Nighthawk Energy: Westhouse says today’s update reveals first stage in Jolly Ranch revival

Today’s operational update from Nighthawk Energy (LON:HAWK, OTCQX: NHEGY) is the first stage in the technical revival of the Jolly Ranch shale oil asset, according to Westhouse Securities. 

Nighthawk gave an update this morning on its fully-funded US$7.5 million work programme, which aims to substantially increase production from the project in Colorado. This includes working-over fifteen wells and drilling five new ones.

Last month, Nighthawk completed a key deal to take control of the project. It acquired an additional 25 per cent of Jolly Ranch, taking its stake to 75 per cent. To support this move it raised over £18 million.

“The recent acquisition and funding round completed by Nighthawk has enabled the company to go out on the "front foot" with its plans for the Jolly Ranch project as operator and today's announcement is the first stage in the technical revival of the shale oil asset,” analyst Andrew Matharu said in a note to clients.

Matharu says the work-over programme could demonstrate that the previous operator, Running Foxes Petroleum, had not optimized the completion of the production wells. 

Then subsequent wells may demonstrate the overall ‘producability’ of the project, he added. 

According to Matharu, the programme could also demonstrate Nighthawk’s credentials as an operator.

The analyst believes that Nighthawk’s is heavily undervalued. He rates the stock as a ‘Strong Buy’ and values the company at £134 million, or 10.7p a share. This punchy valuation is some 280 per cent higher than the current price of 2.8p a share.

Mergers and acquisitions are central to the analyst’s valuation for the stock. 

“US shale oil plays have been the focus of increasing levels of domestic and cross-border merger and acquisition activity with transactions valuing shale acreage in excess of US$25,000 per acre. 

“Nighthawk is currently valued at circa US$125 per acre and therein lies the upside." 

He added: “Our valuation is based upon a risk-adjusted NPV of a conservative development scenario for Jolly Ranch, and the new capital structure.” 

Today Nighthawk said that the initial work over portion of the work programme would cost US$750,000 and the work will take place during the second quarter of 2012.  The company is currently contracting two work-over rigs which are expected on location in March. 

In the second half of the year, Nighthawk plans to drill five new wells to add production and further establish the range and extent of the Cherokee shale, with at least one well testing the Niobrara shales in the northern acreage. That portion of the work programme is expected to cost US$6.75 million.

Nighthawk also plans to carry out more logging work and re-interpretation of seismic data. Additional seismic and geological basin studies are expected to be undertaken at a later stage. 

The company has also noted the increased level of third party leasing and drilling activity immediately adjacent to Jolly Ranch and it anticipates that additional valuable information will become available from these activities.

It also reported that gross oil production from Jolly Ranch in 2011 reached 24,494 barrels of oil, a daily average of 67 barrels. Average production in January 2012 up to 23rd of the month, when Nighthawk assumed operatorship, was approximately 50 barrels a day. 

In the stock exchange statement, chairman Stephen Gutteridge said: “We are now commencing the implementation of a completely new development plan for Jolly Ranch, with Nighthawk in control as operator." 

“Investment in the project has been severely restricted over the past 12 months, which has resulted in lower production levels and the need for remedial work on a number of wells." 

“We will now change this with the commencement of a US$7.5 million gross work program this year, with existing wells being worked on and 5 new wells to be drilled in the second half of 2012. 

“Whilst we will not be able to fully quantify the potential for increased production until we have some results from the work-overs, we are confident that we can deliver a significant uplift on current levels."