Mississippian Pure Play Comparative Valuation - Osage, Red Fork And AusTex

 |  Includes: ATXDY, OEDVQ, RDFEY
by: Josh Young

There are three pure-play, small cap, publicly traded Mississippi Lime-focused companies of note: Osage Exploration (OEDV.OB), AusTex Oil (OTCQX:ATXDY) and Red Fork Energy (OTCPK:RDFEY). All three have their main acreage positions located just east of the Nemaha uplift, a structural feature which seems to indicate substantially better and more oily well results on its eastern side. Osage trades on the bulletin boards and the other two trade on the Australian stock market but are also listed on the OTCQX exchange.

For the purposes of this analysis, I have excluded larger companies such as Chesapeake (NYSE:CHK), Sandridge (NYSE:SD) and Range Resources (NYSE:RRC). Despite their excellent Mississippi Lime acreage positions and drilling programs, those companies are not pure plays and are significantly larger than Osage, AusTex and Red Fork, and thus are not directly comparable.

AusTex has a ~$53 million market cap, is producing 700 boepd (70% oil, estimated production for end of March), and has 23,000 net acres in the play. Red Fork has $248 million market cap, is producing 1,500 boepd (also ~70% oil and estimated production) and has 75,000 net acres in the play. This compares to Osage, which has a $83 million market cap, is producing ~200 boepd and has 11,000 net acres in the play. This is summarized in the table below. (These numbers are based on Yahoo Finance and the companies' most recent updates)

Market Cap ($MM) $83 $248 $53
Production (boepd) 200 1500 700
Net Miss Acres 11,000 75,000 23,000
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A couple of ratios help further dissect the market valuation of these three companies, simply and clearly:

Acres per $MM 133 302 434
Boepd per $MM 2.4 6.0 13.2
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These show that, per million dollars of market cap, each company provides a different quantity of acreage and production. One way of thinking about this is, if you look at buying a stock as buying a proportional share of a business, for every million dollars you spend buying Osage stock, you "get" 133 acres and 2.3 barrels per day of oil equivalent production. For every million dollars buying Red Fork stock, you "get" 302 acres and 6 barrels per day of production. And for AusTex, you "get" 434 acres and 13.2 barrels per day of production. Obviously, from these metrics, it looks like you "get" a lot more buying AusTex stock than buying Osage stock.

Another way to look at this is how many "units" of Osage stock you get when you're buying a dollar worth of AusTex or Red Fork stock instead of Osage stock. This is highlighted in the below table:

Share Price $1.71 $0.65 $7.98
Implied Price at Highest Acres per $MM Value $1.71 $1.48 $26.13
Implied Price at Highest Boepd per $MM Value $1.71 $1.63 $43.74
Share Price Multiple on Acreage Valuation 1x 2.3 3.3
Share Price Multiple on Production Valuation 1x 2.5 5.5
Click to enlarge

Essentially, this analysis indicates that $1 spent on ATDXY gets you 3.3 times as many acres as $1 spent on Osage stock and 5.5 times as much oil and gas production as $1 spent on Osage stock.

The obvious question is: what explains this valuation discrepancy, and perhaps it is not as wide as it appears? For experienced oil company investors, the first things that likely come to mind are management and growth rates. All three of these companies have solid management teams with decades of experience in oil and gas. And each of the companies is expecting to roughly double production in 2013 - Osage expects to exit 2013 with 400 boepd, Red Fork has not announced guidance but could be expected to be at ~2,500 boepd and AusTex at 1,300 boepd.

All three companies have issued significant equity in the past two years to finance growth (and in OEDV's case, it sold down most of its ownership in its key property to fund development), so it is unlikely the valuation discrepancy is driven by varying historical and expected equity dilution.

This leaves another possibility. Osage trades on the bulletin board in the US, versus AusTex and Red Fork, which trade primarily on the Australian stock exchange. Many Australian traded resources stocks have declined in the past 18 months as China's growth rate has been called into question and as the future demand for iron ore and met coal has been questioned. These commodities are a focus of many Australian traded equities, and other resources stocks may have been affected as a kind of collateral damage. It is unclear how Red Fork plans to rectify this, but AusTex has announced that it will be listing on the Toronto Stock Exchange, which could introduce a new set of buyers and re-value the stock closer to Osage's valuation.

None of this is to say that Osage or Red Fork are bad companies or investments - on the contrary, both have made significant accomplishments, and fundamentally both could be undervalued relative to their potential future intrinsic value. However, it appears that AusTex's relative valuation is significantly below Osage's and Red Fork's, and it seems that AusTex's management, through their "up-listing" to Canada, may be taking the step necessary to bring AusTex's valuation back in line with its peers.

Disclosure: I am long OTCQX:ATXDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.