The company: Knoxville, Tennessee-based Energy Search Inc. (ESI) is a natural gas exploration and production company in the Appalachian Basin.
The Markets: ESI, which has production sites in Ohio and
West Virginia, markets its gas to high-
demand Northeastern markets through its pipeline infrastructure.
The Sizzle: The company recently acquired the 17,000-acre Beaver Lease in southern West Virginia. This property is surrounded by other gas-producing properties but, due to a prolonged legal battle, was tied up in court for many years.
After its recent IPO, ESI is adequately funded to pursue an aggressive drilling program on the Beaver Lease property. The schedule calls for a total of 32 wells to be drilled this year, with cash flows from operations financing 48 more in fiscal year 1998. The company has also entered into a joint-development agreement on an adjacent property of approximately 5,000 acres.
The first four wells drilled on the Beaver Lease property are yielding average estimated recoverable reserves of more than 550 MMcf (million cubic feet), compared with the 315 MMcf the company predicted in its 1996 reserve estimates. (The technical term for these reserve estimates is SEC PV-10, which is the future value of cash flows from a well or property, discounted at 10 percent, and which assumes a stable historical price.) Due to the greater potential of this field, at press time it was estimated the company's SEC PV-10 value could exceed $50 million by year-end.
Production from this region is sold at a premium compared to the national average, due to its proximity to end markets. Additionally, the company's finding costs of less than $0.40/Mcf (thousand cubic feet) are well below average.
The Risks: Oil and gas drilling operations are inherently risky due to factors beyond management's control. Additionally, natural gas has historically been among the most volatile of commodities, with a corresponding impact on the stock prices of gas producers.
Historical Financial Performance: ESI managed and operated a series of oil and gas limited partnerships from 1990 to 1996 for which working interest income was a secondary goal. Since ESI completed its IPO in January, it has begun an aggressive drilling program for its own account and has acquired several properties.
Projected Performance: Neidiger's projections are based on Energy Search's three-to-five-year inventory of multiple pay zone developmental drill sites (i.e., sites containing gas at many levels) and their potential impact on SEC PV-10 valuations and cash flow. Continued drilling success could have a favorable impact on share prices.