For 2013, LRR Energy has allocated $28.1 million -- more than 80% of its total 2013 capital budget of $34 million -- to this field. So far, LRR Energy has drilled 23 wells and has recompleted 21 wells at the Red Lake field. Through its focus on this oil-weighted acreage, LRR should be able to increase its oil output in the coming years.
Moreover, although the business has not announced the details of its 2014 capital expenditure, the management has stated that the new budget will be in-line with last year's expenditure. The budget, as in 2013, is going to focus on the development of the oil-weighted properties. The official announcement should come within a few weeks. It is clear that LRR Energy is targeting an increase in its oil production in the coming years.
LRR Energy has grown based on acquisitions and drop downs from its predecessor, Lime Rock Resources and its related funds. Since its IPO, LRR has done three drop-down deals valued at $125 million. Lime Rock still has around 30 million barrels of reserves, which could become potential drop-downs in the future. Most of these reserves are oil-weighted and could become an attractive addition to LRR's portfolio.
Moreover, Lime Rock Resources has also recently created a new $750 million fund to acquire oil and gas properties worth $1.5 billion. In the long term, these properties could also become drop-down candidates for LRR.
Investors should note that although the acquisition and drop-down environment has been active, the pricing environment isn't favorable right now. This means that despite the uptick in activity, there is little chance of a major acquisition in the near future.
On the other hand, the company's performance in 2013 has not been impressive. In the first nine months of its operations in 2013, LRR has reported no meaningful increase in production. Its adjusted earnings before interest, taxes, depreciation and amortization have dropped by 5.7% from last year to $59.12 million. This raises questions over the firm's ability to grow its top-line and production levels.
LRR Energy has now narrowed its full year production guidance from the previous range of 6,300 to 6,550 barrels per day to 6,400 to 6,500 barrels per day.
This means that even at the high end of its updated guidance, the business would show a slight improvement (+3.1%) from average net production in 2012. Moreover, even if LRR manages to hit the high end of its guidance, then its average daily production would still be low compared to the average net production of 6,543 barrels per day in its few weeks of operations as a partnership in 2011.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.