Eagleford Energy (EFRDF) Buys Two Major Oil Leases

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EFRDF: Changes the Business Model, Changes the Game

Eagleford Energy (OTCBB: EFRDF) deserves some attention among listed companies in my opinion because the Co has recently made some bold moves that should not go unnoticed. Politicians will never admit to restructuring Social Security in fear of offending voters and in like manner, publicly traded companies dread making a change in direction. For many investors it’s a weakness, for me, it is a great strength and when companies were forced to address their recession issues by making changes, I thought it a good thing. If it’s working; keep it. If it isn’t, either fix it, put it on the back burner, or get rid of it.

Well Eagleford management, by its own choice, here in the midst of the recovery, saw an opportunity and they seized it. Kudos.  

Eagleford (EFRDF) has primarily been an owner of natural gas royalties generated by a well in the Haynes area of Alberta, Canada and in Red Lake, Ontario. EFRDF sold its natural gas production to integrated oil and gas companies and marketing agencies. As commodity traders know, natural gas has fallen from the $16 price to the $3 price and crippled dependent companies because of over-supply. So what to do? EFRDF management figured it out.   

Here are some numbers first: EFRDF is currently trading in the $1.68 range on a 3-Month average daily trading volume of 141,200 shares. EFRDF has a 52-week high of $1.81 set on 10-21-10 (the recent 13 cent dip was due to pent up profit-taking). EFRDF has a current market cap of $44+ million and no short-term debt. Yesterday EFRDF volume spiked to 447 thousand shares traded as word gets around about its recent decisions and activities. The stock is now very liquid.

So what to do?  

In June, EFRDF brought on a new ‘Oil Professional’ in a change to its board of directors. An oil specialist brought into a natural gas pure-play? Yep. Colin McNeil. Mr. McNeil is a geophysicist and has 40 years of oil experience across North America and internationally. Mr. McNeil has managed exploration programs and structured technical assessments for companies in the Middle East, Africa, the Far East, Central and South America, the Arctic and western Canada.

Then Came a Change Primary Direction

On Sept 8 EFRDF announced that the Co on Aug 31^st closed the acquisition of Dyami Energy which held mineral interests in two acreage blocks in Zavala County, Texas. EFRDF funded the deal with cash, stock and long-term notes. The Zavala County, Texas mineral property interests include an 85% working interest before payout (69% working interest after payout) in the Matthews Lease comprising approximately 2,629 gross acres of land and working interests ranging from 90% to 97% in the Murphy Lease comprising approximately 2,637 gross acres. The Leases are located in the north boundary of the Smackover-Austin-Eagle Ford total petroleum system. In Essence, EFRDF had acquired two very important oil leases.

Now here’s something about the oil shale and the players and the cost per acre valuation: The Eagle Ford begins near the Mexican border and sweeps 400 miles northeast, almost to Houston, Texas. CNOOC, the Chinese oil giant, just paid $1.1 billion for 30% of Chesapeake Energy's Eagle Ford acreage. And it agreed to pony up another $1.1 billion to pay for all the drilling costs. That works out to about $12,000 per acre. Who are the other players? India's giant Reliance Energy bought into Pioneer's acreage, Canadian independent Talisman and Norwegian Major Statoil, agreed to pay $1.3 billion for 97,000 acres. The Eagle Ford contains about 25 billion barrels of recoverable oil and gas reserves, 2.5 times the recoverable oil and gas from the enormous Bakken Shale in North Dakota. Independent explorer Petrohawk is producing 1,000 barrels of liquids (like butane and gasoline) per day.

So EFRDF got the leases… now what…

Well it didn’t take Eagleford long to move into action. On Oct 12 the Co was notified by Dawsey Operating that the rig allocated to drill an initial test well of the Eagle Ford shale formation would be mobilized onto location at EFRDF’s lease sites the next day, OCT 14, On the day following that, Oct 15, EFRDF spud its initial well and the rig began drilling.

“Because we are NOW drilling…”

Oil watchers, the media, and analysts sat up and began to take notice of Eagleford with one research report setting a target price of $3.40 and projecting revenues of growing from $17 million in ’11 to $92 million in ’14. The day before the rig was on site to spud the well; Garwood Securities initiated coverage of EFRDF with a ‘Buy’ rating and set a target price of $2.50. The rating was predicated on a total return (capital appreciation + yield) of 15% or more. Garwood noted in its coverage that its target price was based on the production in the Eagle Ford formation at the Matthews and Murphy Leases on a per share basis, with 9.5 million shares added to the sharecount, at $1.00 per share, to cover the cost of the initial wells at each lease and associated general and administrative costs. What that means for the layman is that EFRDF will need to raise roughly $9.5 million to complete the first well at each lease site.

In my opinion there are some very strong investment potentials with Eagleford, both in share value and in earnings. I believe both will rise as another well gets underway and the money is raised to get the sites up and producing. $19 million isn’t so much with so much at stake. It would be better not to dilute the shares to bring in the capital needed and try numerous other routes (like a private placement), but I believe that EFRDF’s management is in ‘high gear’ and has previously answered the question: What to do? For me, EFRDF would be a near-term (3 Mo) ‘Buy’ consideration.     

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