Aurora Oil and Gas (ASX: AUT) is set up for a great 2014 if it hits its latest production guidance. On Friday it announced that it will produce nearly 50% more oil and gas in 2014 compared to 2013. Lower exploration capital expenditure should drive balance sheet strength and financial flexibility going forward.
Some background
Aurora produces oil and gas from the Eagle Ford shale in South Texas, USA. The Eagle Ford is the second-largest oil field in the United States and the fifth-largest in terms of shale gas production. Aurora controls 22,000 acres in the Ford and at the end of 2012 had equity proven, probable and possible (3P) reserves of over 165 million barrels of oil equivalent (mmboe). This represents a reserve life of around 25 years at 2012 production levels.
In order to extract the oil and gas from its fields, Aurora has a joint venture with Marathon Oil LLC (NYSE: MRO) to operate the wells.
Leaked forecast
In an analyst briefing in early December, Marathon noted a potential increase in production capacity of between 40% and 50% in 2014 compared with 2013, and a doubling of production between 2013 and 2017. Since Marathon's briefing Aurora's share price is up nearly 8% at $2.98, just above its 12-month low of $2.63, but well away from its high of $3.92.
2014 forecast
As mentioned above, Aurora is forecasting production levels in line with that announced by Marathon. Additionally, Aurora management has signed off on 2014 capital expenditure up to $US495 million, which will be less than 2013. Actual 2013 capital expenditure will be unknown until 2013 results are released at the end of February.
CEO Douglas Brooks noted that the cost of drilling wells had improved while production had increased even though spacing between each well had been reduced. 2014 capital expenditure will be focused on the group's Eagle Ford shale operated by Marathon, as these wells present the best value for money.
Foolish takeaway
Earnings-per-share are expected to be between 24 and 28 cents in 2013, and up to 43 cents in 2014. This represents a price-to-earnings ratio of under 11 on 2013 earnings and under 7 on 2014 earnings, however the company isn't expected to pay any dividends in the foreseeable future.
Aurora represents a higher-risk but higher-return investment. The company controls quality land and has a good track record of delivering on guidance. As an aside, management ownership of the company is healthy and Aurora is a beneficiary of a lower Australian dollar and strong US economy.
