Synergy Resources Corp. (SYRG.A) is an oil and gas operator in Colorado that develops assets primarily located in the Greater Wattenberg Field in the Denver-Julesburg Basin (northeast Colorado). With a net oil and gas production increment of 93% in Q1 fiscal 2014 and a total increment in operating income of 66% in 2013, Synergy Resources represents one of the biggest opportunities within the energy industry.
In Alpha Deal Group’s initial due diligence call, Co-CEO and President Edward Holloway and Vice President, Capital Markets, Jon Kruljak stated that as of Oct. 31, 2013, the company holds 374,000 gross and 245,000 net acres under lease, substantially all of which are located in the D-J Basin, which ranks as one of the most productive fields in the U.S. Of this acreage, 12,550 gross acres are held by production.
Competitive Strengths
Synergy Resources has a young and experienced management team who have drilled, participated in drilling and operated over 350 wells in the D-J Basin and uses best in class service providers to drill and complete horizontal wells in Wattenberg Field. In addition, it retains a balanced mix of oil and natural gas reserves that can provide diversification of cash flow sources and will lessen the risk of significant and sudden decreases in revenue from short-term commodity price movements.
Strong Financial Position
Synergy Resources strong current cash position and very low debt level gives it strategic mobility. In fact, the company’s aim is to finance operations through cash on the balance sheet, internally generated cash flow and utilization of credit facility in order to continue to focus on operating efficiencies and cost reductions. Operating income for the year 2013 was $19.545 million compared to $11.754 million in 2012, an increase of 66%. Income before income taxes also rose 40% in the same period — $16.45 million compared to $11.79 million in the previous year. The results stem from the continuous growth in production and the constant investments carried on by the company. Trailing 12 months (TTM) sales for the company reached 98.4% compared to an average 18% of energy industry and only 1.38% of the sector.
Table 1: Synergy Resources Growth Rates
Source: Eikon/StarMine
Profitability Indicators
Compared to its peers, Synergy Resources has reported strong results in all the main profitability indexes. TTM return on assets (ROA) is 5.73% compared to 2.72% for the industry, return on investment (ROI) is currently at 6.62% and return on equity (ROE) is 7.73% compared to a 5.83% for the industry.
Table 2: Synergy Resources Management Effectiveness
Source: Thomson Reuters Eikon/StarMine
Table 3: Synergy Resources Profitability Ratios
Source: Eikon/StarMine
Share Price Gains
Positive results have also brought a huge benefit for outside shareholders who have seen the share price jump +27% from last year. Positive revenue is reflected in an earnings per share (EPS) gain of 90% in the last quarter (versus the previous year) and in the stock price. Outside shareholders have also their interests aligned with those of company, since insiders and employees own 15% of Synergy Resources.
Chart 1: Synergy Resources Stock Price
Source: Eikon/StarMine
Table 4: Synergy Resources Earnings per share
Source: Eikon/StarMine
Synergy’s Business Strategy
Closing our call, Holloway said Synergy’s primary objective is to enhance shareholder value by increasing net asset value, net reserves and cash flow through acquisitions, development, exploitation, exploration and divestiture of oil and gas properties.
Synergy Resources intends to follow a balanced risk strategy by allocating capital expenditures in a combination of lower risk development and exploitation activities and higher potential exploration prospects. Key elements will include leveraging management’s significant experience and expertise in the basin, utilizing an aggressive drilling program in proven low-risk areas with predicable rates of return, continuing to expand the acreage footprint through leases and acquisitions and maintaining a financial flexibility while focusing on controlling the costs of operations.
This research note is provided by Alpha Deal Group LLC, which works for buyside clients on special situation deal intelligence in select regional capital markets on mispriced equity idea generation, deal sourcing and deal networking introductions.
