Energy Prospectus

Osage Exploration & Development (OEDV.OB) -- This is a very small company that is in the very early stages of getting a project going in one of the hottest new plays, the Mississippian play in Oklahoma and southeastern Kansas. SandRidge was the pioneer here and after over 100 horizontal wells is maintaining around a $10/boe F&D cost, about as low as you'll see in any play around these days. These wells are not the barnburners of Bakken fame but also cost quite a bit less than half of a Bakken well (about $3M or so). Devon has recently gotten into the play in pretty big way, and Chesapeake has some exposure there also.

Osage leased up about 10,000 acres in the very southern edge of the Miss. play and then did a farmout to none other than Slawson Exploration (of Bakken fame), who, along with another privately held company, cut Osage a check for just under $5M for a 75% interest in Osage's acreage. Also, they agreed to carry Osage for a portion of the drilling costs of the first 3 wells. IMO getting a company such as Slawson to pay you more than double what you bought your acreage for, and carry you on some wells, speaks volumes of the quality of your play. Usually Slawson is on the other side of these kind of deals.

The stock is very thinly traded so caveat emptor. I'm expecting the first well in the program to get spudded sometime next quarter, maybe as early as next month.

Osage has stated in its latest 10Q that it expects that it will need to come with at least $2M to meet their share of cap ex obligations in its program with Slawson over the next 12 months. Osage has a legacy oil property in Colombia (a 9% interest in a 7-well field plus a pipeline) that throws off enough cash flow to meet G&A costs.

I believe this company has a tremendous play going and have bought a ton of the stock. It has recently run up quite a bit so I've cooled my jets on buying more for now, and am waiting to see how they solve this financing issue. Just thought I'd get the story out on this so folks could at least put it up on your radar screen if nothing else.

One of our SMU interns, Landon Hawke, has been assigned the task of updating our profile for SandRidge (SD). That report will contain an update on the Mississippian HZ Play in northern Oklahoma.

These reports are posted under the Watch List tab and they are available to EPG members only.

Dan, please let Landon know I thought he did a great job on the SandRidge profile.

If only SandRidge did not have so much debt, I would own more of it than the very small amount that I own currently. I really like the Miss. play and if anyone comes across any better-capitalized companies that are getting into this play, ideally without the "baggage" of a lot of natgas production from legacy plays, I'd be interested to hear about them.

I also updated MHR's forecast today. My take is that companies like SD, MHR and BEXP, with large acreage blocks in these "resource plays" are really trying to prove up as much acreage as they can with their real goal to be takeover. All three are very attractive targets at today's share prices.

The majors think differently than most of us. They are focused on long-term reserve growth. Believe me, they all have smart teams looking at these companies. I ran such a team at Hess for three years.

Matt Denegre and Landon Hawke are my two interns from SMU. They are first class young men and they do a great job on the profiles. They both will be attending the TGA luncheon in Dallas on Tuesday, October 11.

Its been more than 6 months since I've posted on these guys, long overdue. Below is pasted a compendium of posts that I've made on this company in the SIBBR, which is my main cyber hangout. Needless to say I still think this is a great investment and its my second largest position (only to Ridgeline, RLE.V).

11/21/11

[Osage] announced today that they are kicking things off by drilling a water disposal well. This is a curious order in which to drill, given that they are drilling in a fringe area of the Mississppian play so its not a lock that they will find commercial amounts of oil to produce. I believe they are thinking that in the worst case they could sell the SWD well for at least what they paid to drill it, since there is a shortage of SWD wells around there thanks to all the drilling going on up north in the heart of the Miss. play.

I expect them to move right along to drilling their first horizontal well right after this SWD well (otherwise why drill the SWD well now?).

They ended last quarter with over $2M of cash and if you figure $3M a well, 10% of which is carried by the other partners, OSAGE can easily fund their 25% share of the first 2 wells. Their Colombian assets are now generating enough cash flow to pay the company's G&A costs plus about another $150K per quarter. This cash flow together with the results of the first 2 wells should put them in a solid position to get a loan, so that they could stay up with Slawson in drilling out this play.

1/1/12

Now that their drilling program in into full swing its time to get down to what the value proposition is here and how they will get to the promised land:

The Size of the Prize

For starters, see a report issued last March on Osage's Mississippian acreage by a PE firm called Pinnacle Energy Services at http://finance.groups.yahoo.com/group/E ... ing/files/ (you need to join the group to download files, its easy & free to do so). In that report, which OSAGE used to shop its farmout deal and which was good enough to get Slawson to buy in a month later for 45%, Pinnacle concludes that of the 37,760K acres that comprise Osage's whole project, they believe there is 58,526 mbo and 209,652 mmcf of gas that is recoverable. So far OSAGE and its partners have leased up 20,000 acres in this project and OSAGE has a quarter of that. So let's keep the math simple and just divide Pinnacle's #'s by 2 to get a figure for gross recoverable hydrocarbons on the 20K acres that have been leased up so far.

This means that net to OSAGE, assuming a 78% NRI, they could be sitting on 5.7 mmbo and 20 bcf of gas. Using $25/bbl. for oil and $1/mcf for gas for in-ground values we then arrive at a potential value of $163M. Not too shabby for a company with a market cap at just above $20M!


How Do They Finance Their Drilling

OK, so we see they could be sitting on the mother lode. That may be great but if they can't figure out a way to finance their drilling without diluting the hell outta everyone by issuing cheap stock, it will all be for naught. As of the end of last quarter they had about $2.9M of cash but that's probably only going to be enough for their share of the first 4 wells, including one paired SWD well per producer. Since the operator of the project, Slawson, has 2 rigs going, that doesn't leave much time before OSAGE will run out of money.

This is where their Colombian Connection comes in. They own a small but very valuable interest in a pipeline in Columbia that currently is generating about $450K/qtr. in cash flow net to OSAGE. Also they own a small interest in a mature oilfield there that has an after-tax PV10 value net to them of about $5M. Right now OSAGE has zero debt. I believe these 2 assets alone could support a loan of $2-5M.

A loan of even just $2M would get them through the next 3 wells. By that point they would have 7 wells producing. Assuming OSAGE is able to generate 30-day IPs the same as what SandRidge has been getting, which is about 300 boepd, 50-50 oil vs. gas, this means their first month's production revenue will be about $90K per well, and then it will taper off from there. So with 7 wells cranking away they should then have no problem in borrowing more money, to keep the drilling going.

The Bottom Line

So net-net I believe they can get this entire multi-year project done without issuing much if not any more stock. If they do have to issue any it will probably be very soon and will not need to be very much (maybe a couple million $$ worth). So 3 years from now we could be looking at a company that is so far along in drilling out its $160M worth of reserves that the market has decided to give it value for all of them, with say 55M shares out and maybe something like $20M of debt. The stock could be had today for under $.50/share but it could be a $2.50 stock in 3 years.

The stock price has gone up more than 10-fold in the past year so it would not be an immense surprise if we see some indiscriminate selling going on in the first few weeks of this year, from profit-taking. If in fact this occurs this would provide an excellent opportunity to build a position in this stock.

Continuation of prior post.

3/14/12

The thing that bugged me the most about OSAGE when I first started researching them was, why was their area of the Miss. play, Logan County, not even on SandRidge's map? SD was the company that really opened this play up so you would think that they knew where the play boundaries were. Thankfully I was able to get my head around this issue thanks to help from the consultant that I use for O&G projects, who sat down with the OSAGE geologist, and I bought a huge amount of the stock.

Logan County has now been pushed front & center on the Miss. play stage thanks to Devon's Matthews 1-33H well, which Devon announced in their 4Q CC last week. In that CC, Devon had this to say about this well and their Miss. play in general:

"In the Mississippian oil play located North Central Oklahoma, the partnership has now secured approximately 230,000 net acres. We drilled our first vertical well in the second quarter of last year to gather data and have since drilled our first horizontal Mississippian producer, yielding very encouraging results. The Matthews 1H was brought online in the fourth quarter and achieved a 24-hour sustained IP rate of 960 barrels of oil equivalent per day, of which greater than 80% was oil. Through the first 30 days of production, the well averaged 590 barrels of oil equivalent a day. These results are among the best reported in the play to date. And with an API gravity of around 40 and low sulfur content, this appears to be some of the best-quality crude oil in the lower 48. We are obviously very encouraged with these results and plan to drill or participate in approximately 15 Mississippian wells by year end."

This is a blockbuster well, about double what the average SandRidge well is doing in the north. When I was at NAPE, I happened upon a great map of the Miss. play that actually showed Logan County on it, which can be downloaded from http://finance.groups.yahoo.com/group/E ... ing/files/ (you need to join the group to download files, its free & easy to do so). As shown on the lower left of that map (zoom required), Devon's well is located in Logan County, about 9 sections (or 7 miles) to the east of Osage's northern well (25% non-op interest, operated by Slawson).

Devon has nearly a quarter million acres in the Miss. play and where do they choose to drill their first Hz. well in that play? Right there in Logan County, 7 miles from Osage's well. And the damn thing comes in at double what SD is doing up to the north!

But wait, just like the Ginsu Knives it gets better. Word has it that the site Devon selected for their 2nd Hz. well in this play, which I believe is drilling as we speak (or may have already finished), is a only 2 miles from some of Osage's acreage. Its hard to conceive of a better vote of confidence on Logan County than this. Word also has it that on the first 2 Slawson wells, they copied Devon's frac design on the Matthews well to a T.

So in case you were wondering why this stock has been on a tear in the last month or so, here's why.