SkyWest Energy is one of the few publicly traded, Cardium oil focused companies in the Canadian junior oil and gas sector. SkyWest is focused on organic growth through aggressive drilling supplemented by targeted corporate/asset acquisitions, land sales and farm-in deals.
Last Price: SKW.V 0.00 [N/A]
Shares O/S: 202.5 MM (Basic)
Production (Q2 2011 average): 1,400 boe/d (40% Oil+NGL)
Net Debt (end of Q2): $15.36 million
Cardium Land: 35 net sections
SkyWest Energy emerged on the Cardium landscape though a combination of 2 companies EMM Energy and Stratosphere Energy. SkyWest was able to put together a nice Cardium land package with 130 net drilling locations, 40 of them in the Willesden Green area which is producing impressive IP rates.
So far SkyWest reported results on their first 4 wells in the Cardium with the following results:
- Drilled and completed 1st HZ Cardium well (77.5% W.I.) in South Pembina with IP of 530 boepd and a 60 day production average of 185 boed.
- Drilled and completed 2nd HZ Cardium well (100% W.I.) at Willesden Green with IP of 948 boepd.
- Drilled and completed 3rd HZ Cardium well (100% W.I.) at Willesden Green with IP of 985 boepd.
- Drilled and completed 4th HZ Cardium well (70% W.I.) in South Pembina with IP of 570 boepd.
There is a lot of industry activity in the Willesden Green area surrounding SkyWest with 22 Cardium HZ wells recently licensed within 3 miles for a good reason. Bellatrix Exploration’s (TSE:BXE) top 2 Cardium wells were in this area with an IP7 of 1,308 boe/d for the first and IP15 of 721 boe/d for the second. Penn West’s 12-13 well (approximately 2 miles from SkyWest acreage) flowed an average of approximately 860 boepd in its first month of production. The players are hitting excellent reservoir quality in this area.
Outlook for 2011
For 2011, SkyWest is planning to drill another 9 to 12 net Cardium horizontal oil wells which should significantly increase net asset value per share as production and reserves are steadily added. The exit rate for 2011 is set between 2300-2500 boe/d which is at least 40% higher than average Q1 figures. The plan is to exit the year with 1 to 1 debt to cash flow ratio or less.
The stock is currently trading below $0.50 which in my opinion is does not reflect the proper value given production growth and the prime Cardium acreage. As of December 31, the company reported a NAV of $0.70 per share. If I take the last transaction metrics in the Cardium and apply it on SKW, the result would reflect the upside potential in which I believe in.
According to SKW’s presentation from May 2011, the median on an EV/Boed basis for transaction metrics is $102,000. In the following scenario, let’s assume the following variables:
- SKW has a debt to cashflow ratio of 1 (net debt = $23 million).
- Production at 2,500 boe/d.
- 202.4 million Basic O/S
If the company is acquired using this metric at the beginning of 2012, the resulting share price would be $1.15. By the end of 2012 it will be a different story as the company is projecting more than 3,200 boe/d in exit production.
Obviously, this is a very simple valuation model that does not necessarily reflect the true value of SKW which might turn out to be higher or lower due to other variables such as commodity prices. On the other hand, it does indicate that the company still has a lot of value to unlock and that as it executes, the market will price it properly sooner or later. I will be holding my core shares until $1 is hit.
Update (October 12, 2011)
SkyWest Energy and Marquee Petroleum combination commentary.
I was not paid any fees to feature this stock. I am just sharing my research. Please do your own due diligence before buying or selling any security.