VIRGINIA HILLS OIL CORP VFGGF

RE:2014/15 is looking very good

[nlr2]

I would agree with your take. I wish they would have revised the exit target downwards, remove the artificial target at the end of the year and help the decline situation further. If debt is the concern then them taking it easy in Q2 and Q3 should be reassuring, not a cause for concern. We all saw Arcan wreck themselves by refusing to take it easy until they were in too deep. The capital expenditure will be down significantly this year from both 2011 and 2012 but with much higher yearly average production and lower declines. If they could hit 5500 in Q4, which is doable then they would average 4166 BOE/D for the year. This would be a pretty big improvement from 3142 BOE/D in 2013. Debt is down 15 million from Q1 and should remain constant through Q3 then ramp up in Q4 as drilling hits its stride. If they still plan to hit 30 wells for the year I would guess that exit debt would be 145-150 million and yearly cashflow would be about 85 million so about 1.76 times debt to cashflow. This is clearly higher then the 1.5 or less that is optimal but far from basketcase status. 

Entering into 2014 they will have 7 waterfloods which should achieve the 1 year mark were production peaks anywhere from Q1-Q3 with 4 others planned out. If corporate declines are 35% then they will only have to replace 1458 BOE/D as opposed to the previous 2000+. Plus pipelining and electrification will reduce costs and seasonality. The other positive through H2 and into 2014 is the potential upside from open hole completions and further cost savings. I dont see why they couldn't grow 20% from mostly cashflow which would get the debt under 1.5 and remove that worry. 

Clearly the production swoon in Q3 isn't optimal and drilling results could be lousy or the floods could not work well or oil could crash but those things are the risks involved with the industry and any company. I'd say going into 2014 this is a real, sustainable company that should be self funding as opposed to a true junior going from financing to financing and currently starving to death.