Second Wave Petroleum Inc.1 (SCS-V) BUY Last: $3.15 Target: $4.50?
SCS announces that first Beaverhill Lake wellaverages 2,145 boe/d over the first week on stream
On Friday, Second Wave announced the results of its first horizontal Beaverhill Lake well at Judy Creek. The well (15-36) flowed at an average gross rate of 2,145 boe/d(86% light oil) for the first seven days and averaged 1,825 boe/d (86% light oil) over its first 15 days on stream. This initial rate is above our expectations and above management’s internal expectations. The 15-35 well produced 27,600 boe in only 15 days on stream with 86% of the production comprised of 40 degree light oil. The high oil rate combined with a strong oil price environment gives the high rate Beaverhill Lake wells some of the top economics in the basin.
Reminder that SCS is essentially being carried in the Beaverhill Lake through a JV agreement
The Joint Venture for the Beaverhill Lake at Judy Creek covers 13 wells and the JV partners will pay 85% of the capital costs associated with the first 13 earning wells on the play to earn 60% with Second Wave paying only 15% to retain 40% of the wells. In our view 78 sections of BHL rights will be delineated over next year at minimal cost to SCS (less than $10 mm). SCS only contributed 15% of the cost (~
.7 million) to retain a 40% working interest in the 15-36 well. Assuming a field netback of $80.00/boe, the 15-36 well would have paid out for SCS in under two weeks.
SCS participating in 8 (3.2 net) additional horizontal BHL wells in 2011
As noted above, SCS recently announced a large Joint Venture agreement with an intermediate producer for the Beaverhill Lake oil zone at Judy Creek. The JV is structured as a rolling option which would result in a horizontal BHL well being drilled essentially every month for the remainder of 2011. SCS has plans to drill an additional eight (3.2 net) Beaverhill Lake horizontal oil wells in 2011. The first of these eight wells is scheduled to be spud as soon as ground and road conditions allow.
Target price increased to $4.50 up from $4.00
The well result announced on Friday is a positive catalyst for SCS as the company now has demonstrated that it has the high impact BHL play on its Judy Creek core area. Due to the structure of the JV we see the potential for numerous high impact BHL drilling catalysts in the coming months as SCS will participate in 8 additional horizontal BHL wells this year.