Aroway Energy has been on my radar for months, it is among a select number of companies that deserve an “A” for execution. The growth in land and production that was achieved in less than 12 months is nothing short of a feat. The company’s production grew from 0 to 530 boe/d (76% oil) and its land base increased from 4 to 96 sections. In my opinion, this is definitely a story worth following into 2012.
Symbol: ARW.V 0.30 [-0.015]
O/S Shares: 55.8MM F/D (21% Insider Ownership)
Production: 530 boe/d of Oil, NGL and Gas (76%/2%/22%)
Cash: $1.8 million
Land: 96 sections
$/flowing BOE: ~$85,000/ flowing BOE
Last week, I caught up with Chris Cooper, President and CEO of Aroway Energy, to get a feel on what’s in store in the coming months. We started off our discussion with commodity prices in light of the recent turmoil. Chris believes the dust will settle by December and sees oil prices in the $80-$85 range but when it comes to natural gas, a price recovery is a little bit tougher to expect for this year. We quickly moved off to the Peace River Arch area where the company assembled an impressive land package.
The Peace River Arch area is located in north western Alberta and NE British Columbia with a rich geologic and geographic diversity. This area is recognized for its high quality of reserves and its prolific oil, gas liquids and dry gas potential found in multi-stacked hydrocarbon charged formations. This makes it a highly competitive area to operate in as several large players are established.
Chris was able to carve up his land holdings in the midst of the competition by striking a strategic JV partnership with an experienced private company in the area. The partner is also the operator and owns the nearby gas plant and pipeline infrastructure which gives Aroway guaranteed access to to the pipeline at a competitive cost structure. Basically, the company pays the same amount as the operator for gas gathering and transportation and facility use which makes for some fantastic economics. Aroway’s operating costs are $10 per barrel of oil and $1.35/mcf of gas. Its finding and development costs are $9 per barrel of oil and $0.50/mcf of gas.
This strategic positioning is in line with the exit strategy of the company: getting acquired by one of the senior players. Chris is very clear about that and he knows his land base is desirable. It is only a matter of time before the Birchcliff scenario is repeated with Aroway. The suitor might turn out to be one of the 5 majors that surround Aroway’s current land base. I personally like it when the CEO is working hard on losing his job to an acquisition since it usually makes shareholders quiet happy. In this case, management and shareholder interests are aligned thanks to the 21% insider ownership.
Aroway is exposed to several resource plays but the main focus is currently on the Leduc and Charlie Lake formations. For the balance of 2011, the company has 2 more Leduc wells to drill. The exit rate guidance of 600 boe/d will likely be exceeded. Furthermore, the company has a rig in the field working on a big recompletion program putting 12 older wells back on production at attractive rates for as little as $100k per well. For 2012, even though the company might scale back on its aggressive drilling plans until clarity prevails in this market, Aroway is potentially looking to exit the year at about 1,200 boe/d. That is double its 2011 exit production! But this will partially depend on the results from an upcoming high impact horizontal well targeting a new resource play in the December/January timeframe. Management is optimistic in a successful outcome as positive results would turn out to be a major catalyst for the stock.
Aroway Energy has everything an investor seeks in a company: enviable land position, low operating costs, rising production weighted to oil, no debt and free cash flow to the tune of $1M per month. Yet, it seemed to me the share price does not reflect these points. When I asked Chris to give me an estimate on the company’s NAV, I was shocked to hear his numbers quickly add up to $0.80 a share. Aroway is currently trading at a significant discount to net asset value for an oil weighted company even if you apply an extra 20% discount. Why then is the stock trading at such a low valuation per flowing barrel? Chris quickly points out to the $0.20 warrants set to expire in October mainly holding the stock down as they get exercised by some investors for a quick gain. However, he believes this weakness is only temporary and expects the share price to stabilize over $0.40 soon after.
Aroway’s story is not complicated and the exit plan is known before hand. It’s simply a matter of when and not if a suitor will appear. However, waiting for the company to get acquired might take time and I would be more willing to bet on consistent growth in production and reserves since management has proven it can execute. The share price has a lot of upside potential that could materialize as economic instability dissipates or as the true value of this company gets priced in.
Are you familiar with Aroway? What do you think?
Disclaimer: I currently do not own shares in ARW. This is not an invitation to buy or sell Aroway Energy shares, please do your own due diligence before taking an investment decision.