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5 reasons Aurora Oil & Gas Limited could soar

The Eagle Ford Shale Play, one of the largest tight oil plays in the United States, has risen to prominence with much being said about its vast potential. One such company benefitting from this potential is the dual-listed Aurora Oil and Gas Limited (ASX: AUT), which holds 22,000 net acres in the Eagle Ford Shale, the majority of which is operated in by its joint venture partner, Marathon Oil (NYSE: MRO).

Here are five reasons to give Aurora Oil and Gas a closer look.

Reason 1: Downspacing and improved stimulation design could lead to better well performance

Marathon’s Eagle Ford operations have been driven, in part, by its focus on increasing the spacing density of its wells, a process known as “downspacing”, with over 90% of wells drilled in 2013 at 60-acre spacing or less. In its most recent quarterly update, Aurora reconfirmed the positive results from the downspacing of its Sugarkane Field acreage operated by Marathon.

Aurora now anticipates that the majority of its non-operated Sugarkane field’s acreage will be developed on 40-acre spacing based on the positive results yielded by Marathon’s operations, with a 30-acre spacing pilot potentially adding further value to the field’s development and increasing its well inventory.

Reason 2: Production forecasted to increase by 47% in 2014

Aurora anticipates that in 2014 production will increase 47% to 8.2 million barrels of oil equivalent (net), or 22,500 barrels of oil equivalent per day in net production. Despite this significant announcement, it seems that Aurora’s share price has not improved and in fact has fallen 9% from its recent one month high of $3.02 to $2.74, which suggests that the market remains unconvinced of the company’s potential to deliver a positive result.

Reason 3: Reduced capital expenditures and an increased focus on balance sheet management

Aurora’s outlook is focused on its non-operated assets, with total capital expenditure in 2014 of US$415-495 million anticipated to be lower than 2013. Additionally the company anticipates that its gearing profile will be lower than 2.5x debt to earnings before interest, tax, depreciation, amortisation and exploration Costs (EBITDAX) in 2014. Lower anticipated capital expenditures and an increased focus on its gearing profile indicates that the company is taking a conservative approach to managing its costs.

Reason 4: Acquisition of Eaglebind position

Aurora has secured 14,000 net acres  in the Eaglebind prospect, a play that is regionally on trend to the Eagle Ford shale. Although this has not been assessed in any great detail, this prospect represents great potential. Aurora is still in the tentative stages of development, and is considering “acquiring partners to participate in the next stages of project evaluation.”

Reason 5: West Texas Intermediate crude oil price expected to average $93 per barrel in 2014

The U.S. Energy Information Administration is forecasting that WTI crude oil prices will average $93/bbl in 2014 and $90/bbl during 2015. This falls squarely within Aurora’s scenario analysis, with a $90/bbl WTI price and 11.0 million barrels of oil equivalent gross production rate estimated to produce US$428 million in EBITDAX in 2014.

Foolish takeaway

Although readers should be mindful to consider macroeconomic factors at play, such as the price of crude oil (and supply/demand factors therein), Aurora Oil and Gas represents an avenue to explore when riding the potential upside in relation to the shale revolution and its related production technologies. The company’s fourth quarter update is scheduled for Friday, 31 January 2014, which will give investors greater clarity with regards to this operator’s performance and ability.

 

 

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Motley Fool contributor Sid Narsey does not own shares in any of the companies mentioned in this article.

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