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Undervalued, Rapidly Growing Oil Company

How would you expect the market to value an oil company growing by over 100% per year? Better yet, a company with industry leading capital efficiency, and that is in a resource play with years of additional inventory to develop. Perhaps such a company would be valued at a 15x multiple like Cabot (NYSE:COG). Or at 5x its 1P reserve value like Red Fork (OTCQX:RDFEY).

Austex Oil (OTCQX:ATXDY) is an oil and gas exploration and production company focused on the Mississippi Lime in Oklahoma and Kansas. Austex has 23,000 net Mississippian acres and is rapidly growing its production, which is currently at ~700 boepd (72% oil). It has $198 million of 1P reserves and $389 million of 3P reserves, versus a current market cap of $65 million.

Why bother with a small cap oil E&P:

Austex is interesting because it is cheap on both an absolute and relative basis, and because it is growing rapidly (and thus rapidly increasing its value). Austex is very cheap compared to its comps: Austex trades at 1/3 of its 1P reserve value, while other Mississippian focused companies trade for well over their 1P reserve value. Other rapidly growing Australian traded E&Ps trade for as high as their 3P reserve value. It is also cheap on a cash-flow multiple basis - Austex trades for less than 4x 2013 cash flow, which is very low for a rapidly growing small cap E&P. Austex only recently began its development work, and should rapidly close the valuation gap, as other formerly micro-cap Australian E&P companies like Red Fork, Sundance (OTCPK:SDCJF) and Aurora (OTCPK:AAGLF) have been able to do. Catalysts include an updated reserve report, continuing strong well results, higher production numbers, up-listing in Canada in the near term and adding a reserve-based loan.

Also unusual for a small cap company, Austex is covered by two reputable, global investment banks - RBS (NYSE:RBS) and GMP. Both banks have $15 price targets on ATXDY (or 30 cent targets on AOK AU, the Australian listing). Both reports are somewhat recent, and lend credibility to a small company that is not well known in the public markets here in the U.S.

Assets:

Austex has two key areas, a 6,000 net acre block in Kay County, Oklahoma and 17,000 net acres in North Western Kansas. Current production is almost entirely from Kay County, which appears to be a Mississippian sweet spot, with a recent horizontal well drilled by Range Resources (NYSE:RRC) producing over 1,000 boepd sustained over 30 days (AOK has a ~13% stake in that well), and with multiple vertical wells drilled by Austex producing over 80 boepd over 30 days (72% oil).

Aerial view of Austex
(Click to enlarge)

Austex's NW Kansas acreage is less developed, but Apache (NYSE:APA) recently leased 550,000 net acres all around Austex's acreage position, which boosted the private market value of the acreage considerably and provided some validation to the resource-play thesis for the area. That also makes it highly likely Apache will deploy meaningful capex to delineate the area, which should benefit Austex. At the current valuation this acreage does not need to work for ATXDY to rise substantially, but it does provide considerable additional upside potential.

Balance Sheet:

Austex has ~$10 million in cash and $7.5 million in debt. The debt is a $7.5 million 10% interest senior secured loan, convertible at $0.15 per share. Austex used the debt to fund well development and intends to grow into a reserve-based loan. This loan will either be refinanced or it will be force-converted at $0.25 per share. Austex likely has $15-20 million in senior borrowing capacity, and that number is likely rising rapidly.

Comps:

There are three good comparable company sets for Austex, and appropriate ways of comparing each set, and Austex trades at a big discount to each of these comparable groups. First are Mississippi Lime focused companies, particularly pure plays - they are relevant because they are the most similar companies to Austex. Second are Australian traded E&P companies - they are relevant because Austex primarily trades on the Australian stock exchange, and to a certain extent the Australian traded E&P companies with US assets have similar investor bases and trade with some correlation with each other. And the third is more general - rapidly growing publicly traded E&P companies.

Another article I wrote discusses Pure-Play Mississippian comparable companies, and you can find that link here. In brief, Austex trades at a fraction of the value that Red Fork trades at on a reserves basis, and trades at a fraction of the value Osage (OTCQB:OEDV) trades at on a production and acreage basis.

There is not yet an article comparing Australian publicly traded companies with U.S. E&P assets, or at least one that includes Austex. The best comp is mentioned above, Red Fork. Another very good comp is Aurora Oil. Aurora is a pure-play Eagle Ford company, which trades at around its 3P value. Austex's 3P value is over $600 million, so if ATXDY traded how Aurora trades on a reserve basis, Austex would trade at almost 9x its current market price. Red Fork, Aurora and Austex are all growing rapidly and are all focused on resource plays in the Texas/Oklahoma/Kansas area.

Finally, Austex can be compared to rapidly growing U.S. resource players. These range from Cabot Oil and Range Resources on the large side, to Kodiak (NYSE:KOG), Magnum Hunter (NYSE:MHR) and Triangle Petroleum (NYSEMKT:TPLM) on the smaller side. Cabot and Range trade for 15x+ 2013 EV/EBITDA, and all of these companies trade at a large premium to their 1P value. The fastest growing, like KOG and TPLM, are growing at a similar rate as Austex, but trade at similarly high valuation premiums compared to Austex. And none of these companies are as capital-efficient as Austex.

A recent study by GMP (that I wrote about here) compared Austex's well results and returns to publicly traded Canadian companies. Austex's wells were in the top decile, showing some of the highest IRRs of any wells drilled in Canadian resource plays (and thus making Austex among the most capital efficient companies in that group). None of the third set of comps are Canadian, but their average well results and returns would place them in the middle range of that set, comparing less favorably than Austex.

Also, Austex compares favorably versus that third set from a liquidity perspective - it has more cash than debt, and will be spending within cash flow by the end of 2013, versus many of those companies being debt financed and far away from spending within cash flow. Cabot achieved capex within cash flow in the past year, and its stock has outperformed its peer group partly as a result.

Summary

In summary, Austex trades at a significant discount to its comps and to its proved reserve value. Austex is rapidly growing production and reserves while spending within cash flow and cash on hand. Austex a small company, and thus incurs numerous risk factors particularly applicable to small companies. In a strong oil price environment and considering its recent track record of strong, capital efficient growth, it appears to represent a compelling opportunity in the oil and

Source: Undervalued And Rapidly Growing - Introducing Austex