I would be cautious on any company that relies on a single asset, initiating EOR in a play in the early innings with few or any peers. AB Bakken had high declines prior to the DTX spin out when EOR with a limited history was touted as the vehicle that could deliver enough FCF to transform the asset into a yield and growth play for the new spinco. While a recent past presentation may show the 2017 break-even rise from $50 to $55 I would reflect on the presentations issued at the beginning of the year. Recall the GXO graph which showed 'Sustainable Below USD $40 WTI' in fact GXO suggested @$37.50 wti 2017 would have a 100% all-in POR. So how does GXO's break-even go from $37.50 to $55 with well costs going down and well results improving according to the company? The answer may be in the decline rate, where GXO is having to convert more wells to injectors, increasing costs, raising debt while losing oil prodn for the wells converted. The additional injectors required suggest GXO may have incorrectly modeled past decline assumptions. I would also note the decline rate has been removed from page 22 of the Three-Year Business Plan –Dividend + Growth.
I have no position in GXO long or short, the purpose of this post is to give the retailer as much info as necessary to make an informed decision. Generally institutional investors would avoid an early innings single asset yielder with limited EOR history, as such GXO made the yield as appealing as possible to attract retail investors. Often this is a red flag to institutional investors and when a high POR yielder suffers operational issues the same crowd will start shorting the stock relentlessly.
Here is a little blurb from NBF:
Granite (GXO; OP; $9.50T): The company was out with an operations update last night. A bit mixed. While GXO noted strong rates from one of its recent drills in a re-pressurized location in its core Bakken pool at the same time the company has trimmed 2H16 guidance. Additionally, debt will come in slightly higher than analyst Brian Milne was initially forecasting. Here is what you need to know:
· 10-24 test rate. Company noted its second well of its five well program targeting a re-pressured portion of its Bakken pool showed strong initial productivity of 520 boe/d (71% oil) over a 9-day period and attractive capital costs of $1.2mm (33% below budget of $1.8mm – yes, short test rate just to acknowledge that;
o GXO also pointed in their release that migration towards shorter laterals has expanded its inventory count by 57% to 135 (~5 yrs of potential incremental drilling inventory);
· Corp volumes now expected to come in slightly below expectations. This has resulted in an 8% reduction to second half guidance to 2,950 bbl/d; reflecting estimates of 2,800 bbl/d and 3,100 bbl/d for the third and fourth quarters, respectively;
o Management said in the release that the lower volumes were due to having to shut in nine wells to expand the EOR scheme. At the same time we’d noted that recent well results have come in above type curve and with 3 more wells slated for the year, so just from a high level/simplistic view we would have maybe assumed GXO might have been able to meet prior guidance of 3,200 bbl/d (Perhaps conservative estimates? Should we be thinking about the decline differently?);