Synergy Resources Corporation

Transcription

1 Synergy Resources Corporation Management Lynn Peterson, CEO and Chairman James P. Henderson, EVP, CFO Frank L. Jennings CAO Craig D. Rasmuson, COO Jon Kruljac, VP Capital Markets Commentary by Dan Steffens Synergy Resources Corporation (NYSE: SYRG) is one of the companies in our Small-Cap Growth Portfolio. They have doubled production each of the last two years and should increase production another 40% to 45% in 2016 even though they have dropped capital expenditures to a one rig drilling program. They can quickly ramp up drilling activity if oil & gas prices recover. The big news since our last profile is that Synergy reached an agreement with Sweet 16 member Noble Energy (NBL) to acquire ~33,100 net acres of leasehold in Colorado s Wattenberg Field. There will be two closings which will add estimated production of 800 Boepd in the 3rd quarter and another 1,600 Boepd in the 4th quarter. This is a Transformative Transaction: Synergy now holds ~47,000 net acres in the Wattenberg fairway, including ~28,000 acres to be acquired in the deal. The NBL leasehold is estimated to hold more than 900 low-risk horizontal drilling locations. Management believes the acquired acreage is comparable to the best in the play, as do several industry analysts. Heading into 2017, Synergy will have the potential to rapidly increase production and they have many years of running room in a proven area.

2 From Stifel s Update on Synergy Resources dated May 16, 2016: After drilling the upcoming Evans pads, located in the heart of the play, the company will likely drop one rig in late June. Preliminary plans contemplate entering 2017 with two rigs before a third is added near mid-year and a fourth in early Based on current NYMEX strip prices, the company sees the potential to more than double its production in 2017 over 2016 while maintaining a strong balance sheet and drawing only modestly on its revolver. This implies significant upside potential to our estimates and Street consensus, which project 2017 production growth of 20% and 18%, respectively. Synergy has one of the strongest balance sheets among their peer group. In 2016 they have closed three common stock offerings and, as of the date of this profile, the company is virtually debt free. However, they may add a small amount of debt to close the deal with Noble. On May 3, 2016, the Company entered into a commitment letter with two investors pursuant to which the Investors have agreed to purchase $80 million aggregate principal amount of 9% senior unsecured notes of the Company. The Senior Notes will mature five years from the date of issuance. The Senior Notes will be issued, subject to the satisfaction of certain conditions, contemporaneously with the first closing under the agreement governing the GC Acquisition from Noble Energy. Flexibility: Thanks to the stacked pay zones in their core Wattenberg area, Synergy can hold a lot of reserves just by drilling a few wells. After Synergy closes the acquisition from Noble, they will have over 1,800 low-risk drilling locations just in this one area. Most of the leasehold being acquired from Noble is already HBP.

3 My Fair Value Estimate for SYRG is now $10.00/share Compares to First Call s Price Target of $8.58 Disclosure: I do not have a position in SYRG and I do not intend on buying or selling it in the next 72 hours. I wrote this profile myself, and it expresses my own opinions. I am not receiving compensation for it from the company. I have no business relationship with any company whose stock is mentioned in this article. Company Overview Synergy Resources Corporation (NYSE: SYRG) is a growth-oriented independent oil and natural gas company engaged in the acquisition, development, and production of crude oil and natural gas in and around the Denver-Julesburg Basin ( D-J Basin ) of Colorado, which Synergy believes to be one of the premier liquids-rich oil and gas resource plays in the United States. The D-J Basin generally extends from the Denver metropolitan area throughout northeast Colorado into Wyoming, Nebraska, and Kansas. It contains hydrocarbon-bearing deposits in several formations, including the Niobrara, Codell, Greenhorn, Shannon, Sussex, J-Sand and D-Sand. The area has produced oil and gas for over fifty years and benefits from established infrastructure, including midstream and refining capacity, long reserve life, and multiple service providers.

4 Synergy s drilling and completion activities are focused in the Wattenberg Field, an area that covers the western flank of the D-J Basin, predominantly in Weld County, Colorado. Currently Synergy is focused on the horizontal development of the Codell and Niobrara formations, which are characterized by relatively high liquids content. Synergy operates the majority of the horizontal wells in which it has working interests, and it strives to maintain a high net revenue interest in all of its operations. Substantially all of Synergy s producing wells are either in or adjacent to the Wattenberg Field. Synergy operates over 74% of its proved producing reserves and over 98% of its planned fiscal 2016 drilling and completion expenditures are focused on the Wattenberg Field. This gives Synergy both operational focus and development flexibility to maximize returns on its leasehold position. Core Operations Since commencing active operations in September 2008, SYRG has undergone significant growth. SYRG s early development efforts were focused on drilling vertical wells into the Niobrara, Codell, and J-Sand formations. From inception through March 31, 2016, SYRG has completed, acquired, or participated in 618 gross (409 net) successful oil and gas wells. SYRG is the operator of 417 gross (369 net) producing wells and participated with other operators in 201 producing wells. The following table provides details about Synergy s ownership interests with respect to vertical and horizontal producing wells: In addition to the producing wells summarized in the preceding table, as of March 31, 2016, SYRG was the operator of 21 gross (17 net) wells in progress. During the first three months of 2016, the company s average net daily production was 11,510 BOED. By comparison, during the three months ended March 31, 2015, SYRG s average

5 production rate was 7,029 BOED. By March 31, 2016, approximately 90% of SYRG s daily production was from horizontal wells as compared to less than 10% as of August 31, The map below shows how well the recently announced acquisition from Noble Energy (NBL) in the Wattenberg Field fits with their Synergy s leasehold position. Referred to as the GCA Transactions, this deal has the potential to be transformative for a company of this size. It adds more than 900 low-risk horizontal well locations. Reserves As of December 31, 2015, the company s estimated net proved oil and gas reserves, as prepared by the independent reserve engineering firm Ryder Scott Company, L.P. ("Ryder Scott"), were 26.4 MMBbls of oil and condensate and Bcf of natural gas. As of December 31, 2015, SYRG had approximately 441,000 gross and 349,000 net acres under lease, substantially all of which are located in the greater D-J Basin. SYRG further delineates its acreage into specific areas, including the areas SYRG refers to as the core" Wattenberg Field (approximately 55,000 gross and 41,000 net acres) and the North East Extension Area of the Wattenberg Field

6 (approximately 99,000 gross and 51,000 net acres). In addition, the company holds approximately 191,000 gross (188,000 net) acres in southwest Nebraska, a conventional oil-prone prospect, and approximately 87,000 gross (63,000 net) acres in far eastern Colorado First Quarter Update Highlights Revenues were $18.3 million Net Loss was $51.4 million or $(0.42) per diluted share in the quarter which includes a full cost ceiling impairment charge of $45.6 million or $(0.37) per diluted share Adjusted EBITDA of $10.2 million (see further discussion regarding the presentation of adjusted EBITDA in "About Non-GAAP Financial Measures" below)

7 As of March 31, 2016, the Company's cash and equivalents totaled $50.9 million and it had $145.0 million of availability on its credit facility for total liquidity of $195.9 million Operational Highlights Net oil and natural gas production increased 65% to 1,047 MBOE, as compared to 633 MBOE the same year ago quarter, and averaged 11,510 BOE per day (BOE/d) versus an average of 7,029 BOE/d in the same period a year ago Financial Update Revenues in the first quarter of 2016 were $18.3 million, down from $18.9 million in the same year ago quarter. Higher year-over-year production volumes were more than offset by lower commodity prices. In the first quarter of 2016, the average realized price per barrel of oil was $23.89 versus a realized price per barrel of $37.35 in the year ago quarter, and the average realized price per Mcf for natural gas was $1.82 compared to $3.35 in the first quarter of The 2016 first quarter's net loss totaled $51.4 million or $(0.42) per diluted share compared to a net loss of $1.0 million or $(0.01) per diluted share in the year ago quarter. The first quarter 2016 net loss includes a full cost ceiling impairment charge of $45.6 million. Considering the effect of the income tax provision, which was impacted by the related valuation allowance change, the impairment charge reduced diluted earnings per share by $0.37. Adjusted EBITDA in the first quarter was $10.2 million as compared to $20.8 million in the year ago quarter. Operations Update The Company continues to operate one drilling rig and, as noted below, the rig is currently on the Company's Fagerberg Pad. Completion operations are underway on the Vista Pad. Both pads are located in Weld County, Colorado. Below is a pad by pad synopsis of recent well performance, current operations and the remaining 2016 drilling plan. Please note that the Working Interest and Net Revenue Interest percentages are subject to change through acquisitions, pooling, trades, swaps, earning agreements, and other reversionary interests. Vista Pad: 85% Working Interest (WI); 72% Net Revenue Interest (NRI) o Completed drilling 10 standard length wells o Four wells being completed with sliding sleeves; six wells will be completed through plug and perforation completions o Completion operations are underway with flow back anticipated late second quarter Fagerberg Pad: 96% WI; 76% NRI o Drilling underway for 14 mid-length wells o All wells drilled with a conventional monobore design and will utilize plug and perforation completions Bestway Pad: 88% WI; 73% NRI o Four mid length lateral wells o 150 day production averaged ~750 BOE/day, (52% oil), exhibiting a type curve above 750M EUR*

8 Wind Pad: 100% WI; 75% NRI o Eight standard length lateral wells o 90 day production averaged ~270 BOE/day, (61% oil), exhibiting a type curve above 250M EUR* * EUR estimates may not reflect reserves as determined in accordance with SEC rules Remaining Drilling Program Evans Pad: 70% WI; 57% NRI o Two separate 11 well pads o Utilizing two drilling rigs o 18 long length lateral wells o Four extended length lateral wells Williams Pad: 99% WI; 76% NRI o Nine mid length lateral wells o Permitting

9 Recent Activity Acquisition of Wattenberg Field Assets May 2016 Synergy entered into a definitive agreement with Noble Energy (NBL) through private negotiations to acquire certain assets for total consideration of $505 million cash, subject to customary purchase price adjustments. Approximately 72,000 gross (33,100 net) acres located in Weld County Colorado, primarily in and around the city of Greeley. The acquired lands are largely contiguous allowing for longer lateral lengths per well and the efficient development of infrastructure. Over 80% of the acquired lands are held by production from vertical wells, allowing for orderly horizontal development. Synergy has identified over 900 gross locations on the acquired lands, of which over 800 of those locations are suitable for mid (<7,500'), long (<10,000') and extended (>10,000') length laterals, using an initial

10 assumption of horizontal development with wells per drilling unit, creating multiyear drilling inventory. Drilling locations will target the Niobrara A, Niobrara B, Niobrara C and Codell zones which all produce in the acquired lands. For the first quarter of 2016 estimated net daily production of 800 BOE/d from non-operated properties and 1,600 BOE/d from operated properties. The acquisition is expected to close on two separate dates, with the undeveloped lands and non-operated production expected to close in the second quarter of 2016, followed by the operated producing properties (assuming regulatory approval is obtained) later in The closings are subject to the completion of customary due diligence and closing conditions. Synergy intends to finance the purchase price of the acquisition with cash on hand and proceeds from financing transactions, including a private placement of $80 million in notes for which it has a commitment letter in place. In addition, the Company announced that in two separate transactions, it has entered into definitive purchase and sale agreements with two private entities to divest approximately 3,700 net undeveloped acres and 107 vertical wells primarily in Adams County, Colorado for total consideration of approximately $27 million in cash, subject to customary purchase price adjustments. The divested assets had associated production of approximately 200 BOE/d. The vertical well transaction recently closed and the undeveloped acreage transaction is expected to close in the second quarter of Pro forma for the closing of these transactions, the Company will have an interest in approximately 47,200 net largely contiguous acres in the Company's defined Wattenberg fairway area and approximately an additional 22,000 net acres of other Wattenberg acreage. "This acquisition is transformational for Synergy and a significant step forward in the Company's evolution to become a leading operator in the Wattenberg Field. By consolidating our properties into a more focused footprint, we should be able to gain operating efficiencies. We have assembled an experienced Wattenberg technical team that can execute a capital efficient growth plan while maintaining a balance sheet with low leverage. We do not expect to increase our operational activity in 2016; however, we anticipate the development of the acquired properties to be a significant part of our expanded 2017 operation program, which is expected to incorporate up to three drilling rigs. This was a unique opportunity to acquire a contiguous block of acreage in the heart of the Wattenberg Field that may never present itself again. The acquisition provides the Company the ability to exploit the talents of our team across a broader and more contiguous footprint, which should result in operational efficiencies and enhance shareholder value," stated Lynn Peterson, Chairman and CEO. "We look forward to working with the county and city officials to create a development plan that can incorporate all parties' interests. Synergy has recently demonstrated success in working in a municipal setting with the drilling and completion of our Bestway wells in late This acquisition presents the opportunity to develop a largely de-risked leasehold predominately through midand extended length lateral wells and, since the acquired assets are largely held by production, we maintain our flexibility to deploy capital when appropriate."

11 Capital Expenditures Synergy s primary need for cash will be to fund its drilling and acquisition programs for its 2016 fiscal year. Synergy s cash requirements have increased significantly since May 2013, when it implemented its horizontal drilling program. However, as commodity prices have dropped, Synergy has negotiated lower costs from its service providers and has revised its completion design. Accordingly, Synergy currently anticipates that the standard-length horizontal wells to be drilled in 2016 will cost between $2.5 million and $3.0 million each as compared to fiscal year 2015 costs of $2.5 million to $3.8 million. Synergy s preliminary capital expenditure plan continues to anticipate the use of one drilling rig during the remainder of the year ending December 31, 2016; except for a short period which SYRG anticipates adding a second rig to drill adjoining pads to minimize the impact on the local municipality. The company also regularly reviews capital expenditures throughout the year and will adjust its program based on changes in commodity prices, service costs, drilling success, and capital availability. SYRG s total anticipated capital program for the year ended December 31, 2016 is estimated at a range between $130 million and $150 million, including approximately $30 million for discretionary seismic and land leasing, but excluding the GC Acquisition and any other potential acquisitions that SYRG may execute.

12 The majority of capital expenditures during the three months ended March 31, 2016 were associated with the acquisition of certain acreage assets and the costs of drilling and completing wells that SYRG operates. During the three months ended March 31, 2016, SYRG completed the drilling of 10 horizontal wells on the Vista pad and began the drilling of 14 horizontal wells on the Fagerberg pad. In total, the company had drilled 21 gross (17 net) wells that had not been brought into productive status as of March 31, All but eight of the wells in progress are scheduled to commence production before December 31, With respect to its ownership interest in wells operated by other companies, SYRG participated in drilling and completion activities on 10 gross (0.1 net) wells during the first quarter. Hedging

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