Horizontal Drilling Pays Off For Synergy Resources

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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 impact.

A year later, that's no longer a concern. Due to the early success of the program,Synergy ( SYRG ) 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 ( EOG ) 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 ( NBL ) .

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 fourth quarter."

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, analysts say.

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 million.

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 ( BOE ). That averaged out to 3,917 BOE per day vs. 2,067 the prior year.

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 share.

Synergy's stock trades near 11.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: SYRG , EOG , NBL , BOE

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