Synergy Resources Offers Strong Production Growth And Drilling Upside

Synergy_Resources_Corporation_LogoStephen Simpson, CFA Kratisto Investing – Seeking Alpha – Aug. 25, 2014


  • Synergy continues to generate solid IPs from wells in its core Wattenberg acreage targeting the Niobrara and Codell formations.
  • The company is about to start testing its acreage in the Wattenberg extension and may start drilling test wells in its Nebraska acreage as well.
  • PDC Energy and Bonanza Creek are likely less risky than Synergy, but Synergy still has considerable risked value that can be unlocked through its drilling program.

Wattenberg operators have done pretty well this year, and results from the Niobrara and Codell formations continue to support solid IRRs on these wells. Since I wrote about Synergy Resources (NYSEMKT:SYRG) in late January, the shares are up about 44% – a little better than Bonanza Creek (NYSE:BCEI) and about double the return of PDC Energy (NASDAQ:PDCE) over that period. Synergy’s quarterly production numbers have come in a little soft relative to expectations, but the company’s drilling results have offset this with solid IP rates and good well cost controls. The shares do not look cheap on the basis of peer-level EBITDA multiples, but I would argue that Synergy’s triple-digit oil growth deserves a premium and the company’s core Wattenberg drilling inventory supports a mid-teens fair value.

Good Inventory And IPs…

As of the company’s recent update in August, the company is looking at 1,000 drilling locations in its core Wattenberg and extension acreage. Management is adding a third rig, and I would expect a fourth rig in 2015, but that still works out to several years of drilling inventory in this core area.

The company is looking to drill test wells in the extension for the Niobrara and and Greenhorn relatively soon. There’s not much value from this acreage factored into the shares yet, and management believes that they still have an opportunity to acquire acreage here if the drilling results show that it would be worthwhile.

Looking at recent pad drilling results in the core area, the results have been pretty good. The Renfroe pad wells have delivered a 270-day IP of 219boepd at a $3.6M well cost, while the Leffler wells have produced a 180-day IP of 145boepd. More recent pads like Phelps and Union have delivered 30-day IPs of 544boepd (Phelps) and 566 boepd (Union) at costs of around $4M per well. In the case of the Phelps pad, those results include two wells targeting the Codell that have produced at 668boepd rates.

Those are solid numbers compared to recent sub-500boepd 30-day rates from Bonanza Creek from Niobrara B wells and likewise strong compared to PDC Energy’s results. Like Bonanza Creek, Synergy is also drilling some longer laterals, with the Eberle pad (which is in completion) including two wells with 7,000′ laterals. Synergy is also still testing different completion designs – “plug and perf” and sliding sleeve – and management has indicated that they may continue to use different completion techniques for different formations.

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