Investment Summary:

AMAZ holds attractive core oil and gas assets in the Permian Basin and U.S. Gulf Coast: it has ~75,000 acres in Pecos County, Texas; Lea County, New Mexico; and Walthall County, Mississippi. Pecos County is a rich production resource area with proved production history. It has more than 1,863 exploration and production leases operated by ~192 companies. The major oil companies operating in Pecos County are Chevron, Conoco Phillips Apache Corporation, Kinder Morgan, and Occidental. This field also accounts for more than 21,000 wells, with more than 30 thousand barrels per day (kbpd) of oil production.

Fig 1: Pecos County – A strategically placed asset

Source: Amazing Energy, Diamond Equity Research, January 2020

The leasehold area lies within the Central Basin Platform of the Permian Basin, west of the Yates Field and east of the Taylor Link Field. More specifically, AMAZ’s leasehold property lies within the White & Baker Field and portions of the Walker Field. The two fields have produced over one billion barrels of oil to date.

Fig 2: Strategically located acreage

Source: Amazing Energy Presentation, Diamond Equity Research, January 2020

Holding assets adjacent to a proven oil field is often a good indicator that production from the property could be strong, if properly developed. AMAZ began drilling operations in October 2010. Its current field operations center on optimizing relatively shallow vertical wells, referred to as the Queen Sand development program. The company is also evaluating drilling deeper wells past the Queen Sand by using vertical drilling, as it has in the past. AMAZ estimates potential of thousands of additional drilling locations (at least 3,500), which could result in increased production.

Attractive core oil and gas assets in the Permian Basin

In the Permian Basin, located between West Texas and a part of southeastern New Mexico, experts still see substantial oil and natural gas potential . Exploration of this oil-rich area has fundamentally changed the energy dynamic not only in the U.S., but also worldwide, having attracted oil and natural gas businesses for decades.

Fig 3: A map of the Permian Basin

Source: Naturalgasintel.com, Diamond Equity Research, January 2020

The Permian Basin – One of the United States most important oil sources

The Basin covers an area ~250 miles wide and 300 miles long – a substantial 75,000 square miles, with oil and gas produced from depths of a few hundred feet to miles below the surface. In context, more than 30 billion barrels of oil have been extracted from the area since 1923¹.

The Basin’s importance to almost all U.S. oil and gas companies has continued to grow, evidenced by the fact that it accounted for ~40% of expenditure on oil exploration acreage acquired in the U.S. in 2018 according to Shale Industry News.

Technological advancements have added to the Permian Basin’s attractiveness. Moreover, this reservoir is largely untapped, making it even more attractive to oil and gas companies. Research firms continue to raise their estimates of reserves buried within the Permian Basin, and it is believed that it could be the world’s richest oil field. Recent studies suggest that the area has far more deposits than previously forecast, estimating a reserve potential of 60-70 billion barrels of oil. At today’s crude oil prices, resources in area could be worth more than $3 trillion.

There are technological reasons for rising estimates of the Basin’s reserves. Two technologies have had significant impact on the U.S. oil industry – hydraulic fracturing (often referred to as fracking) and horizontal drilling techniques – both of which enable far more efficient extraction of oil from shale formations. Often, as is the case with some Permian Basin drilling, fracking and horizontal drilling are combined to maximize production.

The Basin also benefits from highly developed energy infrastructure, being connected to several established pipelines and other essential infrastructure required for production and transportation. Additionally, it benefits from friendly tax policies in the state of Texas.

Moreover, the increase in oil prices since 2016 has made the Basin more economical. With prices remaining above $50 per barrel, it has become a profitable production area, and it is expected to remain attractive over the long term.

Growing importance – Production from Permian slated to grow faster than rest of U.S. assets

U.S. oil production grew by 1.5 million barrels per day (MMbbl/d) in 2019 to 12.3 MMbbl/d), according to one of the energy industry’s leading data, software, and insights company, Enverus. This was a 13% increase over 2018. However, Enverus estimates that production growth could moderate and increase only by a 6% CAGR from 2020 to 2023 (adding 3.2 MMbbl/d) to reach 15.5 MMbbl/d in 2023.

Fig 5: US crude – Production forecast

Source: Enverus, January 2020

Most of this growth could come from the Permian Basin, where production grew by 0.8 MMbbl/d in 2019, i.e., average production of 4.3 MMbbl/d. Enverus suggests that production at Permian could grow to an average of 5.7 MMbbl/d by 2023, i.e., at a 7.3% CAGR from 2020 to 2023. This growth in U.S. oil production will likely be driven by substantial land bands that are currently de-risked and economical at prices of $55 per barrel or less West Texas Intermediate (WTI).

Fig 6: Permian to lead production – Estimates revised upwards

Source: US EIA, Diamond Equity Research, January 2020

AMAZ leased Permian asset at very low cost - unique in the industry

AMAZ has received the lease right of its acreages (70,000 acre) in the Permian for a lower rate. The Company paid (continues to pay) ~$200-$300 per acre, while acreage in Permian is very high at ~$60,000/acre. This is unique for any Oil and Gas Company and works in favor of AMAZ. The lease term allows AMAZ to just drill and bank time its drilling commitment as required. Further, The Company can just go out and lease part of the acreages that they need when it is ready to drill a well. Moreover, AMAZ doesn’t have to go through the financial burden to maintain the lease agreement (lease terms require Companies to drill the acres to maintain the lease). Thus, acquiring the acreages at a lower cost frees up capital for asset development in the shallow zones (~2,000 feet and up).

The following table summarizes AMAZ’s leased acreage as of July 31, 2019. The company has 2P reserve life of 52 years.

Table 1: AMAZ has rights in multiple locations

Source: Amazing Energy, Diamond Equity Research, January 2020

AMAZ has also acquired acreage in Lea County, New Mexico. The properties are in the Northeastern Shelf of the Permian Basin, where AMAZ has a 56% working interest in two leases and a 100% working interest in a third lease, and total 16,904 gross and 10,501 net effective acres. Its JV partner Devon Energy will own a 30% working interest in the asset, while the rest will be held by EOG WI Partner. These assets are “held by production” in nature. AMAZ acquired the assets from Wyatt Energy in January 2019, and has acquired several producing properties, constituting 5,385 gross acres and 4,682 net acres, in Lea County. AMAZ operated seven producing oil wells as of July 31, 2019. The assets have ~93 potential horizontal drilling locations, targeting the prolific San Andres area. A recent reserve report produced by petroleum consulting firm Ryder Scott calculates potential reserves of 20.2 million barrels of oil equivalent and estimated ultimate recovery (EUR) of 250 thousand barrels of oil per well, pegging the PV-10 at ~$146.7 million.

AMAZ’s strategy for this location is to increase production by drilling shallow, low-cost wells, typically with investors sharing the risk and profits. Most of the wells it has drilled are completed for ~$275,000 or less at depths of ~2,000 feet.

AMAZ also holds an interest in assets located in Walthall County, Mississippi, known as the “Denver Mint Project”. These assets consist of 900 acres of leasehold acreage, nine oil wells and a saltwater disposal well. This field was discovered in 1970, has produced over 6 million barrels of oil equivalent from the Lower Tuscaloosa B, C, and D sands and ranges in depth from 10,100-11,100 ft. AMAZ’s acquired assets include the associated production facilities and installed infrastructure.

Fig 7: Denver Mint Project – Prolific production

Source: Amazing Energy, Diamond Equity Research, January 2020

We believe this infrastructure will bode well for AMAZ, increasing the assets’ current production profile. AMAZ plans to increase production from these fields by (1) restoring existing Lower Tuscaloosa production, (2) pursuing a Lower Tuscaloosa water flood project, (3) perforating and testing shallow, 3,300 ft. zones, and (4) recompleting wells in other Lower Tuscaloosa zones. The combined efforts could allow for recompletions up-hole and increase production over the next one year. The company has already closed $4.5 million in financing for the development of the Denver Mint Project. The assets have the potential to add approximately 300 barrels of oil per day (bopd) to AMAZ’s production by December 2020.

Fig 8: Projected oil production from Denver Mint Project

Source: Amazing Energy, Diamond Equity Research, January 2020

The company’s total 2P reserves were 709.8 barrels of oil equivalent as of July 31, 2019. Proved reserves accounted for 70%. The following table summarizes AMAZ’s assets, with estimated 2P oil and gas reserves as of July 31, 2019.

Table 2: AMAZ’s assets and their potential – 2P

Source: Amazing Energy, Diamond Equity Research, January 2020

Table 3: Summary of oil and gas reserves as of July 31, 2019

Source: Amazing Energy, Diamond Equity Research, January 2020

AMAZ’s current production

AMAZ currently produces ~100 barrels of oil equivalent per day with a 77% net revenue interest. It had drilled 26 wells across its properties as of July 31, 2019. Of these, 16 are in production, eight are shut for further evaluation and two are permanently closed.

Jilpetco – Oil Service Company Adds Synergies

In 2016, AMAZ acquired Jilpetco, an oilfield services company that owns and operates drilling, completion, and workover rigs, and leases operational services equipment. While Jilpetco had previously provided services for other companies, it became a wholly owned subsidiary in 2016, servicing only AMAZ’s assets and related properties.

Jilpetco introduced important assets to the AMAZ group, including multiple rigs, trucks, trailers, and heavy equipment. Management is positive about the acquisition, as it also introduced experienced staff, enabling AMAZ to reduce costs and increased the capability to drill new wells efficiently. We expect Jilpetco to grow at the same pace as AMAZ’s Pecos County operations.

AMAZ is a U.S. independent oil and gas exploration and production company headquartered in Plano, Texas. It was first established in 2008 as a Texas Limited Liability Company and in 2010, it changed its domicile to Nevada.

AMAZ’s primary operations are in the Permian Basin and in the Gulf Coast. It has over 75,000 acres of exploration rights in Pecos County, Texas; Lea County, New Mexico; and Walthall County, Mississippi, with Pecos County being its most significant revenue driver. AMAZ is focused primarily on drilling shallow (2,000- 4,000 ft) oil and gas wells, with the acreage secured on attractive financial terms (~$200 per acre), with stacked pay zones and significant vertical and horizontal potential near large formations.

AMAZ has an experienced management team with extensive industry financial and business experience, having built oil and gas companies from the ground up and with experience working at larger competitors. AMAZ is aggressively developing its existing operations and simultaneously pursuing reservoir rights to build large acreage for future development.

The company was previously listed on OTCQX prior to uplisting to the OTCQB in February 2020. We believe that trading on this platform is noteworthy and a significant upgrade from trading on the regular OTC market with the company looking to move to senior exchange in the future.

The company has also entered multiple transactions to grow inorganically. We believe the most notable and, by far, the most important one was its acquisition of Jilpetco, Inc., an oilfield services company, in 2016. This acquisition has enabled AMAZ to reduce costs and have the capability to drill new wells efficiently.

Key Investment Items

Competitive Landscape

AMAZ is engaged in the acquisition and exploration of oil and natural gas properties. Its main operation is oil and gas exploration and production. This business is extremely competitive, and industry participants range from large conglomerates Chevron, Conoco, and Exxon to smaller players like AMAZ.

Growth in Reserves and Production

Production volumes to increase rapidly – AMAZ’s oil and gas (O&G) production levels have increased (reaching a peak of 62.9 bopd in 2016). However, production fell to 32.4 bopd in 2018 due to lower production at existing fields. The company has since worked to address the decline. AMAZ has also acquired assets to increase production. With inorganic growth (in Lea County and Denver) and organic growth in Pecos County, AMAZ’s production could increase significantly. The model projects it to add ~58 kboe/year until FY25E.

Growth projects to add a cumulative 539 kboe of production a year, starting in 4QFY20E – The Denver Mint Project (Mississippi) and Lea County (New Mexico) could potentially add 539 kboe/year (peak production: 878 kboe/year, with the project starting in FY20) until FY25E. We have factored in the full project life for these projects but expect most of the production between FY23E to FY30E. However, we have not factored in potential additional production from Pecos County, pending further studies. We may revise our production targets periodically, based on these studies.

Fig 9: Production – Modelled to grow at a 73% CAGR from FY20 to FY25E

Source: Amazon Energy, Diamond Equity Research, January 2020

Valuation

AMAZ’s primary leasehold in the Permian Basin in West Texas is its main asset, and it controls over 75,000 acres in rights in Texas, New Mexico and Mississippi. One of the major positives for the company is its low-cost lease terms (~$200/acre). The lease terms are unique for companies operating in the oil and gas space. We value the company using an NPV analysis and have also performed sensitivity analysis. Our combined valuation analysis is shown below and subject to numerous assumptions, which investors can modify given their expectations and investors should be aware of the substantial risk in oil and gas investments.

Table 4: Key Assumptions

Source: Amazon Energy, Diamond Equity Research, FactSet, January 2020

We value AMAZ based on NPV [WACC: 6.4% and a long-term oil price assumption of $55/barrel (bbl); forecast-period oil prices are from FactSet] to derive our target price of $0.35/share, representing upside potential (even the conservative side of the range indicates upside potential from current trading levels). We assign the producing asset an NPV of $3.1 million, while we derive most of the values from the potential asset valued at an NPV of $34.5 million. However, we have not assigned a value to any potential production from Pecos County and will revisit our valuations on any significant developments.

Source: Amazing Energy, Diamond Equity Research, January 2020

Bull-Bear - Case analysis

We outlined several scenarios to assess how the NPV of AMAZ fluctuates and its potential impact on the share price. The scenarios assume a change in oil price of $5/bbl per interval and a change in production of 2.5 million boe/year. Our best-case scenario yields an NPV of $60.7 million, and the downside scenario an NPV of $20.4 million, corresponding to the best-case TP of $0.59/share compared with $0.17/share at the lowest level. We note these valuations are subject to significant assumptions and investors need to be aware of the significant risk in energy investments and do not function as formal price targets.