Abraxas Petroleum BUY

AXAS : NASDAQ : US$4.75
BUY 
Target: US$5.50

COMPANY DESCRIPTION:
Abraxas Petroleum Corporation, an independent energy
company, engages in the acquisition, development,
exploration, and production of oil and gas principally in
the Rocky Mountain, Mid-Continent, Permian Basin, and
Gulf Coast regions of the United States. The company
was founded in 1977 and is based in San Antonio, Texas.
All amounts in US$ unless otherwise noted

Energy — Oil and Gas, Exploration and Production
MORE THAN MEETS THE “EYE” – UPGRADING TO BUY
Investment recommendation
AXAS has positions in two leading US resource plays: the Williston Basin
(WB) and the Eagle Ford (EF). Renewed production growth combined
with deleveraging of the balance sheet in our view should be positive
catalysts, and we are therefore upgrading the stock to BUY from Hold.
Investment highlights
 AXAS has a number of EF wells coming on line in the next few
months that should drive production higher in H2/14. The Snake
Eyes 1H at Jourdanton was recently placed on sub-pump with solid
results. It also completed both the Spanish Eyes 1H and the Eagle
Eyes 1H. These should come online in Q2. At the Cave prospect, the
Dutch 1H is currently drilling and is expected to be fracked and
turned to sales in mid-June. At Dilworth East, the company plans to
complete the R. Henry 2H in late May and turn the well to sales in
early June.
 Along with the company’s upcoming EF wells, eight WB wells coming
online over the next several months should help drive solid Q/Q
production growth as 2014 progresses.
 The company had reiterated 2014 guidance of 5.2-5.3 MBoe/d earlier
this month in its ops update, but on the Q1/14 conference call stated
that in all likelihood it will continue running a rig in the EF all year,
meaning 2014 capex and production guidance will likely go higher.
AXAS has done a very good job in delevering the balance sheet
through asset sales and expects to execute the increased capex spend
while keeping debt/EBITDA at 1.0x or less.
Valuation
Our $5.50 price target represents a 10% discount applied to a ~$6.10 NAV.

Comstock Resources Target $ 30

Schematic E-W section showing the Eagle Ford Shale among the geological strata beneath the DFW Metroplex (Photo credit: Wikipedia)

CRK : NYSE : US$15.66
BUY 
Target: US$30.00

COMPANY DESCRIPTION:
Comstock Resources is an exploration and production company focused on development of the Eagle Ford Shale, the Permian Basin and the Haynesville Shale.

DEEP VALUE; IMPROVING EAGLE FORD RESULTS

Investment thesis
We are increasing our target price $1 to $30 per share following model refinements. To clearly illustrate Comstock’s deep value opportunity, CRK trades at ~30% discount to the group (’13E EBITDA) though should generate ~50% stronger CFPS growth (‘13-‘15E) via Eagle Ford execution. Accordingly, we feel CRK has 80%+ upside vs. the group’s 30%+ upside.
Permian divestiture eliminates capital structure concern
Pro forma the sale, Comstock’s net debt-to-EBITDA at year-end ’13 declines from ~3.5x to ~1.9x, which is in line with the industry median, and net debt-to-EBITDA should modestly decline thereafter assuming ~$500 million per annum capital plan.
Accelerating Eagle Ford development/volume ramp
As a consequence of the liquidity provided by the Permian sale, the company is increasing Eagle Ford activity from three to six rigs in 2H13 and plans to drill 72 gross wells (~65% WI) this year. McMullen County comprises ~90% of this year’s activity (four- to five-year drilling inventory). We believe acceleration in Eagle Ford activity should drive almost 20% quarterly oil production growth the balance of the year and oil production should exit the year at ~8.5 Mbopd vs. 4.8 Mbopd in 1Q/13.
Improving Eagle Ford results
In 1Q/13, Comstock Eagle Ford wells averaged ~670 Boepd the first 30 days, suggesting recoveries of almost 500 Mboe, which was a ~10% improvement in well performance q/q normalized for lateral length.
Overall capital productivity enhanced by ~10% with Eagle Ford JV
The company’s Eagle Ford JV assigns a one-third interest for the equivalent of $25k per acre. Assuming 80-acre spacing, the partner pays $0.67 million and receives a one-third interest in each well. In essence, the JV is funding ~10% ($30+ million) of the company’s ’13 capital plan

Related articles

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Abraxas Petroleum Eagle Ford / Williston Future

Map of Texas highlighting McMullen County (Photo credit: Wikipedia)

AXAS : NASDAQ : US$2.24
BUY 
Target: US$3.00

COMPANY DESCRIPTION:
Abraxas Petroleum Corporation, an independent energy company, engages in the acquisition, development, exploration, and production of oil and gas principally in the Rocky Mountain, Mid-Continent, Permian Basin, and Gulf Coast regions of the United States. The company was founded in 1977 and is based in San Antonio, Texas.

ADDED FINANCIAL FLEXIBILTY; REITERATE BUY AND $3 TARGET
Investment recommendation
AXAS has solid positions in two of the leading unconventional resource plays in the US in the Williston Basin (WB) and Eagle Ford (EF). We
believe strong production and cash flow growth, along with deleveraging the balance sheet, will be catalysts to drive a higher stock price.
Investment highlights
 Continued success in the EF: In McMullen County, the Gran Torino A 1H averaged 790 Boe/d (89% oil) on a restricted choke over its initial
30 days and is currently flowing to sales at a rate of 720 Boe/d (88% oil). The Mustang 3H, which was brought online for ~$6.2M in mid/late March, continues to outperform AXAS’ 575 MBoe EUR type curve while the Mustang 2H is currently being completed with a 19- stage frac. AXAS owns an 18.75% working interest (WI) in all mentioned EF wells.
 producing ~150 Boe/d before being shut in during the 2H and 3H completions. AXAS owns a 49% WI in the Ravin wells.

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• Abraxas’ loss widens in fourth quarter (mysanantonio.com)
• Abraxas Petroleum (amp2012.com)

Rosetta Resources

University of Texas Permian Basin Seal (Photo credit: Wikipedia)

ROSE : NASDAQ : US$46.56
BUY 
Target: US$69.00

COMPANY DESCRIPTION:
Rosetta Resources is an exploration and production company with operations in south Texas and northern Montana

Investment thesis

The former CEO Randy Limbacher built a deep bench as to executive management, and Jim Craddock (Texas A&M engineer) should capably
move the company forward. Randy’s departure was specific to his own interests and not a reflection of Rosetta’s business prospects.
An equity component to finance the Permian deal is unnecessary, unlikely Pro forma Rosetta’s property acquisition in the Permian Basin for $768
million in cash, the company’s year-end ’13E net debt-to-EBITDA increases from ~0.7x to ~2x, which is in line with the industry median, and should stabilize thereafter assuming ~$1 billion per annum capital plan. Given the company’s latent debt capacity, Rosetta can comfortably
debt finance the acquisition, which is underscored by the company’s ability to access term debt capital at 6%-7%, whereas Rosetta’s current
cost of equity capital is 20%-25%.
Doubling the WTI/condensate spread only has 5-6% equity value impact

Concerns abound as to the deterioration in the WTI/ condensate spread,
with analogies drawn from the erosion in NGLs pricing relative to WTI. The theory of an overabundance of natural gasoline (i.e., condensate)
rests upon the outlook for declining US motor gasoline demand and growing US condensate production. Yet, the condensate discount relative to WTI/LLS this past year has remained steady as lower gasoline imports and demand for condensate to dilute heavier crudes (≤31º API) has sufficiently counteracted this perceived market imbalance. Pro forma the Permian acquisition, condensate comprises ~25% of ROSE’s production.

Even assuming the WTI/condensate spread doubles only lowers ROSE equity fair valve 5-6%.

Related articles

• Rosetta Resources Buying Permian Basin Assets From Comstock Resources (dailyfinance.com)
• Rosetta Resources The Eagle Is Landing (amp2012.com)
• Rosetta Resources acquires Permian Basin assets from Comstock Resources for $768m (explorationanddevelopment.energy-business-review.com)
• Rosetta Resources (amp2012.com)

Approach Resources Inc.

AREX : NASDAQ : US$24.66
BUY 
Target: US$35.00

COMPANY DESCRIPTION:
Approach Resources is an independent energy company engaged in the exploration, development, production and acquisition of unconventional natural gas and oil properties onshore in the US. The company focuses on finding and developing high-quality, long-lived resource plays.
All amounts in US$

FORECAST POST CURTAILMENT ISSUES; REITERATE BUY AND $35 PT

Investment recommendation
The company is a pure play on the oily Permian Basin, with 148K net mostly contiguous acres in the southern Midland Basin. Organic production growth is solid and costs are coming down. As the company accelerates development in the horizontal Wolfcamp and continues to execute, we expect the significant gap between the current stock price and our NAV to narrow.
Investment highlights
 After the close Friday, AREX reported that ~6.1 MBoe/d of production has been curtailed since the second week of March due to third-party fractionation facility repair and maintenance following an electrical storm. Before this, the company’s estimated production for Q1/13 was averaging ~9.2 MBoe/d, which is above the high end of guidance (8.9-9.1 MBoe/d). Curtailed volumes are expected to be brought back online in the coming days. Assuming this to be true, AREX’s FY13 production guidance of 3.6-3.9 MMBoe is expected to remain unchanged.
 change to our FY13 estimate of 10.3 MBoe/d as AREX’s production pace prior to curtailment gives us confidence in the company’s ability to make up the lost volume over the remainder of the year.

Related articles

• Approach Resources Inc. (amp2012.com)
• US Tight Oil Plays – Spotlight on the Learning Curve (unconventionalenergy.blogs.ihs.com)

Abraxas Petroleum

AXAS : NASDAQ : US$2.14
BUY 
Target: US$3.00

COMPANY DESCRIPTION:
Abraxas Petroleum Corporation, an independent energy company, engages in the acquisition, development, exploration, and production of oil and gas principally in the Rocky Mountain, Mid-Continent, Permian Basin, and Gulf Coast regions of the United States. The company was founded in 1977 and is based in San Antonio, Texas.

Investment recommendation

AXAS has solid positions in two of the leading unconventional resource plays in the US in the Williston Basin (WB) and Eagle Ford (EF). We
believe strong production and cash flow growth, along with deleveraging the balance sheet, will be catalysts to drive a higher stock price.
Investment highlights
 AXAS currently has five EF wells on production, one well just beginning to flow back, and another waiting on completion. The company’s last four wells have all IP’d in excess of 1,000 Boe/d and are currently running above AXAS’ type curve. If outperformance continues, our 5.1 MBoe/d production estimate for FY13, representing 23% Y/Y growth, may prove to be conservative (FY13 production guidance is 4.9-5.2 MBoe/d).
 The company is putting forth a solid effort to delever. A data room is opening for the sale of non-operated WB interests (14.3K acres with production of 300-500 Boe/d), and remaining acreage in Oklahoma along with royalty interests in the WB are scheduled to be put up for sale in May. Along with expected cash flow and pro forma liquidity at year end of ~$41M, we are comfortable with AXAS’s ability to fund its $70M capex budget.
Valuation
Our $3 price target represents a ~40% discount to a $5 NAV.

Comstock Resources Target Price Increased To $ 28

CRK : NYSE : US$18.00
BUY 
Target: US$28.00

COMPANY DESCRIPTION:
Comstock Resources is an exploration and production company focused on development of the Eagle Ford Shale, the Permian Basin and the Haynesville Shale.

Investment thesis

We are increasing our target price $3 to $28 per share following the divestiture of the company’s Permian Basin assets. Specifically, Comstock is selling 53.3K net acres in the Permian Basin (40.2K net acres in Reeves County) for $768 million in cash. The properties currently produce ~3.3 Mboepd (~73% oil). Robust sales price, acceleration of Eagle Ford development drives $3 increase in CRK target price Assuming a $60K/Mboepd production rate multiple, the divesture equates to an elevated $10.7K/acre ($14.2K/Reeves County acre) transaction multiple.

Importantly from a value perspective, the company plans to increase development activity from a three-rig to a six-rig program the second half of the year and drill 72 gross Eagle Ford wells (~65% WI) with ~80% of the wells in McMullen County and the balance in Atascosa/LaSalle Counties.
Permian divestiture eviscerates capital structure concern Pro forma the sale, Comstock’s net debt-to-EBITDA at year-end ’13 declines from ~3.5x to ~2x, which is in line with the industry median, and net debt-to-EBITDA turns should stabilize thereafter assuming $400+ million per annum capital plan.
Improving Eagle Ford results
In 4Q/12, Comstock completed seven Eagle Ford wells that averaged ~580 Boepd the first 30 days, suggesting recoveries of ~475 Mboe for a drill/complete cost of $8+ million. Overall capital productivity enhanced by ~9% with Eagle Ford JV The company’s Eagle Ford JV assigns a one-third interest in the next 100 wells for the equivalent of $25k per acre. Assuming 80-acre well spacing, the partner pays $0.67 million and receives a one-third interest in each well. In essence, the JV is funding ~9% ($30+ million) of the company’s non-Permian Basin go forward capital spending this year.

Overall capital productivity enhanced by ~9% with Eagle Ford JV
The company’s Eagle Ford JV assigns a one-third interest in the next 100 wells for the equivalent of $25k per acre. Assuming 80-acre well
spacing, the partner pays $0.67 million and receives a one-third interest in each well. In essence, the JV is funding ~9% ($30+ million) of the
company’s non-Permian Basin go forward capital spending this year.

Approach Resources Inc.

A horizontal drilling machine (Photo credit: Wikipedia)

AREX : NASDAQ : US$24.78
BUY 
Target: US$35.00

COMPANY DESCRIPTION:
Approach Resources is an independent energy company engaged in the exploration, development, production and acquisition of unconventional natural gas and oil properties onshore in the US. The company focuses on finding and developing high-quality, long-lived resource
plays.

Investment recommendation

The company is a pure play on the oily Permian Basin, with 148K net acres in the southern Midland Basin. The acreage, which is 100% operated and mostly contiguous, is a very meaningful position for a company of AREX’s size. Organic production growth is solid and costs are coming down. As the company accelerates its development in the horizontal Wolfcamp and continues to execute, we expect the significant gap between the current stock price and our NAV to narrow.
Investment highlights
 AREX greatly increased its potential horizontal drilling inventory to 2,096 locations, up from 500, primarily due to the addition of the Wolfcamp A bench and more C bench wells.
 Well results continue to improve (7 most recent wells averaged 900 Boe/d, ~17% above its 2012 Hz Wolfcamp average). Recent wells, including 2 A bench tests, are tracking above the company’s 450 MBoe type curve.
 Horizontal Wolfcamp well costs, which averaged ~$6.4M in H2/12and are currently in the $6.0-$6.2M range, are expected to reach the company’s $5.5M target in Q2/13 after infrastructure projects are completed in Pangea Block 45, which is anticipated by the end of Q1/13. The company recently AFE’d a well for $5.6M. We are estimating an 8% reduction in LOE/Boe from Q2/13 to Q4/13.

Related articles

• US Tight Oil Plays – Spotlight on the Learning Curve (unconventionalenergy.blogs.ihs.com)
• The Future of U.S. Oil: Wolfcamp and the Gulf of Mexico (forbes.com)

Comstock Resources

Schematic E-W section showing the Eagle Ford Shale among the geological strata beneath the DFW Metroplex (Photo credit: Wikipedia)

Comstock Resources

CRK : NYSE : US$14.39
BUY 
Target: US$26.00

COMPANY DESCRIPTION:
Comstock Resources is an exploration and production company focused on development of the Eagle Ford Shale, the Permian Basin and the Haynesville Shale.

Investment thesis

We are lowering our target price $1 to $26 per share due to the base effect of appreciably less than expected fourth quarter oil production.
Normalized for ~750 Bopd of curtailed production due to offset well stimulation in the Eagle Ford and artificial lift installation in the Eagle Ford and Wolfbone programs, oil production in the fourth quarter would have been ~6,850 Bopd versus our expectation of ~7,700 Bopd
Our ’13 oil growth expectation of ~43% is toward the low end of company guidance (40%-60%), while we anticipate gas production declines ~25%,
which is at the midpoint of guidance (22%-28%).

Comstock offers modestly greater CFPS growth (’12-’14E) relative to the sector though trades at 20%+ discount (’13E EBITDA). CRK has ~80%
potential upside to our target price versus ~30% upside for the group.
Investment highlights
Elevated leverage should subside as an investor concern over the next year At year-end, Comstock’s net debt-to-EBITDA was ~4x, though should fall toward 3x by the end of this year, and decline below 3x in ’14E.
Solid Eagle Ford/Wolfbone results, encouraging industry Wolfcamp test In 3Q/12, Comstock completed six Eagle Ford wells that commenced at an
average of ~800 Boepd, suggesting a recovery of 500+ Mboe. Vertical Wolfbone wells have commenced at an average of ~350 Boepd and recover ~200 Mboe for a cost of ~$4.5 million. A recent nearby industry horizontal Wolfcamp test (~3,600’ lateral, 20 frac stages) produced ~950 Boepd the first 30 days, implying a recovery of ~700 Mboe.
Overall capital productivity increases ~7% with Eagle Ford JV The company’s Eagle Ford JV assigns a one-third interest in the next 100 wells for the equivalent of $25k per acre. Assuming 80-acre well spacing, the partner pays $0.67 million and receives a one-third interest in each well. In essence, the JV funds ~7% (~$30 million per annum) of the company’s capital spending.

Related articles

• Has Comstock Resources Become the Perfect Stock? (fool.com)

Comstock Resources Target $ 27

Comstock miners, 1880s. Caption on original: “To Labor is to Pray.” (Photo credit: Wikipedia)

Comstock Resources

CRK : NYSE : US$14.72
BUY  Target: US$27.00

COMPANY DESCRIPTION:
Comstock Resources is an exploration and production company focused on development of the Eagle Ford Shale, the Permian Basin and the Haynesville Shale.

Investment recommendation

After two days of investor meetings, management seems highly aware of the need to drive cost improvement into their vertical Wolfbone program
in Reeves County and grow/execute into their leveraged cap structure.
In ’13, we expect the company to deliver ~40% oil production growth, while Comstock indicated oil production should increase 40%-60% this
year. For every 5% of incremental oil production growth (~$420 million capital plan), we believe fair value increases ~15%.
Comstock offers modestly stronger CFPS growth (’12-’14E) relative to the sector though trades at ~20% discount (’13E EBITDA). Accordingly, CRK
has ~80% upside to our target price versus ~30% upside for the group. Elevated leverage should subside as an investor concern over the next year
At year-end, Comstock’s net debt-to-EBITDA was ~3.7x, though should fall to almost 3x by the end of this year and decline below 3x in ’14. In ’13, assuming ~$420 million in capital spending, the company’s negative FCF disposition is ~20%, whereas the industry is ~30% FCF negative.
Solid Eagle Ford/Wolfbone results, encouraging industry Wolfcamp test Last quarter, Comstock completed six Eagle Ford wells that commenced
at an average of ~800 Boepd, suggesting a recovery of 500+ Mboe. Since acquiring acreage in Reeves County, Comstock has completed 20 vertical
Wolfbone wells, which have commenced at an average of ~350 Boepd and should recover ~200 Mboe for a cost of ~$4.5 million. A recent nearby industry horizontal Wolfcamp test (~3,600′ lateral, 20 frac stages) commenced at ~950 Boepd, implying a recovery of ~700 Mboe.
Overall capital productivity increases ~5% with Eagle Ford JV The company’s Eagle Ford joint venture assigns a one-third interest in the next 100 wells for the equivalent of $25k per acre. Assuming 80-acre well spacing, the partner pays $0.67 million per well and receives a one third interest in each well. The joint venture in essence funds ~5% (~$20 million per annum) of the company’s capital spending.

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