company carries very little debt on its bank line.
The company has some excellent hedges in place for 2013 so the prices used above have more upside than downside. Natural gas would certainly average more than $3.50 if we get a normal winter. The sustainability ratio drops substantially lower to ~113% if we use $95 for the realized price of oil. Remember, the company sells its oil for a premium to WTI ($95 is equivalent to ~$92 WTI)
In terms of risk, the obvious commodity price risk which in my opinion is rather low thanks to hedging a substantial amount of production in 2013. The biggest risk would be in execution not??forgetting??risks of operational nature (ie remember the hell Parallel Energy Trust has been going through?)
The market will be watching for the initial Eagle Ford well results ‘ that’s the biggest upcoming catalyst for the stock. Keep in mind that with acquisitions come the growing pains of ramping up production which distorts the sustainability ratio. Argent wont be the last energy trust to join the cross border trust club, a new energy trust called Meranex is getting ready to launch!
What do you think of Argent Energy Trust?
