Description

Austex is an E&P company focused on the Mississippian formation in Oklahoma and Kansas. It has 22,500 net Mississippian acres, 300 boepd (70% oil), $97 million of 1P reserves and $389 million of 3P reserves, versus a current market cap of $42 million ($USD). It is rapidly growing production and only recently issued its reserve report.

Why bother with a small cap Australian traded E&P:

Austex is compelling partly because Mississippian comps trade for over 1P valuations and other rapidly growing Australian traded E&Ps trade for as high as their 3P reserve value. And on a cash-flow multiple basis, Austex trades for less than 2x 2013 cash flow, which is very low for a small cap E&P. Austex only recently began its development work, and should rapidly close the valuation gap, as other formerly micro-cap Australian E&P companies like Red Fork, Texon and Aurora have been able to do. Catalysts include continuing strong well results, higher production numbers, up-listing in the US or Canada (numerous banks I spoke with expressed interest, including the ones that up-listed Aurora) and adding a reserve-based loan.

Assets:

Austex has two key areas, a 5,500 net acre block in Kay County, Oklahoma and 17,000 net acres in North Western Kansas. Current production is almost entirely from Kay County, which appears to be a Mississippian sweet spot, with a recent horizontal well drilled by Range Resources producing over 1,000 boepd sustained over 30 days (AOK has a ~13% stake in that well), and with vertical wells drilled by Austex producing over 100 boepd over 30 days (both over 80% oil).

The NW Kansas acreage is less developed, but Apache recently leased 550,000 net acres all around Austex’s acreage position, which boosted the private market value of the acreage considerably and provided some validation to the resource-play thesis for the area. It also makes it highly likely Apache will deploy meaningful capex to delineate the area, which should benefit Austex. At the current valuation this acreage does not need to work for AOK to be a triple, but it does provide considerable additional upside potential.

Balance Sheet:

Austex recently took on a $7.5 million 10% interest senior secured loan, convertible at $0.15 per share. They are using this money to fund the development of their wells and to grow into a reserve-based loan. This loan will either be refinanced, likely alongside a North American up-listing, or it will be force-converted at $0.25 per share. Austex should have senior borrowing capacity of over $10 million by the end of September, and considerably more by the end of the year. Austex is in the process of spending the $7.5 million they borrowed, but they have not spent much of the money yet.

Comps:

Austex is not only in one of the best parts of the Mississippian play in the Kay County acreage, overall it is the most levered company to the play on an EV/acre basis.

Particularly relevant comps are Osage (OEDV), which has a similar market cap, Red Fork (RFE AU), which trades in Australia, and Sandridge (SD), which is the largest “pure play” Mississippian focused company. Austex trades at a 29-79% discount to these “pure play” Mississippian comps.

Returns on invested capital:

A lot of the attraction of a Mississippian-focused company is the ability to deploy large amounts of capital into very high rate of return, short cycle drilling activity. Returns in the play are higher than pretty much any other resource play in North America. Sandridge is showing 70%+ IRRs across their acreage, and the wells Austex has drilled to date are on track for IRRs well in excess of 100%, with paybacks in the 3-9 month range. The Range Resources horizontal well cost ~$4 million and vertical wells are costing $700,000. Versus 30 day production of 1,000 bopd and 100 bopd each, these are compelling economics, and will allow Austex to quickly recycle capital and grow production rapidly with less need for outside capital than other unconventional and shale plays. The high returns also provide for a margin of safety, as breakeven is substantially lower than most oil shale plays, and lower cost producers tend to outperform in commodity price downturns.

Catalyst

Catalysts include up-listing to a North American exchange, near term production ramp (trading for ~2x 2013 CF), additional horizontal wells drilled by Range Resources, drilling activity in NW Kansas by Apache, transactions of Mississippian acreage, and adding a reserve based loan to finance development.