EOX : NYSE : US$6.47
BUY Target: US$11.00
COMPANY DESCRIPTION: Emerald Oil Inc. is an independent exploration and production company primarily focused on acquiring acreage and developing wells in the Bakken and Three Forks shale oil formations of the Williston Basin in North Dakota and Montana. The company also has acreage in the Sandwash Basin in Colorado and Wyoming, and the Heath Shale oil formation in central Montana.
Energy — Oil and Gas, Exploration and Production ADJUSTING ESTIMATES FOLLOWING SUCCESSFUL CONVERTIBLE NOTE OFFERING
Investment recommendation EOX has successfully transitioned to an operated drilling program in the Williston Basin (WB). EOX has ~85K net acres (75% operated), a very meaningful position for a company its size. With plenty of liquidity at its disposal, EOX is poised to rapidly grow production in 2014 and beyond. Investment highlights On the heels of the company’s successful $140M offering of five-year convertible notes, which was upsized from $125M due to strong demand, we are lowering our EPS/CFPS estimates and NAV to account for dilution. The deal was priced at 2% with a 35% conversion premium (conversion price ~$8.78/share), attractive terms in our view. Pro forma liquidity is ~$312M, including the $32.5M over- allotment option, which we assume gets exercised. Proceeds will be used to repay revolver borrowings as well as to help fund the company’s accelerating drilling program, where a third rig will go to work by the end of this month and a fourth later this year. Liquidity should also be enhanced by a significant bump in the $75M borrowing base in the spring redetermination.
Well results in the WB continue to be stellar. EOX has reported 17 operated well results to date, with an average 24-hour rate of 1,626 Boe/d. Those with long enough histories had average 30, 90, 150 and 240 day rates of 767, 574, 535 and 503 Boe/d, respectively. All are solid results, in our view. The company has stated it will be raising its 2014 Q2-Q4 and full year exit rate production guidance in May. As a result of strong well performance, EOX is also raising its Low Rider type curve EUR. Valuation Our $11 price target represents a ~15% discount to a ~$13 NAV. Our previous $12 price target was the same discount to a ~$14 NAV