Description

Long Brookside Energy

Brookside Energy is a very small Australian Oil company with high quality assets that trades at a large discount to its NPV, 2P value of reserves, price per flowing barrel, or whatever metric you want to consider.

With a market cap of 52 million AUD and 26 million AUD in net cash, you are buying 5,000 acres, 1,400 boe’s of current production and 12 million barrels of reserves in the South SCOOP play in Oklahoma. In essence, that is 17 million USD EV, for 1,400 barrels of production, or 12,142 per flowing barrel. Or around 1.5 dollars per 2P barrel of reserves. And those barrels are discounted since they have since acquired an additional 12.5% interest.

Granted, most of these reserves are in the PU (Proved-Undeveloped) category, but that is still too large a discount to be ignored.

And management is aware of this. Since the large discount and positive cash-flow, the company is actively buying back shares in the market. Last year, they just bought back 5% of the shares outstanding, and they are planning to get shareholder approval in 2024 for more buybacks than the statutory 10% in a year.

While the company (and management) has a checkered history by expanding acreage with too much debt (as the management of the previously known Red Fork Energy - and this is still the same management team) it does appear they have leaned from their mistakes. They praise the virtue of low cost barrels, debt free balance sheets, living within cashflow, etc... I also quite like the fact that they actively engage in buybacks at a substantial discount to NPV, with free cashflow. So while the jury is still out, it appears they have found capitalist religion after their previous failure.

When Red Fork Energy went bankrupt, the company essentially had to start over from nothing. They managed to acquire the acreage which is the basis for its current success at a relatively low price, and proceeded to prove the play. They issued equity to fund a test well. First Brookside raised 8 million AUD, and then another 9 million AUD, so in total 17 million AUD in 2021. They also issued 1.622 billion options exercisable at 0.011 AUD per share thus raising another 16.25 million AUD after costs.

In essence, the company raised 33 million AUD in 2021 and 2022. They drilled 5 wells with that money (The Jewell well – their first one, Rangers, Flames, Juanita – a cheaper vertical well - and Wolf Pack).

Together, these wells have produced Brookside 1.6 million barrels of oil and equivalents (some of it at the record high prices of 2022, but still), 1,400 barrels a day in current production, 26 million AUD in net cash, 3 million in buybacks and 4 million in pre-payments for another 4 well drilling campaign set to finish at the end of the year 2024.

And all of this in about 2 years’ time. This just goes to show the netbacks and productivity of these wells. The current opex is close to 2 dollars a barrel, due to the still high productivity of the wells and the central location close to transportation and processing infrastructure. Break-even prices for these wells are 20-30 dollars a barrel, depending if they are drilling in the Woodford or the Sycamore formation.

In their last quarterly results release, they mention they are just next to a Continental Resources 15 well development. These 15 wells have already produced 4 million barrels (almost equal split oil and liquids rich gas) over a 6 month period, or almost 1500 barrels a day over a 6 month period. These are exceptional results, and if somewhat repeatable, shows the quality of the asset base.

So they have already drilled 4 wells on their acreage, and plan to drill another 4 wells at a cost of 26 million USD by the end of this year, out of a total drilling inventory of 24 wells. These 4 wells should be affordable within the current cash and cashflow from production. Management plans to have developed all their acreage within a 5 year period, all of this is within cashflow.

And this fast development timeline is one of the other advantages of an investment in Brookside.

Within a period of 5 years from now, most of the net cashflow should have been produced in their acreage. So it won’t take long for the value to show given that this company probably trades at 20-25% of NPV. An NPV was calculated in 2023, but that one used a price deck of 94 barrels for oil, and around 6 per cubic feet of gas. The result of that exercise was an NPV of 254 million AUD. And while the price of oil is currently lower and Nat Gas a lot lower, the low production cost still gives me confidence that a correct valuation is probably multiples higher. How many multiples will be determined by the oil and gas price, and the amount of buybacks management does in the meantime.

Overview of acreage and IP24 of their and neighboring wells:

Additional upside

Brookside has played around with another area, the Bradbury AOI interest of just 125 acres.

There they drilled a well called Juanita, a pretty simple vertical well, which has been producing around 100 barrels a day. This is quite a success for a well which costs a lot less to drill (under 1 million). If they are able to replicate this success, and manage to increase the acreage position at advantageous prices, the results here could be even better than the results in their SCOOP acreage, given the lower capex costs (and thus higher ROE’s). There are wells in this play which have produced between 200,000 and 650,000 barrels over their production life.

As of now, no value has been given to this asset.

Catalyst

Drilling, buybacks and cashflow.