Dune Energy: Shrinking to Grow (DNE)

Dune Energy, Inc. (Amex: DNE) is selling off its Barnett Shale assets located in Denton and Wise Counties, Texas, for $41.5 million.  The effective date of the sale will be May 1, 2008, with closing expected to occur on or before July 31, 2008.  Dune’s Barnett Shale at 12/31/2008 had proved developed reserves of 19.3 Bcfe in 35 producing wells, plus 6 wells with behind pipe pay awaiting fracture stimulation.  An additional 13 proved developed locations contained an estimated 14.1 Bcfe of net reserves.  This sale area covers about 19% of Dune’s total proved reserves, but only about 6.8% of Dune’s year end 2007 SEC Present Value discounted at 10%. 

The company noted that the first quarter 2008 revenue attributable to Dune’s Barnett Shale operations totaled $7.64 per Mcfe, while expenses were $4.36 per Mcfe.  Dune’s Gulf Coast operations yielded revenue of $12.14 per Mcfe, while costs totaled $4.14 per Mcfe.  Its operating profit for the Barnett Shale and Gulf Coast were $3.28 and $8.00 per Mcfe, respectively.

Proceeds from the sale will be utilized to eliminate outstanding borrowings under its credit revolver and for general working capital.  The Company will continue its active exploitation program in its Gulf Coast fields during 2008 and the company expects to replace the production lost stemming from the sale of its Barnett Shale assets, with fourth quarter volumes expected to exceed current levels.

More interesting than the sale itself is the relative value this is compared to the overall size of the company.  The company has a market cap of around $78 million.  With shares up 2% at $0.98, this is still at the bottom of the last 52-week trading range of $0.94 to $2.45.

Dune is shrinking its existing operations no matter how you cut it, even if it is short-lived.  But it will now get to focus on growing its higher margin operations and will get to clean up its balance sheet.  There have been some recent changes made to its convertible debt structure, so some of these numbers on a fully diluted basis may be different than they appear on a remedial look. At the end of last quarter, cash was a mere $14.59 million, while it carried $303 million in long-term debt and $441 million in total liabilities.

Jon C. Ogg
July 7, 2008