Q1 2011 Updates: SkyWest Energy, Hyperion Exploration, TriOil Resources

SkyWest Energy, Hyperion Exploration and TriOil Resources released their Q1 reports this week. I thought it would be interesting to discuss these companies in light of their results. The market has been brutal for the junior sector with many stocks trading below NAV and at yearly lows. In my opinion, this sell off is unwarranted. There’s no use in complaining about the market being irrational, it will recover sooner or later.

SkyWest Energy (TSXV:SKW) SKW is my largest holding and has hurt me the most since March. When I saw capital expenditures at $17.6 million for Q1 I almost fell off my chair. How could you spend this amount of money on 2.2 net wells drilled? If you’re concerned with this figure as well then relax as the MD&A breaks the costs down. On average, the 2.2 net wells cost them about $7.7 million, add another $1 million for equipment and facilities and you’re left with $9 million that were used in the completion (& tie in) of 5 horizontal wells which makes sense.

Production averaged 1,636 boed and Q2 is expected to take a slight hit on its gas volumes at Ricinus which should have very little impact on cashflow. Thanks to an extended spring breakup the company failed to tie in about 500 boe/d of behind pipe production in Q2. This volume will show up in Q3 and the company is on its tracks to exit at 2200+ boe/d as previously guided. Starting with Q3 higher oil volumes should appear which should push netbacks to $35 per barrel. The company has 2 rigs ready to rumble for the balance of 2011 drilling 6 net wells.

Let’s play with numbers here; the company is currently valued at ~$63k/boed, if SKW exits the year at 2,300 boep/d the stock should trade at $0.60 using the same valuation. The $/boepd figure is based on the stock price of $0.43 which is the 52wk low. With strong oil prices, the higher your oil weighting is, the higher your $/boedp you trade at. This is only 1 way to play around with numbers and does not take into account reserve additions and increased cash flow. I expect SKW to trade higher once all of this uncertainty in the market dissipates. NAV should rise above $1 by the end of the year unless we double dip and oil ends up at $30/barrel again.

Hyperion Exploration (TSXV:HYX) At $1.06 per share HYX is trading at a lower valuation than SKW. At $63k/boed, HYX should be at $1.26 for 950 boepd and exit the year at around $1.56 for 1,500 boepd using the same measure even if its oil weighting is higher right now. This is all some fun math and should not be taken as a guide for your investment decisions. HYX is targeting an exit rate of 1,500 boepd but I believe they will exit at a higher rate. Watch them review their guidance higher in Q3. For the balance of 2011, HYX has 2 drilling rigs ready to rumble in early July for its 5.2 net cardium wells.

Q2 should have no surprises at all as it was wasted with an extended spring breakup as well. It’s really Q3 that will matter for all of these juniors as they resume their drilling and execute their plans.

TriOil Resources (TSXV:TOL) I thought I’d cover TOL since they released their Q1 at the same time and I still follow the stock. TOL’s volumes came in disappointingly low and I expected to see a higher oil weighting. On the other hand, the company will be fraccing its 4th well and started drilling its 5th well with 7 more cardium wells scheduled for the balance of the year. The slick water completions have mostly provided promising results, they only need to hit their expected type curve and they are on their way to exit the year at 2,400 boepd with 70%+ oil weighting. The company recently added 2 net sections to its Lochend land package bringing the total up to 58 net sections.

TOL should not be written off as dead because its stock price is tanking. The stock is illiquid because of its low float which makes it a perfect playground for traders looking to short. The company has tremendous upside if it proves its completion technique is returning good results. TOL has a strong balance sheet and is well placed to execute its drilling plans this year. It is currently trading at ~$58k/boe so if we take the $63k/boe from SKW’s current valuation, the stock price should be around $4.00 at the end of the year for its 2,400 boepd production. Obviously, this is a very low valuation because its weighting would be %70+ to oil.

Finally, TOL has been ignoring its Tableland assets in Saskatchewan to the point it’s no longer covered in the company presentation. This leads me to believe they might be looking to sell it off for a good chunk of change.

I have to wonder if we hit the bottom or if there’s still a 10% to go. I guess we will have to wait and see. In the end, we will have to recover because we cannot afford not to.

This is not an offer to buy or sell any of the aforementioned companies. Do your own due diligence before taking any investment decisions.