Nighthawk Energy directors buy encouraging

Nighthawk Energy (HAWK) has moved up sharply since the weekend with two RNS's catching the eye. Yesterday's announcement confirmed that several "sweet spots" in the shale had been identified on 3D seismics. Secondly this morning a RNS stating that several directors including the MD David Bramhill had purchased stakes between 50,000 and 100,000. HAWK' s share price is currently up 8% at 28p to buy. 


The fact that the Scottish Widows (Lloyds) stock sale overhang has now cleared means that the positive momentum is likely to continue.

Portfolio Update - February 21st 2010

The market’s had a good week, with most of the major indices up 3% or so. Sentiment seems to have turned positive over the last 2 weeks after the negativity early in February. One of Contrarian Investor UK’s principles to maintain adequate diversification is being broken this week as my portfolio is too heavily weighted towards GW Pharma and the Falkland Islands Oil companies.  But the “binary bet” on the success of GW’s Sativex cannabis spray for Multiple Sclerosis is far too tempting a target. The previous application for the drug was rejected because of inadequate clinical trial data. This was addressed with an additional phase III clinical and the new application made for a European licence in the summer of 2009 looks very strong.  I have used Contract’s For Difference (CFDs) to limit the downside risk to 20% or so, but approval should move GW Pharma up at least 50-60%. As for the Falklands Oil drillers, all the hype and TV/press coverage is just too tempting to exploit and again the upward move on these shares will be so significant that a guaranteed stop loss using a CFD seems a sensible trade, albeit a gamble. “Fortune favours the brave”.

Coal of Africa (CZA) – Significant upward move in this share price this week on no news from 130p range to a high of 153p. Positions closed despite long term conviction in this stock, especially as Vele mine approval was finally given this month.  This strategy appeared to have paid off on Friday with CZA falling as much as 5% at one point. I will watch for a potential re-entry point if the positive market sentiment turns for the worse.

GW Pharma (GWP) – Still no news on the Sativex European approval but given the timings of the Decentralised approval process (DCP) for drugs in Europe it would be expected that news is not far off.  Have increased position once again at 87p.

Falklands Islands Oil (Falkland Oil and Gas –FOGL, Desire Petroleum – DES, Borders and Southern Petroleum BOR) – Its been an exciting week for the Falklands Oil stocks as Argentina issued a decree that any vessel passing through its waters would need a permit to visit the Falklands which made investors somewhat nervous. On Friday, the Ocean Guardian Rig, contracted by Desire Petroleum arrived on the Liz field in the North Falklands basin and is due to spud this afternoon. I took the opportunity to top up my holding in Desire Petroleum despite some reservations about my significant exposure to the Falklands Oil sector. The risks are significant but the geology of the Falklands basin and oil finds in the previous drilling campaign by Shell/Lasmo gives more than hope that oil will be found in economic quantities. If the Ocean Guardian Rig does strike it rich then I would expectd Desire’s share price to be closer to £20 than 1 so the risk/reward ratio still looks enticing despite the strong run up in the Falkland Island Oil shares. Falkland Oil and Gas and Borders and Southern Petroleum have been relatively benign for a couple of weeks now, so a rise in these Southern Basin stocks would be expected on any news from the Northern Basin drilling campaign.
Nighthawk Energy (HAWK) - Nice move back up from 27p to just over 30p as the company announced the appointment of a new non-exec. director. News on Jolly Ranch should be imminent and therefore I am hopeful of a solid move towards 40p in the next week.

ITV (ITV) – A move up from below 50p to 53p as news on potential government approval of Product Placement on UK TV came through. Position still in deficit but given TV market revenue rebound in both January and February, outlook looks positive.

Amgen (AMGN) – News was received this week that an opinion on the FDA application for Prolia (denosumab) would be received by end July. I have trimmed by position a little this week because of a shift in the portfolio to GWP and the Falkland’s shares but will look to top up in the next few weeks.

Intel (INTC) - Position closed at $21.7, following a good rise in the semiconductor stocks this week. I like Intel long term but it trades within a range of $19-$22 so a move to the upper end triggered a sale.

Micron (MU) – The worst performing stock in the portfolio but Micron continues to rebound from its lows close to $8 to finish Friday at $8.9. Holding

New Edison research report highlights opportunities for Nighthawk Energy

Edison Investment Research Limited has published a report on Nighthawk Energy (HAWK). Although HAWK is a research client of Edison, the information gives some interesting insights on the company’s prospects and has a 12 month price target of 95p per share ($488m) with potential upside depending on news of £2 per share. This morning HAWK’s share price moved above 29p for the first time in several weeks as anticipation of forthcoming news on Jolly Ranch gathers pace. As this is a substantial holding for Contrarian Investor, this news is particularly pertinent for the portfolio. The undemanding current market capitalisation appears to indicate that the opportunity for significant share price appreciation should not be underestimated if Jolly Ranch and Revere deliver anything close to expectations.



Some highlights from the report:
“The most important in terms of potential scale is the shale oil play, Jolly Ranch, in eastern Colorado. This is broadly analogous to the Bakken plays in Montana and North Dakota and is a potential company maker. In 2009 Schlumberger estimated the P50 oil-in-place fir around 2/3 of the Jolly Ranch project at 1.46 billion barrels of oil equivalent gross. There is the potential for positive news flow in 2010 reflecting the drilling programme, 3d seismic surveys and an anticipated upward trend in production from nominal levels in 2009 to possibly over 1000 barrels a day gross in the coming months. The Revere waterflood project in Kansas/Missouri could also see significant production gains in the 2010 driven by development activity,”


“We see scope for a pre-tax profit of £0.5m on sales revenues of $3.1 m based on an average production rate of 140 boe/d. There is inevitably a degree of uncertainty about the outlook for 2011 and 2012 but we believe Nighthawk should be comfortably profitable at the EBITDA and probably the pre-tax levels based on our production forecasts.”


“As of end of January 2010 we believe the cash balance was about $17m which is adequate to comfortably finance the current development programme”


“We believe the key items of news in 2010 will relate to rising production, particularly at Jolly Ranch. With this in mind, it is likely that there will be regular updates on production probably at the end of each quarter. Near term in late February and March, we also believe that there will be news surrounding the following issues: Jolly Ranch seismic survey results along with potential new drilling targets, Jolly Ranch operational update, Revere operational update including the status of production and resources at Xenia”


“Currently we believe production is running at about 360boe/d gross or approaching 200boe/d net. A sharp increase in production is anticipated in the coming months. This reflects intensifying well test and development work at Jolly Ranch and Revere. We believe that it is possible that gross production across the JV could be running at about 1,250boe/d by end of 2010 and perhaps 1800boe/d by late 2011.”


“Jolly ranch has the potential to be a highly lucrative project. The pre-tax netback could be in the region of $50/bbl after allowing for royalty payments, severance costs and the cost of logistics and lifting. Assuming a cost per vertical well of $1m and production per well of 100b/d, the pre-tax payback period would be 200 days. Allowing for state and federal tax the payback would be 333 days. “


“WTI (West Texas Intermediate) oil would probably have to fall below $35/bbl before a prospective Jolly Ranch project would hit approximate fully accounted break even. On a variable cost basis, break-even might be around $25/bbl.”


“Assuming a similar success rate to that achieved historically (Revere - on the Devon and Buchanan properties), it would not be surprising to see production up to 300bpe/d gross by end 2010 and perhaps 400boe/d by end 2011.


“Since July 2009, Nighthawk has traded between 27p and 48p/share. Trading at around 36p in the second week of January 2010,Nighthawk was up by about 33% from a depressed base at the end of 2008. This was a major underperformance compared with the approximate 122% gain in the AIM Oil and Gas Price index over the same period. The weak performance over the past year or so, we believe, largely reflects heavy cash calls combined with disappointment at the pace of bringing production on stream and defining the reserve base. Oilfield development however, is a time consuming and costly task even in a favourable operating environment and requires patience. Given that production will probably gain momentum in the coming months, investor perceptions could turn considerably more positive during 2010. Ultimately we believe that a decisive change in perceptions will require evidence of a substantial reserve base, as indicated earlier. When this happens or arguably somewhat before, the larger independents are likely to become increasingly interested in Nighthawk/RFP or in particular assets owned by the joint venture. “


“Nighthawk’s current market cap of about £91m is in large part under pinned by the Cisco Springs project plus the investment portfolio alone. The independently assessed 2p reserves of 24mmboe, along with the installed production and logistical infrastructure, should be worth at least $5/boe based on sector data. Allowing another £2m for the portfolio and the implied valuation for the other projects is a mere £12m”.
Source: Edison Investment Feb 15th 2010

NightHawk Energy - a shale oil bet with huge potential!

At 35p, AIM listed Nighthawk energy (HAWK) is a very interesting play on shale oil in the U.S. and with its share price currently depressed, there looks to be a strong investment case for signficant gains in 2010 driven by news flow.

The case for investment:

1. THE JOLLY RANCH PROJECT

Nighthawk owns a 50% share in the Jolly Ranch Project in Colorado (its U.S partner Running Foxes owns the remainder). Hawk owns approximately 400,000 acres in the SE part of the Denver Basin. The hope is that oil can be produced from its black organic shales.

In July 2009, Schlumberger Data and Consulting Services, completed a survey of the oil in place at Jolly on an area of 246,000 acres.

The results were highly encouraging:

P10 - 1.22 billion barrels

P50 (most likely oil in place) - 1.46 billion barrels

P90 - 1.742 billion barrels

Schlumberger concluded that " the regional continuity of the formations was such that the resources in place were likely to be laterally continuous across the total acreage".

Hawk's efforts to date has been focused on proving the reserves in place and recovery rates using a combination of traditional vertical wells and a newer technique known as Lateral or horizontal Drilling. During the second half of 2009, it has been shown that oil recovery has been economic from several of these wells e.g. Craig 4-4, 65 barrels per day.

What is horizontal drilling?

The use of horizontal drilling technology in oil exploration, development, and production operations has grown rapidly over the past 10 years. Horizontal drilling technology achieved commercial viability during the late 1980’s and  It has been used successfully particularly in the Bakken Shale of North Dakota and the Austin Chalk of Texas, Of the three major

categories of horizontal drilling, short-, medium-, and long-radius, the medium-radius well has been most widely used and productive. Achievable horizontal bore hole length grew rapidly as familiarity with thetechnique increased; horizontal displacements have now been extended to over 8,000 feet. The technical objective of horizontal drilling is to expose significantly more reservoir rock to the well bore surface than can be achieved via drilling of a conventional vertical well. Significant successes include many horizontal wells drilled into the fractured Austin Chalk of Texas’ Giddings Field, which have produced at 2.5 to 7 times the rate of vertical wells, wells drilled into North Dakota’s Bakken Shale, from which horizontal oilproduction increased from nothing in 1986 to account for 10 percent of the State’s 1991 production, and wells drilled into Alaska’s North Slope fields.

Comparisons to the Bakken field

The Bakken Formation, occupying about 200,000 square miles (520,000 km²) of the subsurface of the Williston Basin, covering parts of Montana, North Dakota, and Saskatchewan.

There are significant reservoirs of oil in the Bakken shale. Oil was first discovered in the Bakken in 1951, but efforts to extract it have historically met with difficulties. An April 2008 USGS report estimated the amount of technically recoverable oil in the Bakken Formation at 3.0 to 4.3 billion barrels (680,000,000 m³), with a mean of 3.65 billion.The state of North Dakota also released a report that month which estimated that there are 2.1 billion barrels (330,000,000 m³) of technically recoverable oil in the Bakken.

Geologically, Jolly Ranch is similar to the Bakken shale field which is currently the largest shale play in N. America . Because the Bakken shale has generally low porosity and low permeability, it made the oil difficult to extract and until recently recovery rates were poor and it was the advent of the new horizontal drilling techniques that has signficantly increased recovery rates. Jolly appears to have superior porosity and permeability characterisitics and this geology together with the promising early drilling results give credence to the theory that Jolly could be more productive than Bakken in the longer term.

Bakken fields have attracted strong prices per acre e.g. Jan 08 Crescent point/londex $17,000 per acre, Dec 08 Cpe/vilanum $7398 per acre, March 09 tristar/cpe $9332 per acre.

Jolly Ranch financial models based on Schlumberger anaylsis

There is a strong financial case for investment in Hawk based on the Jolly Ranch Project alone. With relatively conservative assumptions, namely;

• p10 oil in place estimates (Schlumberger July 2009)
• 10% recovery rate
• 25% cost per barrel
• $55 per barrel oil price - WTI

Estimated earnings for the life of the project are $2.35 billion, which equates to lifetime earnings per share of $72 (£45). 


2. Financial health


In August 2009, Nighthawk raised US$37 million (£22.4 million) at 35 pence per share via an institutional placing. Cash balances of 30th June 2009 were $6 million. At the AGM in November, David Bramhill (MD) stated that if oil stayed close to the current $75/barrel level, the company would continue to be cash flow positive and as production ramps up (expected to be 700-800 BPD by end 2009), cash flow would continue to improve. Nighthawk is currently debt free and the board is clearly of the opinion that equity is advantageous to bank debt. It is unlikely that  a further placing of shares will be necessary until the end of 2010 and the financial position is helped because Running Foxes contribute 50% towards all costs as well as sharing 50% of all revenues. 


3. Other prospects.


As well as Jolly Ranch, Hawk also has an interest in the Revere prospect. This is a 40,000 acre waterflood project and is located on or around the State border between Kansas and Missouri. It is comprised of the Devon Oilfield (80% interest), Buchanan, Worden and Xenia projects (50% interest).


The reservoir is underpressurised, therefore it is not possible for oil to reach the surface without water injection which displaces the oil in the well. This is a well used technique called Waterflooding.  


Initial gas production from Xenia is expected to be 500,000 cu ft per day plus oil. In addition the P50 (most likely) of the Devon, Buchanan and Worden sections of Revere has been calculated to be 210.5 million barrels. This is expected to increase as further deveopment occurs.


Nighthawk also own interests in smaller projects, Cisco Springs (50% owned) and the Cliffs shale gas project (80% owned).


4. Attractive share price below 40p


Nighthawk's current share price of 35p, gives it a market capitalisation of £116 million (329,639,480 ordinary shares). This is equivalent to the institutional placing price of 35p  which occurred in August 09. The 52 week share price range is 22p to 59p (the 59p coinciding with the release of the Schlumberger data in July 2009).


At the November AGM, David Bramhill (MD) stated that the share had been depressed by some institutional selling and this stock overhang as well as short term profit taking by private investors has moved Hawk's price down from the mid 45p range prior to the AGM to the current 35p. Certainly the news from the 2009 AGM that the company was producing only 250 BPD compared with an expectation of closer to 2000 BPD declared at the 2008 AGM made investors feel that this was "jam tomorrow" story and drove a lot of shorter term speculators out.  Production expected at the end of 2009 is closer to 850 BPD. However, investors should buy Hawk as a "production proving" play not a producer with an expectation of signficant news in Q1 2010:

• Production updates from the Jolly Ranch wells
• Production updates from the Revere Waterfloods and Xenia gas project

5. Moderate risk profile


Although recovery rates are being proved at Jolly Ranch, the Schlumberger assessment gives confidence that there is a signficant quantity of oil contained within the shale rock. Given development in horizontal drillig technology which has been succesfully applied in the Bakken, recovery prospects are encouraging.


The fact that this is a play in the United States cannot be underestimated. Infrastructure for the transport of oil and gas is good and geopolitcal risk is low. Cost of extraction is also low relative to deep water projects in the Gulf of Mexico, the Falkland Islands or Santos basin off Brazil.


6. Listing of ADR's on U.S. Market


Nighthawk was listed as a level 1 American Depository Receipt in November 2009 giving U.S. investors easier access to purchasing shares. 


7. No sale of stock options by directors


It should be noted that the following options for Directors of the company vested on the following dates:

• 4,500,000 shares , exercise price 7p, earliest vest date 15/8/09
• 500,000 shares, exercise price 7p, earliest vest date 25/9/09
• 500,000 shares, exercise price 12p, earliest vest date 11/12/09
• 1,250,000 shares, exercise price 53p, earliest vest date 1/11/07

The directors have not yet exercised these options at current share price levels. Though no directors have purchased, it gives confidence that the directors have not taken early profits.


8. Rumours of takeover


There have been some rumours of a bid for Nighthawk circulating. None of these have been confirmed but they may add spice to the share price. Competitors have been buying up land around Jolly Ranch so it is not inconceivable that a buyout may occur, but probably later in 2010 or 2011.