Equal Energy Ltd. (TSX, NYSE: EQU) is an exploration and production oil and gas company with producing properties in Alberta and Oklahoma. EQU’s current production stream is comprised of approximately 13% crude oil, 38% NGLs and 49 % natural gas. The company is currently focused on its liquids rich assets in Oklahoma (Hunton and Mississippian plays), but EQU also has a multiyear-drilling inventory in the Cardium and Viking oil plays in Alberta.
Recent Financial Results
OAG360 notes that EQU was one of only 79 companies out of 613 E&P companies with market capitalizations under $200 million actively trading on the Canadian and U.S. exchanges with positive net income in the first quarter of 2012. Equal reported Q1’12 net income of $1.8 million, or earnings of $0.05 per share, compared to a Q1’11 net loss of $3.4 million, or a loss per share of $0.12. Operating expenses and G&A expenses per barrel of oil equivalent decreased 16% and 52% year-over-year to $10.05 per BOE and $2.60 per BOE, respectively. Average daily volume of EQU’s shares is 203,675, split 55%/45% between the NYSE and TSX.
Revenues from oil, NGLs and natural gas including hedges during Q1’12 totaled $33.1 million compared to $35.1 million during Q1’11. Production was up 20% year over year and averaged over 10,000 BOEPD during Q1’12.
Flexing to Drill Mississippian Light Oil Play
In April 2011, EQU signed an agreement with Atlas Resource Partners, L.P. (NYSE: ARP) to sell 50% of its interest in approximately 14,500 net undeveloped acres prospective for Mississippian light oil for total cash consideration of approximately US$18 million, or approximately $2,482 per acre. OAG360 has seen per-acre amounts paid for Mississippian-aged prospective acreage ranging between $1,331 and $4,425, and the EQU-ARP deal is in line with industry averages.
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To assist in accelerating development of this particular Mississippian light oil play, the two companies entered into a drilling partnership to drill an initial 12-well program expected to commence in Q3’12. EQU and ARP plan to run one rig to drill approximately six to 10 wells by year-end 2012. Based on three wells per section, EQU and ARP believe 90 wells could be drilled to develop the acreage position. Atlas will conduct drilling and completion activities with Equal operating production once the wells are completed. OAG360 has previously noted that a Mississippian well could have an EUR ranging between 150 MBOE and 500 MBOE. The Mississippian is right in the Equal’s existing operations backyard – the company’s Hunton play assets in Oklahoma where Equal has been active for a number of years has been explored since the early 1990s, and some of the Mississippian acreage which comprises this joint venture is held by Hunton production. The joint venture’s initiation of the Mississippian program may be smoother than some other operators or partnerships because Equal already has years of water handling experience and infrastructure. Many of the same water management hurdles apply to the Mississippian and Hunton.
Strategic Review Process Underway
EQU believes its common shares are trading at a significant discount to the value of the underlying assets. In May 2012, EQU’s Board of Directors initiated a strategic review process that includes, but is not limited to, the sale of all or a portion of EQU’s assets, the outright sale of the corporation, a merger or other business combination, a recapitalization, acquisitions, as well as continued execution of its business plan, or any combination thereof.
Ultimately, OAG360 views the decision for strategic review as a positive. The company already started to divest non-core assets in Canada. On January 31, 2012, EQU completed the sale of additional non-core assets in Saskatchewan, which produced approximately 300 BOEPD of heavy oil for proceeds of $8.3 million. Instead of laying out a bunch of likely scenarios, we thought we’d provide a snapshot of the company’s current operational portfolio (excluding future Mississippian development) for our readers to make their own estimates:
Source: Equal AGM Presentation
Many investors believe it is unconventional for a micro-cap company to operate in many different plays, especially when a company’s operational portfolio spans two countries (Canada and the U.S). In Equal’s case, both its Canadian and U.S. assets provide strong returns with the corporate daily production stream split approximately 50%-50% between gas and oil/NGLs. OAG360 notes Equal has managed its debt structure such that operations can be funded through the cash flow generated from its existing assets. This means Equal is not pursuing strategic alternatives for the sake of survival, as is often the case with smaller companies undergoing a strategic review process. EQU reported cash flow from operations of $62.7 million for the full-year 2011.
Improving its Balance Sheet
Since 2011, EQU made an ongoing balance sheet re-structuring push and implemented a strategy to improve its financial flexibility. During Q1’12, EQU successfully closed on $9.7 million in non-core property dispositions undertaken to reduce overall debt. Currently, EQU only has US $103 million drawn on its $200 million credit facility which includes proceeds from the Mississippian joint venture. Given EQU’s 2012 CAPEX budget of approximately $55 million, and estimated cash flows of $50 million to 55 million, EQU plans to manage its capital programs within cash flow, but also has the financial flexibility to take on additional debt to unlock shareholder value if the opportunity presents itself.
Final Thoughts on Equal Energy
With the continuing priority on reducing its debt-to-cash flow ratio, a cleaner balance sheet, streamlined operations, and the capital to accelerate development of its Mississippian prospectivity, OAG360 notes Equal is in a much stronger corporate position that it was on June 1, 2010. The management team made a concerted effort to reduce debt, drill within cash flow, and grow production and reserves in a manageable way for a company of Equal’s size, and they have delivered on what they set out to do. The Mississippian joint venture with Atlas is a positive step to energize the company’s operations in Oklahoma.
