CFO Blog: 11-12-2011

All,

By now I'm sure everyone has seen the press release on our recent lease acquisition. We're also making good progress on our development program, so I think an update is in order. I'll start with a drilling update.

We reached TD on the Felix Brandt #12 well last weekend. The log looks good so we cased and cemented it (the first step in the completion process). We perforated and swabbed this week and the fluid looks very good. By this I mean that the fluid that is entering the well bore from the target formations has good color and odor, indicating the presence of crude oil. I've included a picture (above right) of the fluid coming from the wellhead during one of the swab runs.

The paragraph above deserves a little more explanation. (If you're already familiar with how oil & gas is produced you can skip to the second paragraph below). When a well bore is "cased" this means that the operator has run heavy pipe (in this case 4.5" internal diameter) to the bottom of the hole. This casing maintains the structural integrity of the well during production. Cement is pumped into the space between the casing pipe and the hole to create a bond and allow us to isolate specific zones for production. The casing and cement protects groundwater from contamination and allows us to produce fluids only from the target formations.

In order to "open up" the target formations we perforate the casing and cement at the appropriate depth. This involves directional explosives and electric logging tools that I won't go into here. Once fluid begins to flow into the well bore, we "swab" the well. This means we run a tool down to the bottom of the hole that pulls residual fluids from the casing so we can get a look at what the target zones are actually producing. In most cases, the fluid is an emulsion of oil and saltwater. The percentage of oil in the emulsion is referred to as the "oil cut" and the more the better! We won't know where the oil cut will settle out on any of the wells we're currently drilling for a few weeks, but as you can see from the picture we're starting from a good base.

We spudded in the Leonard #6 well on Tuesday and should TD today (Saturday). I'll have more info on that well in the next update.

The new acreage that we recently acquired is part of the Leonard/Brandt project in southeastern Coleman County. In our original acquisition of the Brandt lease, we acquired "well bore" leases which means we only got the acreage around each well. (This is not the case with the Leonard - we acquired that entire lease). Well bore leases allow you to produce the wells and do some things to enhance production, which we have been doing for the last year; however, these leases don't allow you to drill any new wells.

As part of our development plan for the Leonard lease we did a geologic evaluation of the entire area. It became apparent that there were some good prospects on the Brandt acreage that we did not currently have under lease, so I made a deal with the mineral owner to acquire the balance of the acreage. We didn't pay any bonus, but we did commit to drilling at least one well on the new acreage within a year. The Felix Brandt #12 is that well, so we have "earned the acreage" and increased our lease position from 119 acres to 395 acres by drilling a well we wanted to drill anyway. That's an example of how we're creating value while conserving cash and avoiding dilution of our equity position in our oil & gas assets.

This has turned into a longer post than I'd intended, but I hope it you find it useful. Please feel free to leave comments or email me directly. Have a great week.

Shannon McAdams
Santa Anna, TX


PS: The article below is a good comparison of the actual costs and benefits of natural gas versus wind for electricity generation:

Gas Against Wind | Newgeography.com:

CFO Blog: 11-01-2011

All,

Things are progressing on our 4Q11 drilling program. After analyzing the open-hole log on Leonard #4 we perforated yesterday. This morning we swabbed the well (essentially cleaned drilling and completion fluids and solids from the wellbore) and installed production equipment. We'll hook up the power tomorrow morning and begin testing. As a reminder, it could be as long as two weeks before we have a good test on the well. We'll establish a baseline production level then make some treatment/stimulation decisions. I'll get the info out as soon as we're comfortable with it.

We spudded in the second well in the program this morning, the Felix Brandt #12. We made good progress today and should be at the casing point by the weekend. Again, I'll keep you informed of our progress.

I hope everyone finds these updates useful. We won't have huge announcements like a new drilling program every week*, but I'm trying to keep you informed on the day-to-day work that we're doing to build our E&P business. It's not sensational, but this is the kind of work that's required to create real value. Over time I believe the market will recognize it.

(*Nobody does unless they're wildly sensationalizing relatively meaningless developments, but that's a whole different discussion) 

Best,

Shannon McAdams
Santa Anna, TX


PS: This is a great article, take a few minutes to read it -

The Energy Revolution That Keeps Carbon on Top: Nathan Myhrvold - Businessweek:

-SM

CFO Blog: 10-25-2011

All,

We're well into our drilling program now which is keeping me really busy. I just wanted to give everyone a quick update and share an interview that I think will help everyone better understand our strategy.

We finished drilling our Leonard #4 well yesterday. The log looks good so we cased and cemented late last night. It will probably be a couple of weeks before we have a good potential test, but I'll let you know as soon as we have hard info. (I can go into the precise reasons why testing takes time if anyone is interested - just put it in the comments).

The good people at OilVoice were kind enough to do an interview with me earlier this month. No, we didn't pay them for the piece or for placement. No, we didn't solicit them to do the interview - they came to us. And finally, no, we don't advertise with OilVoice. Given all of that, I take their interest in our story as a good sign.

OilVoice Interview

I'll keep everyone updated as we progress. Check back often and in the mean time feel free to comment or email me questions directly.

Best,

Shannon McAdams
Santa Anna, TX

CFO Blog: 10-19-11

All,

This is just a quick note to clarify something in our press release. When I say that we expect the wells to average 5,000-6,000 barrels of oil over five years, I mean that each well is expected to produce 5,000-6,000 barrels of oil. That's 25,000-30,000 barrels for the program over five years.

The reason I refer to average numbers is that there is likely to be significant variation from well to well. Some could be significantly above that range, others far below (or even the occasional dry hole). That's part of the reason for a multi-well drilling program: diversification of risk.

I'm in West Texas coordinating the drilling program now. We spudded in the Leonard #4 well today and expect to TD (reach total depth) over the weekend. Things are moving fast now, so check back regularly - I'll keep you updated on progress.

-Shannon McAdams
 Santa Anna, TX

CFO Blog: 10-18-2011

All,

By now you've probably read the press release for our 4Q11 drilling program. I'm heading to West Texas today to manage the drilling and completion, so I'll keep this post brief.

The take-away from the drilling program is that it could more than double our current production levels. This assumes we make our baseline estimates of average performance for the five wells, which we believe are conservative. Keep in mind that there is likely to be significant variation in performance for individual wells, so I recommend that everyone reserve judgement on the program until we finish testing.

The more important item announced today is the partnership with BlueRock Energy Capital. I worked with these guys during my previous life as an investment banker. Their team is made up of professionals with direct experience in oil & gas development. They spend most of their time evaluating management teams and the assets that they've assembled. The fact that they not only gave us verbal encouragement, but also put their money behind us means a lot. We'll do everything we can to make sure that bet pays off for them and for Adino's shareholders.

I'd like to point out one more thing about our new financial partners. Their primary funding comes from Tudor, Pickering, Holt & Co through its private equity arm, TPH Partners. TPH is probably the premier independent investment bank in the energy industry. In addition to evaluation by BlueRock's team, Adino had to gain support from TPH to close funding for our new drilling program. It's hard to overstate the importance of validation of our plan by these two groups of seasoned energy professionals. You can learn more about BlueRock here and TPH here.

I'm off to West Texas. I'll keep everyone updated on our progress so check back regularly. You can also sign up for email alerts at the top right of this page. I'll never share your email address or use it for any purpose other than to update you on posts from this blog.

Let's go make some oil!

-Shannon McAdams
 Houston, TX

The Weekend Interview with Harold Hamm: How North Dakota Became Saudi Arabia - WSJ.com

This is a great interview with a true oil & gas entrepreneur. He's a great example of what's possible in the industry with hard work, discipline and a little luck. It's disgusting that the EPA is using selective enforcement to slow the development of industries of which the current administration does not approve.

The Weekend Interview with Harold Hamm: How North Dakota Became Saudi Arabia - WSJ.com:

CFO Blog: 10-7-11

All,

It's been quite some time since my last post. We've been busy in the intervening months streamlining and improving our field operations as well as preparing for another leg of growth in our E&P business. There's a lot to discuss, so let's jump right in.

We have completed and tested the Leonard #2 and #3 wells with good results. The two wells tested at a combined 14 barrels of oil per day, which is well above our targeted average for the area. The economics on these wells are excellent, mainly because of the low drilling and production costs. We intend to continue to deploy capital on this program which should significantly improve our cash flow.

   

As I mentioned above, we've made improvements to our field operations, primarily in the area of personnel. We've upgraded the quality of the team and reduced headcount. Additionally, we have tweaked our production methods which has improved lease productivity, especially for the more mature wells. This consumed quite a bit of time over the summer, but I am very happy with our new field team and have confidence that we will continue to see measurable improvements in the coming weeks and months.

Some of you may be wondering why I haven't been posting recently. Frankly, I wasn't certain anyone was listening. Of course we continued our SEC reporting, but I wasn't sure the color that I try to provide through the blog was adding value for anyone. After hearing from some of you and reading some of the feedback on various sites, I can see that I was wrong. So from here on out I'll provide regular updates through this blog. We'll continue to do press releases for big items, but if you want to keep up with our progress in more detail then check back here regularly.

Speaking of communication, you may have noticed from our filings that we've retained RKM Capital to increase awareness of our Company and the progress we're making. You can find their latest promotional materials here. 

I hope this has been helpful. As I mentioned above, we're moving into a new growth phase. Keep an eye out for updates and make sure to check back here on a regular basis. Have a good weekend and Roll Tide!   

Best,

-Shannon

Goldman Ups Oil Forecast - WSJ.com

Consensus around higher oil prices is pretty solid now. Which reminds us of the mirror image of the industry truism quoted below: "The cure for high prices, is high prices."

See paragraph four:

"We believe that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand," Goldman Sachs said in the research note.

Goldman Ups Oil Forecast - WSJ.com

As Natural Gas Prices Fall, the Search Turns to Oil - WSJ.com

Key stat in paragraph three: 40% of US natural gas production is sold below break-even.

Remember the old industry saying: "The best cure for low prices, is low prices."

As Natural Gas Prices Fall, the Search Turns to Oil - WSJ.com

CFO Blog: 5-18-11

I wanted to give everyone an update on our drilling program and clarify my comments in the last post regarding the wholesale fuel business. As I indicated previously, we're significantly increasing the pace of development of our E&P assets so let's start there.

We have completed the Leonard #2 well (cased, perforated, stimulated) and are installing production equipment today to begin testing. The fluids produced during the completion process look very good - much better than the early indications on the Leonard #1. I'm not going to guess at estimate a number for the 24 hour IP test, but I expect it to be substantially better than the Leonard #1. 

I've noticed a couple of comments about my last post that indicate that some investors may have taken what I wrote to mean that we are not pursuing opportunities in wholesale fuel distribution. This was not my intention. What I was trying to communicate is that we fully recognize the risks associated with this business and are being careful. This means we're looking for the right way to enter the business, for example through a JV. We could also monetize the asset and possibly retain some portion of the ongoing business. My point is that we're looking to maximize shareholder value without taking on risks that the company can't handle.

We are spudding in the Leonard #3 well today or tomorrow. The #2 well went from spud to completion in 12 calendar days - a vast improvement over our first well. As I wrote in my last post, the operational tempo is increasing substantially. Stay tuned!

Best,

-Shannon 

CFO Blog: 5-9-11

While we are all waiting for results from the Leonard #2 well, I wanted to take a moment to address investor questions regarding our plans for wholesale marketing of diesel fuel and other distillates. I understand that the Company has had significant aspirations in this area, so our plans are naturally of interest to our shareholders.

First, we need to understand a few things about wholesale fuel marketing. It is much more complicated than simply selling fuel through the terminal. The basic business (for a company like Adino) consists of purchasing fuel in bulk that is delivered via pipeline connection to the terminal and stored there for sale to fuel haulers and station owners. This can be an excellent business - buy a commodity in bulk at a discount and sell very large quantities at a small per-gallon margin. As long as you're able to consistently turn your inventory, returns on capital can be more than satisfactory.

However, as the old saying goes, there is no free lunch. The real risk in the business is that you have to purchase several days or weeks of inventory at once. Diesel fuel is priced daily (sometimes several times per day) so if you're on the wrong side of a price trend (declining prices) you can take some pretty big hits in short order. Over time these should balance out, but from month to month or quarter to quarter it can be very volatile.

So where does that leave our Company? At this point, we have a solid cash producing asset in the fuel terminal. Both revenues and cash flow are stable - a big plus for an early stage oil & gas exploration and production company. We are deploying this cash flow to build value in the E&P business and expect to continue to do so.

It's important to understand that we're always looking for ways to optimize our assets to maximize shareholder value. We could potentially get into fuel marketing through a joint venture or some other structure in which we would partner with an experienced commodity risk manager. We could also monetize the asset. We could continue to redeploy the monthly cash flow into the E&P business. Or we could take some other route that either hasn't yet presented itself, or that we aren't yet ready to discuss. But whatever we do, it will be designed to create the greatest possible value for our shareholders.

That's all for now. Look for press releases regarding the Leonard #2 well this week. It's going a lot faster than the first well - a pace that we intend to keep up!

Best,

-Shannon

CFO Blog: 5-5-11

It's been a couple of weeks since my last update, so there are several items I'd like to cover. First, there has been quite a bit of selling in ADNY stock recently. I want to be clear that none of these sales were done by management or other insiders. There are a lot of reasons that someone might get out of a position other than fundamentals around the stock. I can't speak for them, but our plans are to continue to develop the E&P business and otherwise maximize shareholder value through our other assets.

Which brings me to the sale of our drilling rig. For those not familiar with oil & gas drilling, a quick primer on drilling economics is in order. Drilling rigs are designed and rated for specific depths. The deeper the rating, the larger the rig. Larger rigs consume more fuel and require larger crews to operate. The thing to understand is that whether a rig is drilling at 500' or 5,000', it still takes the same crew and similar volumes of fuel. So a rig designed for 5,000' costs significantly more to operate than one designed for 2,000'. This makes it much more expensive to drill a shallow well with a bigger rig than with a rig rated for a depth closer to the planned depth of the well. The wells that we are drilling on our current leases were too shallow to efficiently drill with the rig we had, so when the opportunity arose to sell the rig for a good price, we did so.

Look for an acceleration of the operational tempo through the summer. Thank you for your confidence in our team and stay tuned - things are getting exciting now!

Best,

-Shannon

CFO Blog: 4-18-11

As you can probably tell, we've been very busy lately. We completed our first well on the Leonard lease, acquired a new lease, produced and released our 10K and many other things that I won't go into at this point. We're steadily building and developing our lease position, as well as our team, which together form the foundation of our growing oil & gas exploration and production company.

I'm sure by now everyone has read about the results on the Leonard #1 well. This is a great opportunity to discuss one of the key advantages to our early stage strategy: low cost, low risk development. Even wells that come in below 5 barrels of oil per day can be commercial. This is because these shallow wells have such low drilling costs, it doesn't take a lot of hydrocarbons to make them pay off. The numbers aren't sexy, but by you can build a company on the cash flow. Plus, every once in a while you can hit a really good well (even with low upfront investment), and then the economics are extraordinary.

That said, investors should understand that we're growing our reserves both through the drillbit and through acquisitions. Stay tuned on both fronts.

Best,

-Shannon

CFO Blog: 3-4-11

I expect everyone is anxious for results on the Leonard #1 Well. We should be ready to release testing results next week; however, I'd like to update you on progress.

As discussed in previous posts, completion of the first well on a lease can be time consuming. If done correctly, it requires the application of various completion techniques (acids, chemicals, fractures, etc) in discrete steps so as to isolate their effects. This is what we've been doing with the Leonard #1. As our friends over at iHub so helpfully pointed out, I did indicate that we would have preliminary results last week. Indeed, we do have preliminary results. But we will not release preliminary results because they are precisely that: preliminary.

That said, we will apply what we expect to be the final stimulation to the well on Monday. Final testing should take 24-48 hours, so we should be ready to report solid data soon after that. In the mean time, please keep the comments coming. Constructive feedback from our investors is always welcome.

Best,

-Shannon

CFO Blog: 2-25-11

With the recent global tension and accompanying volatility in the oil markets, it can be tempting for even seasoned energy professionals to shorten their time horizon and focus on the next piece of news. Whether prices are high or low, it is precisely these moments when it can be most valuable to take a step (or possibly several steps) back and remind ourselves of the nature of our business.

Market volatility can make it seem that price signals happen in seconds or minutes, but the fundamentals don't work that way. Supply and demand adjustments happen over much longer cycles, mostly measured in years. It reminds me of one of my favorite axioms of the oil & gas business: The best cure for high oil prices is high oil prices, and the best cure for low oil prices is low oil prices. In other words, supply and demand will balance and are most responsive at the extremes. 

I've attached an excellent interview from last week's Barron's. Charles Maxwell (currently with Weeden & Co) has been in the energy business since 1957. When someone with that kind of experience is willing to talk with you, it usually pays to listen. Enjoy.

Best,

-Shannon

CFO Blog: 2-19-11

As the recently appointed CFO of Adino Energy Corporation, I'd like to take a moment to introduce myself and open the conversation about the Company and our plans for the future.

You can read my bio on this site, so I won't rehash it here. I'd like to focus on why I decided to join the Company. I've worked with Adino's team since 2008 when they were clients of one of my previous employers. I developed a solid understanding of the Company, its history and have had the privilege of helping to develop plans for the future. I know the people and the assets and have great confidence in both. I'm very, very excited about Adino's future and look forward to helping the team succeed.

That said, I'm sure everyone would like an update on the Leonard #1 well. After we made the completion decision we ran into a couple of weeks of frigid weather. Extreme cold makes production very difficult and accurate testing almost impossible. (I know, oil is produced in much colder places, but it doesn't make sense to invest in extreme cold weather production equipment when it's not necessary for the other 50 weeks of the year). We finally moved into the testing phase this week and the results so far are very encouraging. We completed an acid treatment yesterday and we're installing a larger pump to move more fluid. We should have preliminary results next week.

This is a good time to discuss our approach to a new lease, in this case the James Leonard lease. When drilling the first well, a good operator invests time and capital in learning as much as possible. We examine the mud during drilling, we try various completion techniques and treatments. And we do it methodically so that we can isolate the effects of each technique. This way we know exactly what to do with each subsequent well to maximize production on the lease. That's what we're doing right now on the Leonard. We'll announce the numbers when they're finalized, but in the mean time it's important that our stakeholders understand the process and why we're doing what we're doing. I've posted pictures from the acid treatment on the Leonard #1.

I hope this is helpful for everyone. I plan to post general updates, add color to our story and comment on the industry in general. Please feel free to post comments and questions. I'll try to address as many as possible. In the mean time, you can follow me on Twitter @energy_finance or email me at smcadams@adinoenergycorp.com. I look forward to the conversation. 

Best,

-Shannon

Reaganomics Vs. Obamanomics: Facts And Figures - Peter Ferrara - On The Cutting Edge - Forbes

The following piece makes some excellent points about government policies and the debate about whether they should be pro-growth or simply re-distributive. The summary of the economic expansion of 1982-2007 is extraordinary.

Reaganomics Vs. Obamanomics: Facts And Figures - Peter Ferrara - On The Cutting Edge - Forbes

Donald J. Boudreaux: If Supermarkets Were Like Public Schools - WSJ.com

Sometimes it takes a good analogy to cut through the obfuscation and get to the core of the issue.

Donald J. Boudreaux: If Supermarkets Were Like Public Schools - WSJ.com

Breaking News: The Climate Actually Changes! - Larry Bell - The Bell Tells for You - Forbes

The recent failures to reach agreement for global emissions limits appear to be shifting the climate debate in meaningful ways. There appears to be a gradual realization that the entire debate about anthropogenic climate change is pointless. Even if human activity is causing climate change in measurable and predictable ways (the predictability claim being particularly dubious), there will be no global agreement to restrict growth in order to reduce emissions of GHGs. This leads us to a simple logical conclusion: if we are unwilling or unable to control the causes of climate change (and the climate does change - a perfunctory look at the geologic record tells us this) then the best we can do is prepare for it.

The article below provides an interesting list of important historical events that were, in large part, driven by changes in climate. It provides a good jumping off point for consideration of how to prepare for inevitable climatic changes. Give it some thought and feel free to share in the comments section.

-E_F

Breaking News: The Climate Actually Changes! - Larry Bell - The Bell Tells for You - Forbes

Three More Attacks on Civilization - Jeffrey A. Tucker - Mises Daily

Three More Attacks on Civilization - Jeffrey A. Tucker - Mises Daily

This is an entertaining read. Take a few moments to ponder they ways your life is changed and your choices are limited - in plain view but without your knowledge or consent.

-E_F

Oil Prices: Investors Are in the Driver's Seat | STRATFOR

The following article is from STRATFOR, one of the best resources available for energy investors. The main thrust of the piece is the role of pure financial players in the commodity markets; however, the discussion of global money supply is more interesting and important. Enjoy.

- E_F

Oil Prices: Investors Are in the Driver's Seat | STRATFOR

Chevy Volt: The Car From Atlas Shrugged Motors - Forbes.com

An excellent example of interventionist government policies, particularly instructive regarding government's (lack of) success in picking winners. A good lesson to bear in mind when considering "green" or "clean" energy subsidies.

Chevy Volt: The Car From Atlas Shrugged Motors - Forbes.com

The Great Texas Wind Swindle: Property Owners vs. the State (Part I) — MasterResource

This is a great example of how energy finance is distorted by regulatory intervention. That's not to say that all regulation is bad. Some regulations are designed to improve safety and protect people and the environment. Other regulations are designed to subsidize uncompetitive energy sources, which inevitably leads to the formation of a class of entities with a strong interest in continuing subsidies. The former can generally be classified as "good" regulation (with some notable exceptions), the latter as "bad" regulation (in virtually every case).

The Great Texas Wind Swindle: Property Owners vs. the State (Part I) — MasterResource