Synergy Resources Update

Synergy Resources
Ipsit Mohanty 713.331.9460
Target: US$15.00

Synergy Resources Corporation is a domestic oil and natural gas
exploration and production company with over 40,000 net acres
in the Denver-Julesburg Basin, as well as 180,000 net acres in
East CO/West NE. The Wattenberg Field in the DJ Basin ranks as
one of the most productive fields in the U.S. Synergy’s corporate
offices are located in Platteville, Colorado.
All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Top line and bottom line growth in FY14
SYRG discussed FQ1/14 earnings in its conf call and issued updated
2014 guidance. Negative headline EPS/production miss from flooding
impact was offset by a steep prod growth outlook, and the stock finished
the day up ~7%. The updated capex budget of $189mm reflects the
addition of ~8 net Hz wells to the FY14 drilling plan due to the addition
of a 2nd rig. SYRG has guided well costs down to $3.4-3.8mm from
$4mm, to become one of the lowest-cost drillers in the basin. The 6
Leffler wells were drilled at an avg. cost of ~$3.5mm, and Renfroe well
costs were ~$3.5-$3.7mm/well.
Solid results lead into development plan
SYRG provided longer-dated results for Renfroe, with 90-day average
Niobrara production of 321boepd; we note that these rates do not reflect
the use of gas lift or compression, but both have since been installed,
indicating better rates in the future as evident from neighbors. Renfroe’s
Codell wells had 90-day average rate of 376boepd. Leffler testing has
been interrupted by third-party plant downtime, but management noted
the superior performance of Renfroe wells that had larger frac designs,
and Leffler has been completed with 20 stages/well while Phelps and
Union will see 22-26 stages per well, vs. 16-20 stages at Renfroe. FY14
should see at least ~27 wells turned to sales, with drilling spread across
B, C, and Codell on 6-well pads.
On the path of growth as planned
Post our road trip in Nov, we mentioned FY14 (Sep’13-Aug’14) will see
SYRG moving into the core of Wattenberg with full-scale pad
development. Codell will be a prominent part of development and we
believe SYRG will improve on its existing sub $4mm well cost. Further,
SYRG will accelerate drilling with a second rig and continue to remain
active on bolt-on acquisitions in the Wattenberg core. Today’s guidance
reflected all of that, but we reduce our price target to $15


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