UPDATE: Nighthawk quarterly output down; 12 wells now on test production

Adds comments from city Broker Matrix.....

Nighthawk Energy (LON:HAWK,OTCQX:NHEGY) this morning unveiled a fall in quarterly production as it continued to concentrate on its completion and recompletion programme.

In its latest investor update it said the number of wells now on test production has risen to 12 from five and it expects its output will increase markedly in the three months to June.

Production from the Jolly Ranch shale oil project in Colorado was 2,062 barrels of oil in the period to the end of March with 3,086 in the three months before that.

Nighthawk’s drilling programme, meanwhile, has been delayed by “tight rig availability”, it was revealed this morning.

The target was to drill up to seven new wells with four on the core Craig Ranch field targeting the Pennsylvanian Atoka and Cherokee shales. 

Then in the second quarter there would be up to another three in the Middle Mist area, testing the 'J' sands and the Cretaceous-aged Niobrara shale formation.

Boss Tim Heeley and his team still have plenty to keep them occupied with and expanded completion roster. And the initial six well programme has been expanded. 

A number of other wells are now connected to the water disposal wells and further well sites are being electrified, enabling more efficient pumping and water disposal, the firm said.

In an interview with Proactive Investors last week Heeley said it would take another year to place Nighthawk on an “exceptionally sound footing”.

Key to this is the completion and recompletion work currently being carried out.

“In many ways this process is something akin to creating a new company,” Heeley said.

“We are trying to do something complicated in the oil the world – something more complicated than a conventional oil field. And nobody should doubt this. But we are going in the right direction.” 

Investors appeared unperturbed by today’s news marking the shares 0.07 pence higher to 5.27 pence, which builds on the momentum of the past week, which has seen the stock gain more than 10 per cent.  

Broker Matrix, meanwhile, agrees with Heeley’s strategy of completions and recompletions, which it reckons will help unlock the true value of Nighthawk’s main project.

Analyst Charlie Sharp said: “The Jolly Ranch development offers substantial potential, providing the door to understanding the reservoir performance and how best to drill and complete wells can be unlocked. 

“The additional wells completed this year, and five further wells in the current completion programme, should begin to provide the information to tune the further development of the field. 

“The second quarter should be a step in the right direction in terms of production, and with up to 17 wells completed/to be completed, the data gathering and cash flow is anticipated to gain momentum.”

Part of the overhaul of Nighthawk involves the recruitment of senior management with either City experience or operational expertise. 

The group is on the hunt for chief operating officer, while earlier this week it appointed a finance director.

Richard Swindells joins from Ambrian Partners, where he was Nighthawk’s broker and nominated advisor. 

It means he has very good understanding of the company, the challenges it faces and also the opportunities to develop the Jolly Ranch project.

The new FD also comes with an impressive track record for raising funds, having helped find £275 million for Ambrian clients.

The appointment does appear to have piqued the interest of investors in the past couple of days. 

However it is difficult to say whether this is a turning point for the stock which took a knock in after the publication of long-anticipated Gaffney, Cline Associates reserves report last month. 

On the face of it the 2P reserves figure of 27,500 barrels of oil looks pitifully small.

However there are two things to remember. First, the results were produced from 200 acres of the project’s 410,000 acres. And second, they were based on just two discrete intervals in the Cherokee formation. 

“We said the numbers were going to be low and we said this from day one,” Heeley said.

“We’ve got to get more wells on the Cherokee, but we’ve also got to crack the Atoka (formation).

“We know there is oil in the Atoka. We have produced it, just not in sufficient volumes to get the reserves so we need to focus on this horizon too. 

“This is where the effort is with completions and recompletions.”

A recent report from City broker Westhouse puts the Gaffney, Cline data into context.

Analyst Peter Bassett says the reserve numbers are likely to “grow significantly” as more wells and more horizons are included in the study. 

“If the 2P reserve numbers were applied pro rata to the 410,000 acres, there would be around 56 million barrels net to the company,” Bassett said. 

“Based on the 3P reserve numbers, the reserves for the whole acreage would be around 131 million barrels net. 

“We stress that these are not reserve forecasts and that actual reserve numbers will need to be certified.”

It may take another 12 months before the GCA work is updated to give a more meaningful figure. 

However in recent days the trajectory has been upwards as buyers have entered the fray.

“The price continues to be under-strength,” Heeley said. “But what’s heartening is the institutional demand is there, and it shows we are doing the right thing.”