1 Small Cap to Watch

Very few companies transform themselves in a short period of time like Samson Oil & Gas (ASE: SSN) has over the past two years. In just that time frame, the company radically shifted its production mix and cleaned up its balance sheet, becoming a much different company.

Changing things up
Last year, Samson sold part of its DJ Basin Niobrara acreage to Chesapeake Energy (NYS: CHK) in a transaction valued at $3,150 per acre. This transaction strengthened the company's balance sheet, which included a net cash position of $54 million as of the latest quarter.

With a war chest built up, the company plans on developing its core projects, all of which target liquids. This transformation was actually visible as early as mid-2010. The company went from having 15% of total production being oil to 72% at the end of the most recent quarter. Now that it has successfully raised cash and de-emphasized natural gas, it must rapidly increase production so that it can fund drilling through its own cash flows.

Acreage breakdown
Samson's main producing asset is the North Stockyard Field, where the company has five producing wells with Bakken potential. So far, these five wells have achieved initial production rates of between 900 and 2,936 barrels of oil equivalent per day, or BOEPD. One additional well is waiting to be fracked, and the company expects to drill six additional wells, four in 2012 and two in 2013. These wells should provide reasonably strong results, since they're infill wells being drilled alongside its producing wells.

The next asset is the Roosevelt Project, located in Montana. The company has 26,000 net acres, good for 81 net drilling locations. While this acreage is considered by some as a fringe play, the company has high hopes and will be completing two initial wells in cooperation with Halliburton (NYS: HAL) . There have been some decently producing wells in the area, so there's a reasonable chance the acreage is prospective.

To the east of Samson's acreage, Brigham Exploration, since acquired by Statoil (NYS: STO) , has two nearby wells: Its Swindle No. 16-9 well had an initial production rate of 1,065 BOEPD and its Rogney No. 17-8 well had an IP of 909 BOEPD. To the south of Samson's Roosevelt Project, Continental Resources' (NYS: CLR) Tolksdorf No. 1-1H well did 642 BOEPD of initial production and its Rognas No. 2-22H did 1,013 BOEPD.

Finally, there is Samson's Hawk Springs project, which contains more than 16,000 net acres of Niobrara and additional conventional oil targets located in the DJ Basin. Samson's direct neighbors here are Chesapeake Energy and Devon Energy (NYS: DVN) . The company is in the process of exploring its prospects through two wells, the Defender No. 2-29H targeting the Niobrara and the Spirit of America No. 1-29 targeting the Permian/Pennsylvanian.

Looking forward
The company's latest capital spending plan showed $31.7 million in spending, $23.2 million of it allocated to drilling capital expenditures. The company expects to end the year with $32 million in cash, which means it'll draw down its cash by $22 million in just the fourth quarter alone.

The company certainly has been busy with its exploration and development projects, and they could not come on line soon enough. The company only produced about 375 BOEPD in the third quarter, so the current wells being drilled and completed should provide a welcome boost to its production and cash flow.

Foolish bottom line
It's nice to have a net cash position as a micro-cap energy company, but Samson's cash balance won't last forever -- it must achieve success on its exploration projects in order to ramp up its production. Most of its acreage appears to be prospective, but that doesn't quite guarantee the company's success. It'll be an interesting story to watch over the coming year.

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At the time thisarticle was published Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up to date on his latest market commentary. Paul Chi and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential. Paul owns shares of Chesapeake Energy and has written covered calls on Samson Oil & Gas. The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Statoil A and Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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