Aurora Oil & Gas

Think back to 2005. Oil prices were approximately $40.00 per barrel and the shale revolution had yet to begin. The thought of US energy independence was virtually unimaginable. At the same time, a relatively small E&P company, Aurora Oil & Gas Limited (TSX: AEF and ASX: AUT), was hard at work in Karnes County, Texas on what would become one of the most profitable basins in the continental US; the Eagle Ford Shale.

Not many industries or companies have the opportunity to combine low-risk, low-cost, high-margins, and growth into one sentence. But for companies like Aurora – it's a daily reality.

As Douglas Brooks, CEO of Aurora explained, "The rock qualities, attractive geographic location, and the pro-business environment of Texas was what was initially attracted Aurora to Karnes County, Texas, in 2005 – As a result we have some of the best rock in North America and have access to a tremendous infrastructure system that allows us to seamlessly transport crude to markets faster than many competitor basins."

Low-risk, low-cost and high-margin

Since its entry, Aurora has participated in more than 375 wells on its operated leases and with its operating partner, Marathon Oil, across 88,300 gross (22,100 net) acres. With 375 wells, more than 97% of its acreage held by production, and a growing operational team, classifying the company's acreage as low-risk is not a stretch. "Low-risk, predictable development is our strategy," Brooks explained. "We have a quality operator with Marathon on our non-operated portion where they continue to put forth a thoughtful development plan. Aurora's recently acquired operated acreage follows a similarly methodical plan."

Low-cost is a relative term but in the unconventional world where wells range from $6 million to more than $14 million, sub-$8 million well costs in the Eagle Ford for 5,000 ft laterals are considered "low" by many standards. Aurora is utilizing pad drilling to reduce spud-to-spud times with a goal of drilling its longer 7,800 ft lateral wells for less than $10 million.

"Our costs are reasonable because of where our acreage is located, and the correspondingly high crude, condensate and liquids component of our product mix drives our top line. We have strong margins compared to some of the other basins," Brooks said. During 3Q13, Aurora generated $55.70 of EBITDAX per net barrel.

Growing per-share value

Low-risk, low-cost, and high-margins translate into opportunities to grow per share value. From 3Q12 to 3Q13, Aurora has grown net income by +54%, EBITDA by +62%, and production by +70% - and Brooks says his primary focus for 2014 is to continue executing on its core development strategy while maintaining a sharp focus on its bottom line. "Our primary goal for 2014 is executing on the base business in our Sugarkane asset as we've done in the past."

Stage three: Development

Brooks believes Aurora is entering stage three of a resource play: full-scale development. Prior to year-end 2013, Marathon and Aurora will discuss increased density, how closely wells will be spaced from each other, and provide additional color on what full-scale development could entail. "This is really the third stage in resource development," added Brooks. "The first step: identify the resource. The second step; de-risk it. And the third step is to decide how you are going to most efficiently develop the resource – for example, on 60- or 40-acre spacing." More than 30% of Sugarkane field has been drilled on a density less than 80 acres. In fact, Aurora is currently developing its operated acreage on 40 acres. Brooks continued, "This is a scientific process so we need all the data we can before we establish expectations."

Increased visibility

If you are a US investor and this is the first you've heard of the Aurora story, you're not alone. Aurora's roots are in Australia where the company raised its initial capital to explore the Eagle Ford. Brooks described the Australian and Canadian investors as "very loyal" as they have remained committed to the story."

"The Toronto market was another important step for us," Brooks mentioned. "It was designed to broaden the reach to a North American investor and we've been very pleased with the result."

The next stage of growth and execution in 2014 will be complemented by generating additional visibility of Aurora's robust operated program to US investors. Following its first debt raise supported by US banks in 2013, Aurora has now raised money in three countries and is actively marketing its growth story to Wall Street and across the US through non-deal roadshows and conference participation.

It's not often you see a pure play resource company with an opportunity to address an untapped market as large as the US institutional investor base. As the Aurora team executes on its fundamental business, continues to grow its operated program, and communicates the company's true resource potential within their Eagle Ford with increased density – this is certainly a company to watch in 2014.