Tuesday, March 11, 2014

Cardinal Energy Group (CEGX) Seeks Mature Wells

Cardinal Energy Group (CEGX) focuses on mature oil and gas projects that include "stripper wells."  I had this mental image of hot busty women dancing around poles on drill rigs until I figured out that this term meant something else.  These types of wells produce a handful of barrels per day when oil and gas prices are high and nothing when prices are low.  They require a lot of capex to push accumulated silt and fluid out of old wells so low-quality oil and gas can flow.

This company's management makes me wonder.  The CEO has a background in restructuring financial service companies.  It is not obvious from his current bio whether he has education or experience in managing mature energy wells.  Their CFO worked for an oil major . . . as a comptroller.  Oooookaaaay.  Their COO's bio says he has done a lot of oil drilling.  That's nice.  I would like to know whether any of these folks have specifically turned around stripper wells before they formed Cardinal Energy Group.

Cardinal announced its acquisition of something called a Stroybel-Broyles Lease this March 7th.  They bought it from a San Francisco secured lender named Hunting Dog Capital.  Oooookaaaay.  My super-intelligent readers probably know that a secured lender takes possession of a loan's collateral when the debtor can't repay the loan.  Whoever borrows money to develop an oil and gas property runs the risk of losing the assets if they're not able to develop it.  I can't figure out why Cardinal executed this transaction.  Oh yeah, please note that this particular press release revised downward the BOPD of a property in a previous announcement.

Acreage means little in modern oil production and BOPD means everything.  That press release above from March 7 notes that they own a total of 78 wells in Texas with 44 BOPD.  Do the math.  That's a little more than half a barrel of oil, per well, per day.  Bloomberg says today's WTI was US$99.43/bbl.  That's an average of about $55/day gross revenue for each of these Texas wells, without figuring their production costs or the amortization of whatever capex the company needs to spend to rework them.  Let's say I bought a typical well like one of these and it pumps every day, so I'd collect about $20,075/per year in gross revenue from that single well.  My operating costs and the amortized amount of infrastructure I'm building need to be far below that every year for the well to be worthwhile.  The price of oil needs to cooperate and stay in the high 90s.  Cardinal claims in that announcement that they can rework these wells to get 400 BOPD.  Oooookaaaay.  Whatever.

Look at their 10-Q dated November 13, 2013.  This company was called Koko in 2007 and made steak timers.  Read that again.  Steak timers, people.  They admit that they still have to raise capital to complete their programs.  Their auditors have issued a going concern opinion.  I really don't think I need to continue here.

Every once in a while a junior exploration company comes along that intrigues me.  Cardinal Energy Group is not such a company.  Their approach to stripper wells isn't for me.  I'd rather go check out some real strippers.

Full disclosure:  No position in CEGX at this time.