Knowing the drill

Keeping focus close to home fuels Synergy

PLATTEVILLE – Synergy Resources Corp. revenues have more than doubled and the company is continuing to gain steam with its homegrown approach to drilling that has won admirers locally and on Wall Street.

Shares of the oil and natural-gas producer, headquartered in unincorporated Weld County near Platteville, have risen 30 percent this year. George Seward, the company’s director, made a large open-market insider purchase of nearly $520,000 in shares last month.

“The fact that he is buying stock at this particular level is a really bullish signal,” said Irene Haas, Houston-based managing director and E&P equity analyst for Wunderlich Securities. Haas has rated the stock a “buy” with a $16 price target. The stock traded around $12 earlier this month.

Synergy has ridden an oil boom that set a statewide record of 64.1 million barrels last year and has shown no sign of abating. Companies operating in Weld County produced 80 percent of the state’s oil. Synergy plans at least $200 million in capital spending next year.

Synergy (NYSE MKT: SYRG), which went public in 2008, got its start during the financial collapse. The price of oil sank below $40 per barrel, giving co-chief executives Ed Holloway and Bill Scaff the opportunity to acquire assets to start Synergy.

“We set our mind to not letting the company fail, and we went out and started raising money primarily in the Weld County, Greeley areas,” said Holloway, who has more than three decades of experience in Northern Colorado’s oil and gas industry. “We knew exactly what to do: Instead of drilling wells, we went out and continually leased up as much as we could as fast as we could.”

The company began trading on the NYSE MKT, an exchange for small-cap companies, in 2011, and this year its stock hit a high of $14.11. Synergy shares declined to around $12 earlier this month, but the company remains the top small-cap stock at Iberia Capital Partners in New Orleans.

“Recent insider buying, related to option exercises, should give investors confidence that the recent modest share price pullback is more macro-related and that operations continue to move forward,” says a research note from the analyst firm.

With a market capitalization of $988 million, Synergy has raised $189 million in capital and has total debt of $37 million.

Synergy has 56,600 net acres in the Greater Wattenberg Area, with a total of 1,737 drilling locations in the region.

The company has drilled 32 horizontal wells and added a third rig to the region in September, up one rig from a year ago.

David Beard, managing director of Energy Equity Research for Iberia Capital Partners, said Synergy’s stock has risen on its horizontal well activity in Weld County: A single well can produce hundreds of barrels of oil per day. Beard has rated the stock “outperform” with a price target of $15.

Along with its drilling program in the core Wattenberg area in Weld County, the company’s plans to drill test wells in an area that straddles northeast Weld County and northern Morgan County is an exciting prospect, he said. Beard also is eager to see the outcome of a recent deal between Synergy, Johnson Production Corp. and Kodiak Petroleum Inc. to drill as many as 10 wells in Nebraska. Synergy will take a 50 percent stake in the wells and will pay three-eighths of their drilling cost.

“Both of those new fields could become quite productive over the next two, three, four years,” Beard said. “The company has a great balance sheet and plenty of cash flow to develop them. If that happens, the stock is going to go a lot higher.”

In northeastern Weld County, Synergy has sought permits to drill a dozen wells in the so-called Greenhorn formation, a potentially lucrative oil reservoir.

“They have one solid bread-and-butter project and two exploration projects,” Haas said. “Both can lead to a lot more upside. I think that’s really why the stock has taken off.”

Haas added that Synergy’s horizontal drilling costs are lower than those of other companies. The typical horizontal well costs around $4.2 million to drill in Weld County. Synergy spends about $3.6 million to drill the standard horizontal well because the company, which has just 23 employees, has lower overhead.

Synergy’s production has skyrocketed in the past three years, growing to 4,120 barrels of oil equivalent per day in the third quarter of fiscal 2014 from 452 in fiscal 2011.

Its revenue climbed to $68 million during the first nine months of its fiscal 2014 from $32 million during the same period a year earlier. More than 80 percent of the company’s revenue comes from oil. 

Analysts consider Synergy a conservative company: It began drilling horizontal wells after other companies found success drilling them.

“They didn’t drill horizontal until they saw that other people were able to do it and make it work,” Beard said.

With Synergy’s upside also comes risk to investors. Synergy drills wells in rural areas, but it also drills in urban areas such as Greeley, which may pose risks to greater numbers of people who live nearby if something goes wrong.

Andrew Logan, director of the oil and gas program at Boston-based Ceres, works with investors and oil and gas companies to address environmental and safety issues. The financial consequences of making mistakes in areas with greater numbers of people could be higher than in rural areas, he said.

“It’s definitely an area of great concern for investors,” he said. “They see a much higher risk profile for companies that have a lot of their assets in urban areas or close to population than they would for companies that have more remote operations.”

Companies also must maintain a “social license to operate,” meaning they must have the support of the public to drill in addition to any regulatory approvals, he said.

Holloway said Synergy has gone beyond regulatory requirements in much of its drilling operations in Greeley and other cities and towns.

“We’ve had tremendous success in navigating through that arena,” he said. “I live in this area. We want to make sure that our social license is renewable continually.”

Steve Lynn can be reached at 970-232-3147, 303-630-1968 or slynn@bizwestmedia.com. Follow him on Twitter at @SteveLynnBW.

on Facebook on LinkedIn