Saratoga's drilling program looks to be back on track. The company drilled the SL 195 QQ-209 "Buddy" well to a total depth of 6,820 feet MD/TVD and completed it in the 3A sand in Grand Bay Field. The QQ-209 well had initial production of 208 net Boe/d, which was approximately 95% oil. The MP-47 SL 195 QQ-24 "Roux" well was recompleted with a gravel pack in the 29M sand and had initial production of 154 net Boe/d, consisting of 36% oil. Management noted that both wells were completed under budget and ahead of schedule.
We expect drilling results will provide multiple catalysts in 2013. Saratoga spud the MP-47 SL 195 QQ-25 "Roux Toux" development well. The "Roux Toux" is a directional development well targeting the 10 through 17 sands at the northern edge of the Grand Bay Field, which the company expects to complete in the middle of February. We expect at least four additional PUD wells, the exploratory/development Zeus well, and multiple recompletions will be drilled in 2013.
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https://www.sharewellnewswire.com/pdfs/Brean Capital 1.24.13 SARA.pdf
Valuation / Target Price
Shares of SARA look cheap relative to other Gulf of Mexico E&P stocks. At 5.2x EV/EBITDA and 3.1x P/CF, Saratoga Resources' stock is trading below the median multiples of 5.8x EV/EBITDA and 3.7x P/CF for our Gulf of Mexico peer group. We reiterate our Buy rating on SARA. Our $8.00 price target is equal to 85% of our $9.00/share NAV, which assumes midcycle NYMEX benchmark oil and gas prices of $85/Bbl and $4.00/Mcf.
Ultra-deep prospects are potential game changers. Saratoga's Vermilion 16 and Grand Bay fields are largely unexplored beneath 16,000 feet. The Vermilion 16 field sits in the middle of the Lower Wilcox Sand Fairway, which feeds into the deepwater Gulf of Mexico fields. The company's Long John Silver Prospect in Vermilion 16 is approximately 30 miles southeast of Chevron's (CVX, $105.17, Not Rated) Lineham Creek Prospect and 30 miles northwest of McMoRan Exploration's (MMR, $15.82, Not Rated) Davy Jones Prospect. While ostensibly there has been a lot of hype around the ultra-deep shelf play, a flow test from MMR's Davy Jones well appears imminent, and positive results would significantly increase the value of Saratoga's ultra-deep prospects. SARA currently has no booked revenues associated with the ulta-deep prospects.
Saratoga Resources is a good way to play improving gas prices, in our view. Natural gas accounted for 58% of proved reserves, but only 36% of production in 2011, as the company focused on oily targets. The company has a large inventory of natural gas targets available when prices improve. In addition, SARA typically receives a premium for its high BTU gas, which averaged approximately 45% in 3Q:12. Therefore, we expect Saratoga to benefit from a rebound in natural gas prices in 2013 and beyond.
About (NYSE MKT: SARA)
SARA is an independent oil and natural gas company with operations in the transitional zone of Louisiana. The company’s focus is on conventional targets with multiple stacked pay zones in known fields, including Grand Bay, Vermilion 16, and Main Pass 46. The company also has ultra-deep Gulf of Mexico Shelf prospects, which could be a game changer. Saratoga’s inventory of proved developed nonproducing and proved undeveloped drilling locations provides ample running room to grow production and reserves through 2013.
Proved reserves were 19.0 MMBOE, consisting of approximately 42% oil and 58% natural gas at
year-end 2011. Probable reserves were 12.9 MMBOE (31% oil) and possible reserves were 33.7
MMBOE (41% oil) at December 31, 2011. Approximately 88% of proved reserves are classified as proved developed nonproducing and proved undeveloped reserves, resulting in a large inventory of PUD wells, workovers, and recompletions. At December 31, 2011, Saratoga Resources had 32,119 net acres, most of which are held-by-production (HBP), holding all depths. Production totaled 945.6 MBOE in 2011, and was 64% oil and 36% natural gas. As of September 30, 2012, Saratoga Resources had 101 net producing wells. The company’s crude oil is priced at Light Louisiana Sweet (LLS) and Heavy Louisiana Sweet (HLS), which commands a premium to West Texas Intermediate (WTI). The differential between Saratoga’s realized sales price for crude and WTI was $10.24 per barrel in the third quarter of 2012. Similarly, the company’s high BTU natural gas realized a $1.25 premium to the Henry Hub contract in 3Q:12.
The company owns interest in nine other fields in the Main Pass and Breton Sound areas; all nine fields are in shallow waters on state leases in Plaquemines, Vermilion and St. Mary parishes of southern Louisiana. Saratoga operates all its wells with 100% working interest in virtually all leases.
Saratoga Resource, Inc.