When oil and gas producer Synergy Resources launched a
horizontal drilling program about a year ago, one unknown was how
long the program would take to have a positive financial
A year later, that's no longer a concern. Due to the early
success of the program,Synergy (
) now gets about half of its production from horizontal wells
rather than the vertical wells it specialized in during the first
few years of its operation.
Now the company has plans to increase its use of horizontal
drilling, which involves drilling at an angle to hit targets that
can't be reached with traditional vertical drilling techniques,
which involve boring straight down into the ground.
"Encouraged by the early results and execution of our operated
horizontal drilling program in January, we added a second rig to
increase the pace of our leasehold development and growth,"
Synergy Resources CEO Edward Holloway said on an April 4
conference call with analysts.
Strategy For The Long Haul
Synergy produces crude oil and natural gas primarily in the
Denver-Julesburg (DJ) Basin's Wattenberg Field. Its interests in
the Greater Wattenberg area cover 24,000 net acres in Colorado.
It also holds interests in the Wattenberg's northern extension
area that covers roughly 20,000 net acres.
The company, founded in 2008, was a little late to the game
with its horizontal program.EOG Resources (
) announced its first horizontal well in the DJ Basin's Niobrara
Formation in early 2010. This was quickly followed by a similar
program fromNoble Energy (
One reason Synergy focused on vertical drilling in its early
years was because vertical drilling tends to be simpler to
execute than horizontal drilling, and therefore has a more
immediate financial payoff.
"When you start drilling horizontally, you have a longer lag
time between when you drill it and when you sell it," said Irene
Haas, analyst at Wunderlich Securities. "Synergy had always been
very cognizant of that and how it impacts cash flow."
Even though Synergy "had always been a vertical driller," she
says the company still kept an eye on how other drillers fared
with their horizontal programs.
"A lot of the kinks on horizontal drilling had been worked out
by competitors," Haas said. "Over the last couple of years
horizontal drilling has really intensified among others."
Synergy, which did not respond to requests for comment,
commenced its operated horizontal drilling program in May 2013
with a rig on its Renfroe lease in the Wattenberg Field. One
concern early on was whether Synergy's horizontal program would
be cost-efficient enough to boost its bottom line. That is no
longer an issue.
On the conference call with analysts, which came after Synergy
reported its fiscal second-quarter 2014 earnings, CEO Holloway
said the company was in the process of completing six wells at a
cost below its previous estimate of $4.5 million per well.
"This further demonstrates the increased efficiencies of our
horizontal operations," Holloway said.
As of Feb. 28, Synergy operated 11 horizontal wells and had a
nonoperating interest in an additional 26 horizontal wells.
"In the few short months that we have focused on developing
horizontal wells we have equaled the production from the vertical
wells drilled and acquired over a five-year period," Holloway
said. "Now our two-rig program is setting the stage for a for
continued rapid production growth coming online in our fiscal
Scouting New Territory
Meanwhile, Synergy is also expanding its land position "to
test plays outside the Greater Wattenberg," SunTrust Robinson
Humphrey analyst Ryan Oatman noted in a recent report.
"Cognizant that there is only so far the Greater Wattenberg
can push resource estimates and shareholder value, Synergy has
been adding to its leasehold elsewhere," Oatman said. "The
extensional DJ Basin has increased from 20,040 net acres at our
last count to 24,700 net acres, while Nebraska leasehold has
surged from 123,000 net acres to 160,000 net acres."
These moves should help the company continue the strong run of
year-over-year revenue gains it has produced the past few years,
Latest Quarterly Results
The company has posted three straight quarters of triple-digit
growth on the top line and has increased revenue at least 64%
over each of the last 16 quarters.
During its fiscal second quarter, which ended in February,
Synergy logged revenue of $23 million. That was up from $10.9
million the prior year but below consensus estimates for $24.47
Earnings climbed 80% to 9 cents a share ex items, in line with
views. It was the third time in the past four quarters that EPS
rose by at least 20%.
Net oil and natural gas production during Q2 was 352,537
barrels of oil equivalent (
). That averaged out to 3,917 BOE per day vs. 2,067 the prior
Oil production more than doubled to 204,622 stock-tank
barrels, while natural gas production rose 73% to 887,494
thousand cubic feet (Mcf).
Adjusted EBITDA increased to $17.5 million, up 36% from the
previous quarter and 122% from the previous year.
Analysts polled by Thomson Reuters expect Synergy to post
earnings of 38 cents a share for the full fiscal year, which ends
in August. That's up from 18 cents a share in fiscal 2013. The
company's fiscal 2015 profit is seen about doubling to 77 cents a
Synergy's stock trades near 11.