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Analyst stays positive on Nighthawk Energy after strategic review

Westhouse Securities analyst David Hart held firm on Nighthawk Energy (LON:HAWK OTCQX:NHEGY) after it revealed the findings of a strategic review.

This morning Nighthawk told investors that it was selling its non-core assets so it can cut cash-burn and focus all its attention on the Jolly Ranch oil shale project. The measures are expected to cost US$65 million in write-downs.

Whilst shares dropped more than 20 percent this morning and were still trading down at 10.25 pence in early afternoon deals in London, Westhouse Securities analyst David Hart held firm with a positive view on the company’s prospects.

Hart said: “Clearly, the shape of Nighthawk’s business will undergo significant change as a result of the actions announced today.” 

The analyst cut his price target from 88 to 37 pence, but stressing the stocks current value, he still maintains his ‘buy’ rating.

Obviously, the 51 pence revision is pretty substantial but crucially with Nighthawk shares reaching lows of 10.25 pence this morning, the analyst’s assessment shows that plenty of value still remains for the downtrodden oil shale specialist.

Whilst the other projects had potential, Jolly Ranch has always been Nighthawk’s primary focus. This is a fact that was recognised by one of the world’s largest financial institutions recently.

Highlighting Jolly Ranch as the company’s main growth driver, Goldman Sachs initiated coverage on Nighthawk with a ‘buy’ recommendation earlier this month.

The investment banking heavyweight gave Nighthawk a 12-month target price of 24.6 pence. 

“Further work to prove commerciality of the shale in Jolly Ranch is the main visible catalyst for the stock in our view,” Goldman analysts said in a note to clients.

“We believe that, if the company can increase production rates and flow rates from individual wells, then additional confidence over the ability to commercialise the resource will begin to de-risk the asset.”

The analyst added: “We believe the share price implies excessive risking around the Jolly Ranch asset.”  

“Despite the risking we apply and what we regard as conservative assumptions, we still see 90% upside to our valuation.

Now with the review out of the way, the streamlined group will be able to concentrate on the potentially huge oil shale development.

A number of well completions and re-completions are expected at Jolly Ranch over the next four months.

At the same time consultant Schlumberger is putting the finishing touches to the detailed reservoir simulation model for the core Craig and Jolly drilling blocks.

This will then be passed to Gaffney, Cline & Associates to provide a reserves and resources report during the first quarter of next year.

Heeley said: “This thorough review of strategy assessed each project on a capital expenditure versus medium-term value potential.  

“It has resulted in the decision to exit a number of projects that have been soaking up investment and management attention without the prospect of delivering acceptable returns. 

"We are now able to focus on Jolly Ranch, our lead project, which we believe has tremendous potential.  

“A number of completions are planned over the next four months on the existing wells to be followed by the drilling of up to a further five wells later in 2011 once we have a better understanding of the completion and stimulation methods.  

“The increasing competitor activity around our acreage continues to reinforce the belief that Jolly Ranch holds considerable upside."

Post-review, Nighthawk will now transfer its interest in the Revere project to its long-standing development partner Running Foxes.

In return it will receive a 5 per cent royalty and 25 per cent of the proceeds if Revere is sold.

The company is also formulating an exit from the Cisco Spring project, while its licences for the Cliffs Prospect will be allowed to expire.