CEI: Camber Energy Analysis and Research Report

2018-05-14 - by Asif , Contributing Analyst - 565 views

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Overview

Camber Energy, Inc., a Nevada corporation, is an independent oil and natural gas company based in San Antonio, Texas. Camber Energy is engaged in the acquisition, development and sale of crude oil, natural gas and natural gas liquids from various known productive geological formations, including from the Hunton formation in Lincoln, Logan and Payne Counties, in central Oklahoma; the Cline shale and upper Wolfberry shale in Glasscock County, Texas; and recently in connection with its entry into the Horizontal San Andres play on the Central Basin Platform of the Permian Basin in West Texas announced on January 3, 2017. Incorporated in Nevada in December 2003 under the name Panorama Investments Corp., the Company changed its name to Lucas Energy, Inc. effective June 9, 2006 and effective January 4, 2017, the Company changed its name to Camber Energy, Inc.

The company's primary value drivers are its reserves which must be developed to unlock their full potential. The company believe the market conditions driving it toward the need for a larger entity of greater size and financial mass are even more essential in the current environment. In order to develop the significant reserves at its disposal, the company believe that the company must become, or become part of, a larger organization with ample cash flow and greater access to capital. Measures such as return on equity, liquidity and stock multiples have led it to conclude that the market, in general, views small-cap and mid-cap exploration and production companies as having greater potential than microcaps. The larger companies tend to have access to more favorable debt financing, receive greater analyst coverage, trade with greater liquidity and consequently, often have higher share prices. Camber Energy is actively conducting workovers and subject to raising the balance of the funds due in connection with the October 2017 Purchase Agreement, which is subject to certain closing conditions described herein, the Company intends to drill wells, acquire producing/non producing properties at value prices and participate in joint ventures with industry partners with the goal of enhancing production and cash flow.

The Company is also executing on an aggressive growth strategy by building on the platform and technical capacity created by its recent asset acquisitions described below. The company seek to create a growth company capable of delivering on the long-expected conversion of reserves to production, continued long-term acreage development, and sustainable shareholder value.

As of December 31, 2017, the Company had leasehold interests (working interests) covering approximately 13,776 net acres underlying a total of 56,436 gross acres in its two core regions, Central Oklahoma and West Texas. In Central Oklahoma the Company had 13,567 / 55,247 (net / gross) acres, most of which was acquired pursuant to the Acquisition (defined under Liquidity and Going Concern Consideration). Approximately 97% of the Central Oklahoma acreage is held by production (“HBP”). In West Texas, the Company had 209 /2,253 (net / gross) acres. Approximately 9% of this acreage is productive from the Cline and Wolfberry formations acquired pursuant to the Segundo transaction. The remaining West Texas acreage is acquired leasehold located on the Central Basin Platform of the Permian Basin, which was announced by the Company as part of its entry in the emerging Horizontal San Andres play.

On August 2, 2017, and effective June 13, 2017, the Company entered into an agreement with Vantage Fund, LLC (“Vantage” and the “Vantage Agreement”), pursuant to which Vantage agreed to provide up to $6 million of funding to the Company, in the sole discretion of Vantage, with $400,000 provided in the initial tranche (the “Initial Tranche”). The consideration for the Initial Tranche of funding was the assignment to Vantage of all of the Company’s rights and ownership in its wholly-owned subsidiary Camber Permian II, LLC (“Camber Permian”) which included leaseholds and potential participation rights. The Vantage Agreement contained customary indemnification requirements. On July 17, 2017, Vantage provided $120,000 to the Company under the Vantage Note and on July 20, 2017, Vantage provided $30,000 to the Company under the Vantage Note. Vantage was granted a second lien on the Jackrabbit property in connection with the financing. On November 9, 2017, in connection with the sale of the Jackrabbit Acreage, the Company paid Vantage the full amount due on the Vantage Note of $150,000.

The cure period on the Rogers Loan expired on September 11, 2017, and as of such date, all principal, interest and unpaid costs thereunder were immediately due and payable (which totaled approximately $9.4 million as of the date of acceleration which amount included $2.1 million of default interest). Prior to the default, CATI had not recorded interest due on the note based on its earlier agreements. As a result of the default, demand and acceleration, CATI recorded the default interest demand of $2.1 million in the three month period ended December 31, 2017. In September 2017, Rogers foreclosed on the assets of CATI which secured the note. On October 3, 2017, the trustee of those assets, for the benefit of the lender, sold these assets in public auction foreclosure sales which took place in Gonzales County and Karnes County, Texas. The proceeds from the foreclosure sales of approximately $3.5 million were applied against the outstanding indebtedness.

On December 15, 2017, CATI entered into a Release of Mortgage, Deed of Trust, Assignment, Security Agreement, Financing Statement and Fixture Filing (the “Release”) with Rogers. Pursuant to the Release, the Company completed a transaction in which CATI provided Rogers, pursuant to an Assignment of Overriding Royalty Interest (the “Royalty Assignment”), with an overriding royalty (equal to 0.01 of 8/8ths of all oil and gas) on CATI’s remaining leasehold and Rogers released CATI from all remaining indebtedness owed. The Release, which was filed in various counties in Texas on January 22, 2018 and January 23, 2018, discharged approximately $5.8 million in principal and interest outstanding and owed to Rogers, according to Rogers. The effective date of the Release was December 15, 2017. Additionally, the remaining leasehold and ownership of CATI was assigned to Arkose Lease Partners, L.L.C., a third party (“Arkose”), pursuant to an Assignment of Membership Interest (the “Assignment”), dated November 1, 2017, in exchange for Arkose’s assumption of all plugging and abandonment liabilities of CATI of approximately $1.8 million.

As of December 31, 2017, Camber was producing an average of approximately 869 net barrels of oil equivalent per day (Boepd) from over 100 active well bores. The ratio between the gross and net production varies due to varied working interests and net revenue interests in each well. The company's production sales totaled 158,555 barrels of oil equivalent, net to its interest, for the nine month period ended December 31, 2017. At December 31, 2017, Camber’s total estimated proved producing reserves were 5.98 million barrels of oil equivalent of which 3,383,500 barrels (“Bbls”) were crude oil and NGL (“Bbls”) reserves, and 15.6 billion cubic feet (“Bcf”) were natural gas reserves. Approximately 97% of the barrel of oil equivalent (“Boe”) was proved producing. With the closing of its asset acquisition in August 2016, the Company acquired estimated proved reserves of 6.3 million Boe, of which 0.2 million Bbls were crude oil reserves, 14.8 billion Bcf were natural gas reserves and 3.7 million Bbls were natural gas liquids. Approximately 72% of Boe was proved producing.

On May 1, 2017, the Company entered into a service agreement (the “Service Agreement”), with Enerjex Resources (“Enerjex”) to outsource the management of its back-office functions for a fixed monthly fee. Under the terms of the Service Agreement, Enerjex will be responsible for performing all back-office services for the Company, including all data entry and bookkeeping, financial reporting, management reporting, reserve reporting, SEC compliance, audits, filings, and any other services required to maintain the Company’s good standing with all local, state, and federal laws. Enerjex will not be responsible for any field operations, including drilling, operating or maintaining any wells or leases, of the Company under the terms of the Service Agreement. Enerjex will receive a fee of $150,000 per month for services rendered, plus any pre-approved out of pocket travel expenses. The monthly fee may be reduced to the extent the Company retains employees to perform certain of the functions contemplated to be performed by Enerjex. Effective December 4, 2017, Enerjex and the Company mutually agreed to terminate the Service Agreement.

On November 9, 2017, the Company (through its subsidiary, Camber Permian LLC) and NFP Energy LLC (“NFP”), its joint venture partner, sold oil and gas properties totaling approximately 2,452 acres in Gaines County, Texas, to Fortuna Resources Permian, LLC (“Fortuna”), for $1,000 per acre or an aggregate of $2,206,718 payable to the Company (with $245,213 payable to NFP), pursuant to the terms of a letter agreement (the “Sale Agreement”) and an Assignment, Bill of Sale and Conveyance to Fortuna, both dated November 9, 2017 and effective November 1, 2017. This acreage, part of the Company’s “Jackrabbit” acreage, targeted the San Andres formation in the Permian Basin. Additionally, the Company and NFP jointly terminated their venture. With the proceeds from the sale, the Company paid the 1st lien holders, including Alan Dreeben (a former director of the Company), and 2nd lien holder Vantage, thus reducing its liabilities by $1,518,924 and paid NFP $662,072 to terminate the joint venture agreement. The Company maintains a 90% ownership position in the remaining 1,100 acres in the area. The net proceeds from the sale to the Company totaled $25,914. The Company entered into a nonbinding letter of intent in November 2017, to acquire a 95% net working interest position in 3,220 net acres in Yoakum County, Texas, within a 6,000 acre area of mutual interest (“AMI”) in the Permian Basin. The Company intends to enter into an agreement with a joint venture partner within the (“AMI”) with the plan to initiate a drilling program on this acreage, targeting the San Andres formation, during the first half of 2018, subject to the transaction closing by year end. This transaction did not close and the letter of intent was terminated.

Broadly, Camber is targeting acquisitions in the southwest United States, inclusive of Oklahoma, Texas and New Mexico, which represent a vast array of oil and gas deposits. As the company consider producing properties, the company plan to prioritize those with cash flow returns near its current assets that can substantially improve its bottom line. In addition, the company will evaluate the property to determine whether it conforms to its experience and technical expertise. Specifically, the company prefer relatively shallow (less than 10,000 feet) formations that require horizontal drilling techniques and significant surface infrastructure management, and Camber Energy is currently evaluating several opportunities to expand its asset acreage. The ultimate success of each transaction will be significantly dependent upon arriving at acceptable terms and the availability of capital, which may not be available on favorable terms, if at all.

While actively pursuing specific exploration and development activities in the Mid-Continent area, the company may not be able to close future acquisitions for a variety of reasons, new drilling opportunities may not be identified and any new drilling opportunities identified may not be successful if drilled. Camber Energy has recently made significant strides in improving production from its existing fields where its barrel of oil equivalent per day rates have risen from 850 barrels of oil equivalent per day (Boe/d) in September 2016, its first month of operating the Oklahoma property, to a December 2016 rate of 1,054 Boe/d. Continued improvement in these rates should result in increased revenue and cash flow. Production rates should increase as well from new production which is expected to ramp up in early 2018, subsequent to the completion of drilling activities the company plan to complete in early 2018, funding permitting.

Industry Segments

Camber operations are all crude oil and natural gas exploration and production related.

Operations and Oil and Gas Properties

The company operate and invest in areas that are known to be productive, with a reasonably established production history, in order to decrease geological and exploratory risk. With the closing of the Acquisition in October 2016, the Company acquired over 13,000 net acres in producing fields located primarily in the Mid-Continent region of Oklahoma including Payne, Lincoln and Logan Counties, along with a small amount of interest in production located in Glasscock County, Texas. The Mid-Continent assets produce from a liquids-rich, gas reservoir known as the Hunton formation. These properties include interests in four different fields, of which one is operated by Camber and the other three are non-operated. The Glasscock County, Texas properties produce oil and gas primarily from the Wolfberry, Cline and Fusselman formations and are all non-operated. In addition, the Company owns 1,000 net acres and operations in the emerging Horizontal San Andres play in the Central Basin Platform area of the Permian Basin (as described in greater detail below). The company intend to expand its footprint in the Central Basin Platform and with a JV partner, begin drilling in this area during end 2018, funding permitting.

On January 3, 2017, Camber entered into a Lease Acquisition and Participation Agreement (“Acquisition”) with a privately held, Houston, Texas-based oil and gas holding company (“Partner”) whereby the company acquired a leasehold position in the Permian Basin in Texas, consisting of 16,300 gross, 3,600 net, mineral acres in consideration for $1.43 million, and formed an area of mutual interest (the Jackrabbit project).

Camber Energy has steered the Company to a strategic path leveraging on its expanding technical and operational “dewatering” expertise. Since closing the acquisition of the Segundo Hunton dewatering assets in August 2016, the Company has sought an opportunity to expand its dewatering expertise to another productive formation. As a simplified explanation, dewatering occurs in formations with high water saturations, greater than 50%. The oil and gas resides in pore spaces of conventional subsurface rock formations and is held in place by the pressurized water. By producing the water (dewatering), the pressure holding the hydrocarbon in place is lowered, the hydrocarbon expands, and transitions from a residual state to a mobile state, allowing for commercial production. This concept is now being used throughout the Mid-Continent to produce large quantities of oil and gas, and has recently been applied with increasing success to the San Andres formation in West Texas.

The San Andres formation, the target of its most recent purchase, is found at relatively shallow depths (4,500’) and has similar attributes to the Company’s dewatering Hunton play in Oklahoma. Camber believes that it has certain advantages in initiating a development program in the San Andres. Both the Hunton and San Andres are carbonates with relatively high water saturations where the production profile appears to be optimized by a dewatering and depressurizing process. Camber plans to use the twenty-plus year technical evolution and knowledge of the Hunton to the San Andres formation of the Permian Basin to produce oil and gas through the dewatering process and expects to grow its initial 3,600-acre position moving forward, funding permitting. While commodity prices have rebounded from their lows and service costs have declined, the drilling of new wells continues to require constant economic viability evaluation. Camber has assessed its portfolio of opportunities and is currently performing workovers on acquired wells while assessing additional opportunities to acquire temporarily abandoned or underproducing assets in the MidContentent and Central Basin Platform, funding permitting.

The company's growth plan includes the development and enhancement of existing production, in addition to the drilling of new wells on its acreage. It also includes material acquisitions of leasehold or production in new areas. The company's San Andres initiative is a prime example of it moving into a new area where the required expertise fits its technical capabilities. The company's third initiative for growth is the acquisition of production and acreage near its existing operations. By pursuing adjacent or nearby properties, the company plan to expand its acreage footprint and capitalize on cost efficiencies. Camber plans to work diligently to grow its operations by considering strategic acquisitions that are near the region or location of its current assets, offer attractive production and cash flow returns, and/or conform to the Company’s technical proficiencies. All of the planned growth initiatives described above are subject to it having sufficient funding to complete such initiatives and cash on hand to support its operations and pay its debts as they become due.

Broadly, Camber is targeting acquisitions in the southwest United States, inclusive of Oklahoma, Texas and New Mexico, which represent a vast array of oil and gas deposits. As the company consider producing properties, the company plan to prioritize those with cash flow returns near its current assets that can substantially improve its bottom line. In addition, the company will evaluate the property to determine whether it conforms to its experience and technical expertise. Specifically, the company prefer relatively shallow (less than 10,000 feet) formations that require horizontal drilling techniques and significant surface infrastructure management, and Camber Energy is currently evaluating several opportunities to expand its asset acreage. The ultimate success of each transaction will be significantly dependent upon arriving at acceptable terms and the availability of capital, which may not be available on favorable terms, if at all.

While actively pursuing specific exploration and development activities in the Mid-Continent area, the company may not be able to close future acquisitions for a variety of reasons, new drilling opportunities may not be identified and any new drilling opportunities identified may not be successful if drilled. Camber Energy has recently made significant strides in improving production from its existing fields where its barrel of oil equivalent per day rates have risen from 850 barrels of oil equivalent per day (Boe/d) in September 2016, its first month of operating the Oklahoma property, to a December 2016 rate of 1,054 Boe/d. Continued improvement in these rates should result in increased revenue and cash flow. Production rates should increase as well from new production which is expected to ramp up in early 2018, subsequent to the completion of drilling activities the company plan to complete in early 2018, funding permitting.


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