Aroway Energy Inc. (TSX.V:ARW) Research Report

James West
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Aroway Energy has all the ingredients for a dramatic rise in production and revenue. For risk-tolerant investors seeking exposure to conventional and enhanced oil and gas plays in the Western Canadian Sedimentary Basin, Aroway is attractively priced.

  • Rapidly growing production predominantly oil;
  • Strategic relationships with industry to provide greater
    access to established pools;
  • Lower costs in 2014 thanks to installation of water
    disposal well;
  • Lots of drilling planned in 2014

 

Shares Outstanding:(Basic) ~61.1 Million
Fully Diluted ~71.1 Million
Market Cap ~$17 Million
Debt ~$1.1 M
52-Week Trading Range $0.16 – $0.44
Average Trading Volume (3 Months) 79,197
Focus Oil and Gas Exploration and Production
Operating In: Western Canada

Aroway Energy Summary

Aroway Energy was first covered in this newsletter in December 2011 when the compnay was trading at $0.60. So if you’ve been one of the long-suffering shareholders of this or any other TSX Venture-listed victim, there are some companies out there that have just been swept up in the ‘guilt-by-association’ investor sentiment, and are drastically oversold. I believe that Aroway Energy is just one such company. If you compare this company’s exit production targets for 2014 with those of its peers, there would appear to be a lot of value compressed into Aroway’s shares that should at some point be reflected in the share price.

aroway_energy_land_position

Aroway has acquired some new ground, and immediately south of this new property, a competitor is producing 2,500 barrels per day. The Kerrobert property in Saskatchewan is part of a seismic farm-in deal with a major NYSE-listed company whereby Aroway is shooting 21 square kilometers of 3D seismic, after which it can acquire the freehold leases of the major’s lands in exchange for a fee payment suject to a Gross Overriding Royalty. Aroway is required to drill a test well on the optioned land and to continue to drill to maintain the leases with the option to extend the term of the leases.

CEO Chris Cooper said in a recent interview that he expects this new area will become one of Aroway’s core hollding. He points out that given the size of the land position they could drill up to 400 wells, and that the area has the potential to deliver 2,500 barrels of oil per day from that project alone.

“In 2014,” he said, “right now we will probably going to be spending anywhere from $8-12 million so far, and that could increase as some of the properties that we are looking at, and also based on the success of our initial well into this farm-in, if that is successful, I think that will increase significantly.

Revenue coming in right now is a little over a million dollars a month. At the beginning of 2013 we had about $4.4, $4.5 million of bank debt; today we have 1.7. We are scheduled to be debt free in July of this year. So we have really cleaned up the balance sheet.

We are very conscious of the current markets and the banking industry and the oil and gas business has really tightened up. Banks are no longer lending based on reserve values; they are lending based on cash flow, and they are really focused on a company’s ability to handle the debt that they have taken on.

The company reduced its operating costs by half this year with the completion of a facility installation and drilling of a produced water disposal well at its 100% owned and operated West Hazel property in Saskatchewan, which is contiguous with the Kerrobert property just acquired. So a lot of companies are being hurt because they have taken on way too much debt, because they were lent on reserve.

Companies with only a little bit of production and they have bank lines of like $12, $15 million, and they can’t afford that, but they have big reserve numbers for some reason and those companies are going under. So we are really conscious of the fact that it’s good to have a nice, clean balance sheet, good production, and like to grow out of our cash flow.

Financial Results

Aroway’s most recent financial statement for the 6 months ending December 31st, 2013 demonstrate the company’s improving economics as follows:

  • Total production for the six month period was 85,777 BOE, a 109% increase versus 40,955 BOE from same period of 2012;
  • Achieved gross revenue of $6,345,983 for the six month period ending December 31, 2013, compared to $2,557,934 in the same period of 2102, an increase of 148% period over period;
  • Achieved positive net adjusted income of $1,997,664, or $0.03 per share for the six month period compared to adjusted net loss of $61,976, or $0.00 per share in the same period of 2012;
  • Achieved net income of $541,230 for the six month period ending December 31, 2013, compared to a net loss of $879,801 in the same period of 2012
  • Achieved Cash Flow from Operations of $3,422,993 or $0.055 per share, representing a 141% increase from the comparative six month period of 2012;
  • Reduced credit facility debt by $2,150,000;

Stock Price Catalysts in 2014

Aroway’s completion of 3D Seismic and drilling of its first well on the recently acquired Kerrobert Property; • 6 Wells yet to be drilled at West Hazel could add substantially to year-end exit production; • Improving production economics are starting to make Aroway an attractive takeout target for larger companies seeking growth through acquisition; • Chris Cooper’s own acqusition strategy could yet bring some pleasant surprises in 2014.

James West

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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