Arrow Exploration Corp. (AIM: AXL): FY25 budget: Production growth and exploration upside
• The 3Q24 financials were in line with our expectations with cash of US$16.5 mm at the end of September, which is consistent with previous indications.• The sixth horizontal well at Carrizales Norte (CNB HZ-7) is producing 700 bbl/d of oil (350 bbl/d net to Arrow) with a water cut of 65%. While this flow rate is lower than at previous wells, we note that the horizontal well has been positioned lower in the structure and only 50 feet above the oil water contact. The other horizontal wells were positioned ~100 feet above the oil water contact. Arrow was expecting a higher initial water cut at HZ-7 well than at other horizontal wells.
• The HZ-7 well is the first well that went through the fault in this area of the field, resulting in additional drilling locations and potential reserves.
• Overall current net production is now 5.5 mboe/d (5,305 boe/d on 11 November).
• Arrow plans to spend ~US$50 mm in 2025 to drill up to ~23 wells with two rigs. The programme includes development wells at RCE and Carrizales Norte as well as exploration wells at Mateguafa Oeste and Capullo. Including the upcoming Alberta prospect, the programme is targeting ~11 mmboe prospective resources with an aggregate unrisked NAV of £0.42/sh. Arrow will also shoot 3D seismic to mature additional prospects.
• We forecast that the drilling programme will increase production from ~5.5 mbbl/d to >7 mbbl/d at YE25. By comparison, the US$37 mm FY24 drilling programme has increased production from 2.6 mboe/d in 4Q24 to 5.5 mbbl/d.
• As we incorporate the FY25 budget, partially offset by lower Brent price assumptions, we have increased our target price from £0.70/sh to £0.75/sh. We anticipate an increase in 2P reserves at YE24.
Reflections on decline rates and water cut
The decline rates at the horizontal wells are less than the company expected. Declines from CNB HZ-1, the longest producing horizontal well, were 50% in the first 3 months and 27% from day 90 until now. Using water cut as a proxy for decline rates, we are assuming water cut of 60-80% after six months.
Valuation and cashflow
We have reduced our Brent price assumptions for 4Q24 and 1Q25 from US$80/bbl to US$75/bbl. Our Core NAV based on the company’s 2P reserves is now £0.36/sh (£0.32/sh previously) with a ReNAV of £0.76/sh (£0.67/sh previously). We forecast net cash of US$46 mm at YE25.
Front Range Resources is engaged in oil and natural gas exploration and production focusing on horizontal multi-stage frac development in Montney, Bluesky, Wilrich and Falher formations in the Deep Basin area of west central Alberta.
Auctus Advisors is a specialist Equity Capital Markets and Advisory business with a focus in the Energy Sector.
The partners have complementary skill sets, with decades of experience across Equity Capital Markets, Investment Banking and the Energy industry. We have worked at Société Générale, Canaccord Capital, BMO Capital Markets and Schlumberger. Most recently we have worked together for many years at GMP FirstEnergy.
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