Price of natural gas helps boost shares of junior producer: Cinch Energy.
Editor’s note: This article first appeared as a Stockhouse blog entry: 'Tis a Cinch to make money in the junior gas producers.
Cinch Energy Cinch Energy (TSX: T.CNH, Bullboard) is an aggressive, growth-oriented junior gas producer working the Canadian Sedimentary Basin. The CEO is John Elick, past co-founder of Pan East Petroleum which was known for "hunting elephants in the majors [sic] backyard." He is joined by George Ongyerth, past president of Hunt Oil. The company looks for prolific gas deposits in northeast British Columbia and northwest Alberta. (Go to Cinch website: www.cinchenergy.com)
In BC, principle operations are in the Dawson area. This area offers Montney, Kiskatinaw and Wabamun potential. The Montney trend is a hot area with resource-type potential with long life production. The prolific Kaskatinaw zone has shown flow rates of up to 10 mmcfd (million cubic feet per day) and the Wabamun can deliver in the 3 mmcfd range.
In Alberta, Cinch has the Kakwa-Chime core area. The Kakwa H Pool produces 570 boepd (barrels of oil equivalent per day) and the entire core area produces about 1300 boepd. The recent 9-7 well flowed 7.5 mmcfd, which shows the high deliverability potential of this area play.
Production history shows steady growth with 2005 year-end production of 1250 boepd, ‘06 was 1600 boepd, '07 was 1900 and '08 is projected at 2300 boepd.
The costs of some of these wells can amount to $6.5 million to drill, complete and tie in. Hence, Cinch takes a 20-50% working interest and works with some large partners. Cinch does have some 100% WI wells and lands and one could expect that WI to get larger as increasing cash flow allows.
The 2008 capex program is projected to cost $25 million which would see 13 gross wells (5.5 net) split evenly between exploration and development drilling.
Currently there are 55.6 million shares outstanding. Cash flow for ’07 was 19 cents a share. Based on $7.50 AECO (Alberta gas spot trading price), 2008 cash flow is projected at 37 cents and if we project $10.50 AECO pricing we could see 50 cents per share in cash flow in '08.
The company offers significant drilling upside in high-deliverability wells and the resource-type plays it has on its valuable lands.
Current reserves sit at 5.8 mboe (million barrels of oil equivalent), proved plus probable (2P), with significant potential to add in the Montney potential.
One caveat is the company carries higher debt at two times '07 cash flow. The higher gas prices we are seeing could certainly remedy that situation. In fact if these prices hold up it would halve that ratio and Cinch would be in great shape.
All things considered I look upon Cinch as a great little speculative play. Solid growth with real upside that many punished in '07 as gas prices were low and heavy debt caused some to grow concerned. However as '08 shows an uptrend in natural gas prices we should see the debt ratio close to a more secure level. Their lands are very nice and the potential is really quite high for continued growth in production and cash flow. High impact drilling can be very lucrative and Cinch’s ability to mitigate the risk by working with some great partners and holding lower working interests is a solid plan.
Disclosure: Author has no position in Cinch Energy (although has owned it in the past).
This article was written by a member of the Stockhouse community.
