It has been a turbulent two months since Tim Heeley took the helm at Nighthawk Energy (LON:HAWK and OTCQX:NHEGY), one of the most actively traded small-cap stocks on the market.
In that time the stock has lost around half its value as the new chief executive has undertaken a strategic review of the business and secured new finance in the form of an equity drawdown facility.
After a baptism of fire, which included a fairly uncomfortable annual meeting earlier this week, I caught up with Heeley, who gave Proactive Investors the inside track on the review, which was unveiled on Monday.
Perhaps the most significant step was to exit the Revere project, while retaining a 5 percent royalty and 25 percent of the proceeds of any sale.
Revere, on the border of Kansas and Missouri, was supposed to be a relatively low cost, high potential opportunity that would help bankroll the main asset, the Jolly Ranch shale play in Colorado.
However it didn’t work out like that.
“Revere was entered into with the correct view that it was going to be a low cost producer that once the water kicked in would give us lots of oil and lots of free cash that would go into the development of Jolly Ranch,” Heeley said.
“The simple fact is the water flood did not happen in the way it would have been liked. The asset wasn’t performing.
“It was taking a lot of money. We spent the best part of US$40 million on Revere which is about the same as we have invested on Jolly Ranch.
“You compare and contrast the projects and it is a bit of a no-brainer.
“We have retained a five per cent overriding royalty, which is not a bad thing. It is the equivalent to having a working interest around 15 percent without the outlay.
“Of course 25 percent of any sale proceeds are retained, if sold in a two-year period, which is a good non-liability upside as we could expect.”
The exit was part of a programme of focusing down on the Jolly Ranch shale play. Heeley is still upbeat on its prospects despite ending discussions with potential partners, a process being handled by Macquarie Tristone.
“Whilst the process has raised the profile of the play and we have had some encouraging feedback, it was just too early (to bring in a partner),” Heeley said.
“We want to make sure we can deliver as much value as possible for shareholders. The way to do that is to spend the money on the asset ourselves.”
So the work continues proving up Jolly Ranch and Heeley and his team are now pressing on with a series of completions and recompletions.
Early in the New Year Gaffney Cline will issue a reserves and resource report, while Schlumberger will produce a reservoir simulation model at some point in the first quarter of 2011.
If positive both ought to give the share price some much needed traction.
“When you are doing an unconventional play such as a shale oil play, the initial drilling of the well is relatively straightforward,” Heeley explained.
“The well is the mechanism to get you to the shale. These things don’t produce on their own.
“This is the unconventional element. You have to frack and complete the wells.
“The actual science time and effort are spent at the shale interval.
“You don’t have exploration risk in the traditional sense, but you do have significant development and appraisal risk.
“So it is a case of completing these inter-bedded shale horizons. And that’s what we are engaged in as we prove up the play.
“Because of that you don’t have these binary events like a huge discovery in the Falklands creating more value than is actually in the play itself.
“What you have to do is look at the steps we can take to prove value.
“That means demonstrating that the frack methodologies work across the play and that we can get consistent production across the play.
“We have six wells on production. The ones that have been on the longest are exhibiting very good performance. We are beginning to see them stabilise.
“Wells that have been on for a long period of time have paid back. So it is all about now getting a portfolio of wells across the acreage.”
Heeley said as the share price has fallen investors have taken this as their cue to buy into Nighthawk at bargain level.
They sniff a bargain, as did Heeley and the team when they bought shares last week.
“The drive into next year is to institutionalise the stock. At times like this you do need big shareholders to come in and anchor the position.”