Few weeks ago, Cenovus Energy (CVE) sold its Shaunavon assets (54 net sections) in the southwest area of Saskatchewan to Surge Energy (OTCPK:ZPTAF) for $240 million. These properties are located very close to the Williston Basin, produce approximately 3,600 boepd of medium gravity crude oil and hold 2P reserves of 10.62 MMboe. These properties did not fit Cenovus's strategic vision because the company wanted to focus on its heavy oil properties.
By the way, Surge Energy, the buyer, was my favorite light oil weighted play among all the oil-weighted plays in North America. After analyzing almost all the E&P companies, I concluded that Surge Energy was the most undervalued oil-weighted producer in North America when its stock dropped below $3.7. This is why I bought it at an average $3/share in early 2013 and also recommended it in my recent articles. The stock hovers at ~$5.3 today. My bullish articles about Surge are here, here and here.
I sold Surge Energy recently at an average ~$5 to lock a 60% gain and switched to another grossly undervalued company from the oilfield services sector.
Meanwhile, Cenovus has never been my favorite heavy oil player. After extensive analysis in late 2012, I concluded that Rock Energy (OTCPK:RENFF) was the most undervalued heavy oil-weighted player in North America. I bought Rock Energy below $1 and recommended it at ~$1 in December 2012. Rock Energy's stock hovers at ~$1.4 today. My article is here.
The Unsold Bakken Asset
Cenovus wants to concentrate on developing its Alberta oil sands assets, and it also put its Saskatchewan Bakken oil field assets up for sale in February 2013. Cenovus notes that it is unable to scale the Bakken projects up to a size that would be material to its portfolio due to competitive limitations on increasing its land base in the area.
The company's Bakken asset remains on the market currently. So the question is whether Cenovus can milk a reasonable pricing out of its Bakken properties these days. Are there any suitors who are willing to pay a good price? What is a really good price for a Bakken asset in Williston Basin? To find this, we need to check out first some recent major deals in the Williston Basin.
Most of the deals of the area target the Bakken and Three Forks formations. Production in these tight oil fields can be boosted quickly when enough capital is invested. These assets are a perfect fit primarily for big oil companies with deep pockets and a mandate to extract more oil resources in an efficient and cost-effective manner.
M&A Activity In The Williston Basin
The Bakken and Three Forks shale formations, which straddle the U.S. and Canadian border, have turned North Dakota into the second-largest oil producing state in the United States. In the U.S., Bakken crude production has tripled in four years and Bakken crude began trading at a premium to U.S. benchmark West Texas Intermediate this month as producers skirted pipeline bottlenecks by shipping it to refiners by rail. Output in the Bakken which spans North Dakota, Montana, and Canada, is expected to double to about 1.2 million boepd by 2015. The Bakken and Three Forks Formations hold an estimated 7.4 billion barrels of undiscovered, technically recoverable oil, a U.S. Geological Survey study said in April.
This is why the M&A activity in the Williston Basin has been vibrant lately. It took me a significant amount of time to gather all the latest major deals in the Williston Basin area as below. It's also to be pointed out that all the properties of these deals have oil-weighted production and 2P reserves:
1) In April 2012, Baytex Energy (BTE) sold 45% of its net acreage in North Dakota and about 40% of its U.S. production to Magnum Hunter Resources (MHR) for $311 million in cash, raising money that Baytex Energy wanted to use to pay off debt and develop new wells. Those non-operated land interests in Divide and Williams Counties were covering about 149,700 acres and were producing 950 boepd. Baytex's production from the United States averaged 2,136 boepd in 2012 and climbed to 2,800 bbl/d in Q1 2013 from its remaining 126 net sections in North Dakota.
Furthermore, that acreage had 12.4 MMboe in proved reserves (92% oil and liquids) and 17.9 MMboe in probable reserves (92% oil and liquids).
2) In April 2012, Legacy Reserves (LGCY) expanded its Rockies footprint and purchased oil properties in North Dakota and Montana for $70.8 million in cash. The seller was Paramount Resources (OTCPK:PRMRF). These properties had net production of 776 boepd and contained 3.2 MMBoe of proved reserves, of which 97% are oil and liquids.
The North Dakota properties are located in Billings County as well as Golden Valley and McKenzie Counties, and produce mainly from the Madison, Bakken and Birdbear formations. The Montana properties are located primarily in Blaine County and produce mainly from the Sawtooth and Bowes formations. Legacy financed this acquisition with borrowings under its existing credit facility.
3) In late 2012, Exxon Mobil (XOM), the U.S.'s largest natural-gas producer, decided to place its second biggest energy bet on tight oil and liquids rich unconventional plays after the acquisition of XTO Energy in 2010 which was a natural-gas deal. Exxon bought 196,000 net acres in North Dakota, and Montana, from Denbury Resources (DNR) for $1.6 billion in cash. That was the entirety of Denbury's assets in the Bakken. Exxon also gave Denbury its interests in the Hartzog Draw field in Wyoming and the Webster field in Texas, plus the cash and some CO2 reserves. Exxon's assets in Wyoming and Texas, are close to Denbury's existing or planned projects for recovering oil using carbon dioxide. The Webster field is 8 miles from a pipeline Denbury opened in 2010 to carry CO2 from Mississippi. The Hartzog Draw field in the Rocky Mountains region is 12 miles from a Denbury CO2 conduit under construction.
The assets Exxon acquired from Denbury produced ~15,400 boepd (88% oil and liquids) while the net production from the interests Exxon transferred to Denbury amounted to 3,600 boepd. The Bakken assets being sold to Exxon had proved reserves of 96 MMboe (84% oil and liquids).
The combined value of the cash and oilfields in Texas and the Rocky Mountains that Exxon exchanged for the Bakken assets approached $2 billion, Denbury's CEO Phil Rykhoek said during a conference call.
This acquisition increased Exxon's holdings in the Bakken region to nearly 600,000 acres. For Denbury, the Bakken was not a core focus because its specialty is enhanced oil recovery. Denbury plans to use the cash proceeds to purchase additional oil fields in the Gulf Coast or Rocky Mountain regions, for capital expenditures and to repay debt. Denbury also plans to resume its stock-repurchase program, under which about $305 million of the $500 million authorized in October 2011 remains.
Meanwhile, Exxon has been criticized for betting too much on natural gas, which is much less profitable than oil amid the natural-gas market glut unleashed by horizontal drilling and hydraulic fracturing.
4) In late 2012, QEP Resources (QEP) was another E&P company that shifted capital spending from dry gas toward crude oil and liquids. Last September, privately held Helis Oil & Gas Co. LLC, Black Hills Corporation (BKH), Unit Corporation (UNT) and Sundance Energy Australia (OTCPK:SDCJF) sold mostly oil properties in the area to QEP Resources for $1.38 billion. QEP Resources purchased 27,600 net acres in Williams and McKenzie counties in North Dakota. The properties had production of 10,500 boepd (~90% oil and liquids) with 2P reserves of 125 MMboe (90% oil and liquids).
That deal fit in with QEP's strategic goal of increasing its liquids reserves and production. The acreage was also contiguous to existing properties held by QEP Resources, allowing the company to leverage economies of scale in its operations.
Most of the acquisition was funded with debt and this increased QEP's leverage. However, QEP said that this level of debt was above its long-term goal and that it would look for an opportunity to reduce leverage, possibly through a divestiture. The company also told investors not to expect a dilutive transaction assuring them that selling equity was the "last thing you should expect us to do."
5) In late 2012, Halcon Resources (HK) made a deal with Petro-Hunt LLC and acquired certain assets in the Williston Basin for ~$1.45 billion. Halcon bought 81,000 net acres prospective for Bakken and Three Forks formations with net production of 10,500 boepd (88% oil and liquids) and proved reserves of 42.4 MMboe (88% oil and liquids).
CPP Investment Board which oversees one of Canada's pension funds, helped Halcon complete that deal by paying $7.16 per Halcon common share in late 2012. CPP Investment Board invested $300 million in Halcon back then but that was obviously a wrong entry point as I have pointed out in my bearish articles here, here and here.
This is why I have been bearish on Halcon three times since early 2013 when it was at $8. The stock performance has confirmed all my three bearish calls thus far.
To average down, CPPIB bought another 1,978,125 shares of Halcon for $10,780,979 few days ago. CPPIB paid an average price of ~$5.45 for those shares. That was a big purchase on a daily basis because Halcon's daily volume is ~5.5 million shares. Apparently, CPPIB was the big buyer who saved Halcon's stock and turned upwards its recent negative momentum at $5. That negative momentum was the result of another debt deal for this highly leveraged oil and gas company. To me, CPPIB picked another wrong entry point because Halcon is still a grossly overvalued play even at these levels of ~$5.45.
6) In early 2013, Denbury Resources was the buyer this time. ConocoPhillips (COP) sold its properties in the Cedar Creek Anticline to Denbury for a total of $1.05 billion. Denbury acquired 86,000 net acres in southwestern North Dakota and eastern Montana with net production of 11,000 boepd (99% oil and liquids).
The anticline produces from numerous reservoirs with the primary reservoir being the Red River formation. The sale did not include any of ConocoPhillips's assets in the Bakken Formation, where ConocoPhillips owns 626,000 net acres, consisting of 207,000 net lease acres and 419,000 net mineral acres. The proved conventional reserves to be acquired were 42 MMboe (99% oil and liquids).
7) A couple of weeks ago, Kodiak Oil and Gas (KOG) bulked up on the Bakken and acquired properties in the Bakken and Three Forks formations along with undeveloped leasehold in the Williston Basin of North Dakota. Kodiak acquired for $660 million 42,000 net acres of producing and undeveloped properties, bringing its total holdings in North Dakota's Williston Basin to about 196,000 net acres. The assets acquired through the deal from privately held Liberty Resources were located in McKenzie and Williams Counties of North Dakota and produced about 5,700 boepd.
This deal when combined with the company's organic growth is helping to turn Kodiak into a significant Bakken producer. Kodiak has been growing its production over the past few years. In December 2012, Kodiak was ranked tenth in total Bakken production at 20,423 boepd. At the time, the company was producing less than a third of the oil that the top producers in the play were producing. Whiting Petroleum (WLL) topped production at 65,156 boepd while Continental Resources (CLR) was second at 65,141 boepd and Hess (HES) was third at 64,657 boepd.
Let The Numbers Speak For Themselves
After all, let's visualize the metrics of all the aforementioned transactions:
Per Boepd (Production)
Baytex - Magnum
Legacy - Paramount
Exxon Mobil - Denbury
Halcon - Petro Hunt
Denbury - Conoco
Kodiak - Liberty
The average metrics are:
- Per boepd: ~$144,700
- Per boe (Proved Reserves): $25.45
- Per boe (2P Reserves): $10.65
I will use these average metrics for my calculations in the next paragraph.
Cenovus And Bakken
The company's Bakken acreage is located in the Roncott area of south central Saskatchewan and lies close to the Canadian-US border. The assets consist of 100% WI in 57 sections (36,480 net acres) of Crown petroleum and natural gas rights (all rights, surface to basement) which have three years of primary term remaining. As of Q1 2013, the company's Bakken asset produced approximately 2,900 bbls/d. Cenovus does not provide the reserves associated with this acreage.
However the company has proved reserves of 115 MMbbls and 2P reserves of 171 MMbbls from its light/medium oil and NGLs properties. These properties also produced 56,000 bbls/d in Q1 2013.
Bakken production is about 5% of the company's total production from these properties. Assuming that the Bakken reserves are another 5% of the reserves held in these properties, I conclude that the Bakken acreage has proved reserves of ~5.75 MMbbls and 2P reserves of ~8.55 MMbbls.
This being said, I get the following valuations:
A) Per flowing barrel: 2,900 bbls/d X $144,700/boepd = ~$420 million.
B) Per proved reserves: 5.75 MMbbls X $25.45/boe = ~$146 million.
C) Per 2P reserves: 8.55 MMbbls X $10.65/boe = ~$91 million.
D) Average from A+B+C = ~$219 million.
Given the majors' collective struggles to grow production and replace reserves, their significant financial resources, and given the fact that they have come to believe that the United States' unconventional oil growth story is a durable one, more Bakken deals will take place in the future. Nevertheless, I cannot speculate about the potential buyer for Cenovus's Bakken assets. One thing is for sure: Anything less than $219 million will be a big failure and anything over $420 million will be a big success. I do believe though that Cenovus will sell its Bakken assets at the right price, protecting its shareholders' rights.