London-listed oil and gas equities may be stuck in the doldrums - the Aim energy sector retreated 17 per cent in the first quarter of 2014 alone - but it's a completely different story across the pond. The North American oil and gas industry is booming thanks to soaring shale oil and gas production, helping share prices there ratchet upward. We suggest gaining exposure to one hot American onshore play in particular, Caza Oil & Gas (CAZA), a small Texas-based company whose shares are dual-listed on Aim and the Toronto Stock Exchange.
- Rising production
- Funding secured for drilling programme
- Substantial oil and gas reserves
- Discount to NAV
- Growing debt pile
- Pace of future drilling uncertain
What differentiates Caza from some of its riskier peers is that Caza has already proven it can extract shale oil and gas in commercial volumes from its licences in New Mexico and Texas. It has been enjoying huge success lately drilling in the 'Bone Spring' play, a series of pay zones in the Permian basin that are mostly oil- and liquids-rich. It typically partners up with other operators to reduce financial risk and is left with about a 50 per cent working interest in each well.
Production has soared over the past 12 months, albeit from a small base; average net output increased to 985 barrels of oil-equivalent per day (boepd) in April, up from 230 boepd 13 months earlier. Moreover, two big horizontal wells have come online since then, almost doubling production again. The Gramma Ridge well initially gushed 653 boepd net to Caza (1,602 boepd gross), while the Jazzmaster 17 well yielded upward of 125 boepd net (650 boepd gross).
Importantly, rising production should quickly convert into improved cash flow; in the first quarter of 2014, Caza's operating net back (oil and gas sales net of royalties, production and transportation expenses) was a robust $58 per barrel produced. That's relatively high because of the high percentage of oil and liquids produced from the Bone Spring wells, which fetch higher prices than shale gas due to the recent supply glut.
CAZA OIL & GAS (CAZA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 19p | MARKET VALUE: | £45m | |
| TOUCH: | 18.5-19.5p | 12-MONTH HIGH: | 26p | LOW: 7p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 12¢ | NET DEBT: | see text | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 2.5 | -3.7 | -3 | nil |
| 2010 | 2.2 | -7.5 | -6 | nil |
| 2011 | 4.1 | -23.3 | -14 | nil |
| 2012 | 5.0 | -12.2 | -6 | nil |
| 2013 | 8.3 | -8.6 | -4 | nil |
| % change | +66 | - | - | - |
Normal market size: 30,000 Matched bargain trading Beta:0.2 £1=$1.71 | ||||
True, Caza has had to borrow heavily to get this far. At 31 March it had drawn down $35m of senior secured notes under a $50m (£29m) agreement with Nasdaq-listed investment company Apollo to finance its share of drilling costs. The pace of further drilling will therefore depend heavily on Caza's ability to pay for it; it had just $5m in the till at 31 March and each well costs around $6m to $8m to drill (gross).
The good news is that Caza raised $10m in a placing priced at 18p a share earlier this month, in addition to selling another $10m of notes to Apollo in June. Together, this should allow it "to embark on an accelerated and expanded drilling program in the Bone Spring play", more details of which should be released next month.
