NAGP: Now producing oil from two wells - Increasing price target to $2 a share

Ian Gilson, CFA

Native American Energy Group ( NAGP ) is now producing oil from the Wright 5-35 and Beery 2-24 oil wells in the Williston Basin in Montana. The company’s field staff and contractors have completed the electrical system repairs and upgrades to surface equipment and subsurface flow-lines.

The Wright well initially flowed oil at 83 bbl/day but settled down to a 53 bbl/day rate. Fluids in the well are being pumped out (both oil and water) and when that is finished it is expected that the mixture will then settle down to about 50% oil.

The Beery well is now flowing at between 8 to 10 barrels of oil a day with a variable choke at 47 psi. The choke will be adjusted to stabilize the pressure and produce oil continuously. When that is done the flow rate should increase.

The two wells combined should exceed our estimate of an average of 53 bbl/d for the December, 2012 quarter. West Texas Intermediate (WTI) has been selling at between $90 and $100 a bbl over the past few weeks. Assuming a $10 a bbl discount to WTI the price received should exceed our $75 target.

Oil demand continues to increase. In the first nine months of 2012 the weekly traffic of major North American (US; Canadian and Mexican) railroads show a Y/Y increase of petroleum products of 35.5% (42% in the US) and a decline in coal shipments by 8.6% (down 9.6% in the US)

Given the encouraging news and the high probability that we will be increasing our estimates we have increased our target price to $2.00 a share.

Please visit Ian Gilson's coverage page at scr.zacks.com to access a free copy of the full research report.