Saratoga Resources (SARA)

[wilmawatts]

Asking if Saratoga was an acquisition candidate one analyst with CK Cooper noted:

“At current trading levels, I think a lot of companies could be looking at Saratoga. The company is trading well below its proved value and carries a lot of upside. Saratoga has a plan to develop some of its lower-risk proven undeveloped reserves this year, and there's a big opportunity there.”

[dan_s]

Although I have removed SARA from our Small-Cap Growth Portfolio, the stock looks very attractive to me at the current share price. The risk/reward is very much in your favor at this price. It is trading well below PV10 - debt.

SARA was removed from our portfolio because production has declined for two quarters and I expect it to be down year-over-year. I can't include a company in a "growth" portfolio if it has declining production.

However, I am modeling a steady increase in production starting in Q2. If natural gas prices drift upward, as indicated by the current NYMEX strip, the company should report an increase in proven reserves at year-end just because they will add back the gas reserves that were written off as sub-economic at 12-31-2012.

SARA needs to stay focused on their current workover program and they should be fine.

[wilmawatts]

Saratoga is drilling the Rocky well into an oil sand in the shallow waters of the Gulf, their first try, just spudded. Target sand is classified as proven, the oil is present. Management said they looked at wells that Kerr McGee drilled 15 years ago in an offsetting block with horizontal wellbores and were impressed so figured they would try one. Technology has come a long way over the last 15 - 20 years in drilling horizontal legs and measurement while drilling. No frac is needed, good porosity and permeability.

We researched the results of the horizontal wells that Kerr McGee drilled in the shallow water in the offsetting block. It looks like the IP on some of these were 1,500 bod plus 1 million cubic feet of gas per day. I'm not sure the street has any idea how good these Kerr McGee wells appeared to be. Or how good SARA's well(s) might be. Plus the KM horizontal leg reduced water coning and increased ultimate recovery according to the engineering reports.

If Saratoga brings in a well anywhere near the KM wells you are looking at a 30 - 50% gain in company production from the Rocky well alone. And they have four more just like Rocky they will drill depending on the results.

Of course this is all speculation until they bring the well in - or it is non-commercial (it is a low risk well). Well will be tested and results will be announced in July. As Dan has noted, company needs to grow production, needs to walk the walk if they aer going to talk the talk. Management owns enough shares to make increasing shareholder prices a focus, and they are shooting fish in a barrel sort to speak (lots of proved undeveloped and proved developed non-producing potential here).

Should make for an interesting summer.

[wilmawatts]

Another of the Kerr McGee wells on Breton Sound (where SARA's well is located) tested at 2,749 bod and 900,000 mcf/d from a 874 foot lateral. Back in the 1990's.

If SARA's Rocky well comes in a quarter of the Kerr McGee well it will be significant. If it comes in over 1,000 bod it could be a company changer.

Keep in mind SARA's total production is only around 3,000 boed right now.

Bought another 10,000 shares today, but order for 7,000 did not fill. Will be back in the market Friday.

Over the last two weeks we have bought 150,000 more SARA shares, risk reward is attractive.

[wilmawatts]

The Kerr McGee wells may not be exact analogs to the SARA Rocky well, but the concept is similar. Will be interesting to see the result in a month or so, if they can make this baby a producer.

[wilmawatts]

A consulting engineer I spoke with says don't rely too much on the Kerr McGee wells as precedent here. He says the success depends on the nature of the sand and reservoir quality, thickness, gas/oil/water contact line, length of lateral, etc etc etc

He said to be happy if the Saratoga Rocky well has an IP of 250 bod, anything above that is a gift. But he said his guess was just that, and anyone else who had an opinion was also just a guess.

Sort of surprised, but this guy knows his stuff. So we will see.

[setliff]

"he said his guess was just that"-----

no matter how smart he is, if he says its a guess that's what we must believe.

jim

[wilmawatts]

good point Jim

if the IP was not a guess most wells would be very easy to drill or to avoid drilling

we should know something next month

I think the company mentioned 1,000 b/d IP would be their guess in the last earnings call or presentation, at least that is what my criptic notes indicate

our engineer consultant said not to be disappointed if the well does not have a wildly high IP, although that is preferable, since it might produce a lot of water if the lateral migrates into a water zone. the water will migrate to the wellbore more easily than the oil. the oil might get pulled along, sort of a high water cut well that lasts for a long time is a possibility. really depends on the width of the zone the lateral will follow and how close the water zone will be.

But if the wellbore can be kept entirely in a good oil zone the IP could be exceptionally high he says and I would be very pleased, as would a few other folks. Company is trying to drill a few more wells this year that could be significant they said at a recent conference, we will see