Broker snap: Nighthawk shareholders need patience

The admission by oil explorer Nighthawk Energy that it will not meet its previously announced target of 1,000 barrels of oil equivalent per day this year is a clear disappointment, broker Daniel Stewart concedes, but it has not dampened the broker's enthusiasm for the stock.The company explained that the shortfall in production this year is due to the limited number of wells on test. Daniel Stewart investment analyst Richard Nolan notes that there are currently 19 wells on the Jolly Ranch prospect, of which only six are currently producing."As we have said in the past, this is not so much as an exploration play as it is an engineering play. The John Craig 7-2 well was drilled 30 miles NW [north-west] of the core area and confirms the extension of the shales. However, sand ingress is restricting production. Solving sand problems, fraccing [fracturing], completion techniques and discovering sweet spots should produce value for shareholders," suggests Nolan.The major area of doubt, however, is whether the company has sufficient funds to solve those problems.It's a view echoed by Nighthawk's broker and nominated advisor (nomad), Westhouse Securities."There is no question that as a shale oil play, Jolly Ranch presents challenges in the early development stages that conventional plays do not. However, with exceptional estimates of oil in place, the patience this requires at the start can lead to substantial rewards, as understanding of completion techniques is optimised. Recent transactions involving other shale plays in North America, albeit predominantly gas, have shown the potential value that can be created once these techniques are established," Westhouse says. "Nighthawk's decision to pursue well recompletions and testing, rather than additional new drilling, will help achieve both better understanding of the play and improve cash flow, which we believe demonstrates the management's focus on value-creating opportunities," the broker concludes.Like Daniel Stewart, Westhouse rates the shares a buy. Its target price of 88p, however, is far more optimistic than Daniel Stewart's 45p,