Elk transformed to serious midcap

RBC Capital Markets has upgraded Elk Petroleum to Outperform after the oiler’s acquisition of 63% of the Aneth oil field in Utah put it in the “big league” – at least for juniors.
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Brad Lingo.

Helen Clark


Elk bought the asset from US-listed Resolute Energy Corporation for US$160 million  (A$200 million), turning the junior into a large and serious midcap oiler, though its market capitalisation is still just $55.7 million, trading at 6.5c this morning. 
Resolute is moving to transform itself into a Permian Basin pure play and Elk seeks serious growth via a focus on US-based CO2 enhanced oil recovery projects. 
"For once ‘transformational' is an understatement," RBC analyst Ben Wilson said of Elk's move. 
The deal lets Elk control the timing and scope of further development of the oil field and is a "highly complementary" purchase for the company, according to CEO Brad Lingo. 
The Greater Aneth oil field is one of the three largest CO2 EOR projects in the US Rocky Mountains alongside Salt Creek and Rangely, with oil initially in place estimated at 1.5 billion barrels, with 31% recovered to date. The rest of the 2P reserves (net 58.8MMbbl) imply a recovery of 367%, according to Edison.
Elk has not just purchased the field but taken some 100 Resolute staff including 90 working at the oil field and Resolute's president and co-founder James Piccone, who has significant US oil and gas experience. 
Wilson says RBC has modelled the transaction as being around 60% accretive at the asset level and has led RBC to upgrade Elk's net asset value by 200% based on a past-2021 outlook that supposes a US$61 per barrel West Texas Intermediate price, up from a 2018-19 outlook of $50-53bbl. 
The deal will add 300% in oil reserves for Elk, with 59 million barrels of 2P reserves and 6500 barrels per day production for next calendar year, meaning Elk will have the second-largest 2P reserves gas-focused Senex Energy and the second-largest oil production after Beach Energy. 
"The 1P (almost entirely proven developed producing) PV10 valuation as indicated by the seller Resolute is US$288 million versus Elk's purchase price of US$160 million highlighting the strength of this deal for Elk," Wilson said.
"In our view this makes it the preeminent oil leveraged name in the mid-cap space."
Elk's first EOR development project, Grieve, is due on stream in late 2017/early 2018. 
Grieve, combined with the recent acquisition of about 14% of the Madden gas field, turned Elk into a producer and material CO2 resource owner.
Having visited both Grieve and Madden in July, Edison analysts noted upside at both projects, numerous high IRR infrastructure optimisation opportunities and CO2 EOR opportunities in the vicinity of Elk's operated assets.