Cline Shale Generating Industry Buzz! Lynden Poised to Benefit

One theme became clear for those who attended Howard Weil 2012, one of the premier investor energy conferences. The Cline shale is generating significant industry buzz! From Concho Resources to Devon Energy to Pioneer Natural Resources, the message was focused on the Cline shale and its vast potential. Companies are finding out that below the Wolfcamp lies this highly prospective zone. They are also discovering that the Wolfcamp (some companies are now grouping the Cline together with the Wolfcamp and referring to both zones as the Wolfcamp) is much more extensive, potentially spanning the entire Basin. Because large Wolfcamp acreage parcels are hard to come by, the play is on the verge of a breakout where companies will have to buy out smaller independents in order to establish a sizeable position.

How to Play the Cline

Many companies are active in the Permian Basin. Pioneer, Devon, Apache, EOG, Chesapeake, Range and Concho all have positions in the Midland Basin and the Wolfcamp. These companies have market caps ranging from $8.8 billion to $36.0 billion. Although these companies should experience an uptick with Wolfcamp success, another company could see multiples of its existing share price.

Lynden Energy Corp. has successful positions in the Wolfberry located at their West Martin project in Martin County and Wind Farms project in Glasscock County. In fact, their current reserves are primarily assigned to just these two areas. Valuations based on these two areas alone would warrant a higher share price.

On April 4, Lynden announced the continued success of their Tubb A #1 well. This well has continued to produce oil in excess of 100 barrels per day over the past 90 days since it was tied in. Should this prospect area ultimately be proven out it would support a significantly higher share price. On 40 acre spacing, there are potentially 170 gross locations with the next well to spud later this month and several more prior to year end.

We believe that Lynden is considerably undervalued based on their Wolfberry holdings at West Martin, Wind Farms and Tubb. Now, how does this relate to the Cline? Lynden has an interest in 103,400 net acres at an area on the border of Sterling and Mitchell Counties called Mitchell Ranch. The market hasn’t yet assigned value to this land. Land around Mitchell Ranch is becoming scarce and exploration of the Wolfcamp shale is developing around the area. Although Chesapeake, Lynden’s farmout partner on the property, is currently only exploring the Mississippian zones below the Wolfcamp at Mitchell Ranch, it is likely that the Cline shale exists throughout their acreage. In fact, Mitchell Ranch is located near the center of the extent of the Cline shale as depicted on a map prepared by Devon Energy in their latest presentation!

Lynden’s net position at Mitchell Ranch amounts to approximately 34,150 acres. As we know based upon recent Wolfberry land sales, successful Wolfberry acreage can sell for as much as $35,000 per acre or more. Should the Cline shale ultimately become a viable source of oil as the industry is starting to believe, Mitchell Ranch could become extremely desirable. Could the acreage ultimately be worth $5,000/acre, $10,000/acre or more? We believe so!

This is where Lynden becomes extremely interesting. At even just $5,000/acre, Lynden is sitting on a very valuable asset. Their 34,150 acres valued at $5,000/acre translates to $170 million. At $10,000/acre this value becomes $340 million. Together with their Wolfberry holdings, Lynden could be a company worth $400 million or more. Given Lynden’s current market cap, this stock has room to run.

It’s easy to see why we are so excited about this company’s prospects. Because Lynden continues to have success in the Wolfberry, the downside risk here is limited. The upside associated with Tubb and Mitchell Ranch is tremendous! Like we have mentioned previously, “Buying Lynden at its current valuation could be looked upon as buying their Tubb and Mitchell Ranch projects for free and Lynden could be a stock worth several dollars per share!”

Article about Devon and the Cline Shale

An article posted on Seeking Alpha talks about Devon exploiting the Cline shale.  "Devon has chosen to gain access in another region, exploiting the midland section of the Basin in the Cline formation."  The article further states, "With Devon's setting aside of capital money to continually acquire land, its diversified portfolio, focus on oil, healthy balance sheet, and smart management plays make for a good combined package for a long-term energy company."

Lynden Energy's non-brokered Private Placement

As much as another private placement dilutes the company, we are very excited and view this as a positive.  The ability to add funds and ensure the longevity of the company means that Lynden Energy Corp. will not fall into financial jeopardy.  Given that financing is difficult to obtain in this market, Lynden will achieve a milestone by obtaining $6.3 million should the placement close fully subscribed.  It appears the company’s borrowing base is not accelerating as fast as their drilling but the financing allows some breathing room.

As the volume today shows, the market is clearly supporting the financing.  There are buyers out there who like the story and buying large blocks.  The buyers in the market and those who participated in the financing have apparently completed their due diligence and like what they see. 

We view Lynden’s prospects as better than before the private placement was announced.  Surely, the dilution is not something we were looking forward to but this was anticipated given the rapid pace of development.  The company’s financial future is now ensured until their borrowing base increases.  With support being shown in today’s market and the industry buzz and excitement about the Cline shale, we believe that Lynden can realize its market cap potential and that this stock can return multiples.

Lynden releases production numbers and comment about Howard Weil 2012

Lynden Energy Corp. reported production after royalties of over 500 boepd on average over a ten day period ending March 31.  Highest daily production during the period was 595 boepd!  These are excellent numbers demonstrating continuing high production from their Tubb A #1 well as well as shallow declines from their existing wells.

Of significance is that the Tubb A #1 well is still producing over 100 barrels of oil per day.  This number does not include natural gas or natural gas liquids and is 90 days after being tied in.  Should these numbers be replicated, Lynden has some very special acreage.  The Tubb Prospect Area includes 7,341 gross acres of which Lynden's net interest is approximately 2,469 net acres.  Additional success here will surely capture industry attention and Lynden's large acreage puts them in a nice position to capitalize.

Recently, Richard Mason wrote an article about Howard Weil 2012.  The article titled "Operators Hint at Two New Liquids Plays, Major Permian Discovery" is one more leg to Lynden's story.  The apparent industry excitement about the Cline shale is generating a lot of buzz.  Devon, Concho, EOG and Pioneer are all actively pursuing the Cline shale.  "Pioneer and Concho are now suggesting that the prospective Wolfcamp (Cline) spans the entire Midland basin," the article states.  (For those unfamiliar with the Cline shale, it exists just below the Wolfcamp shale zones.  Some companies are grouping the shales together and calling them the Wolfcamp shale.)

Tim Leach, CEO of Concho Resources, commented that they have 45,000 net acres of new holdings and their primary target is the Cline shale.  "The punchline here is we think this play in the northern part of the Midland Basin will be very similar in returns and composition to the Wolfcamp in the southern part of the Midland Basin."

A couple of additional comments from the article.  "Long story short: the horizontal Wolfcamp is on the verge of a substantial breakout in the Permian Bains."  Also, Scott Sheffield, CEO of Pioneer, states "People... will will have to buy out smaller independents.  It will be really tough to get a large acreage position because most land is held by production by the various operators."  Again, Lynden is in an excellent position, because of their 103,400 acre Mitchell Ranch project.  The next few months will be very interesting...

Pioneer Article on West Texas Shale

An interesting article was written yesterday regarding the West Texas shale.  Titled "Pioneer Bets on West Texas Shale Oil to Rival Bakken", this article speaks highly of the Wolfcamp Shale.  "Everybody is going to be making a beeline to the Wolfcamp," said Scott Sheffield, CEO of Pioneer Natural Resources.

The Bakken formation in North Dakota and Montana is well known but the Wolfcamp could be the next big U.S. play.  The Wolfcamp is potentially the thickest onshore U.S. oil shale play with some areas having over 1,000 feet of pay.  Pioneer, Devon, Apache, EOG, Chesapeake, Approach, Range and Concho are among those active in the Midland Basin.

Lynden Energy Corp., although small relative to the companies mentioned above, has a large position on the eastern shelf of the Midland Basin.  Their Mitchell Ranch project includes over 103,400 contiguous acres.  They have a 50% interest in 68,400 net acres and 1.25% royalty over 35,000 acres that were farmed out to Chesapeake Energy.  They have already had success with their Spade 17-1 well there and we believe it's only a matter of time before one of the majors comes knocking at their door.  Once the market realizes this, LVL's undervalued share price can only go up!

Lynden releases MD&A

Lynden released its MD&A for the six month period ending 12/31/11. It appears that Lynden Energy Corp. has made production increases over the last month or so.  Stated average production as of 12/31/11 was 471 boepd before royalties.  The company's production exceeded 500 boepd after royalties for several days in January and February meaning their before royalties share of actual daily production was around 650 boepd.  Production is finally catching up to Lynden's drilling activity as several wells that were completed are now being tied into sales.  We expect production to increase further as additional completed wells are tied in.

Industry activity seems to be heating up in the areas where Lynden is active.  Devon is active in the Wolfcamp west of Lynden's Mitchell Ranch and Apache is working on lands adjacent to the Wind Farms acreage.  As acquisition activity increases, Lynden should be in an excellent position to capitalize given their quality acreage.

Energen to acquire Wolfberry property

Energen announced that they plan to acquire 3,200 Wolfberry acres for $65.8 million on Friday.  They are acquiring the acreage from a private seller.  The metrics for this deal equate to $20,300/acre. 

With all of the recent Wolfberry sales, we believe that it's only time before the market realizes the value of Lynden Energy Corp.'s Wolfberry land.  See our previous post for our valuations based upon Lynden's acreage.