Gastar Exploration (GST) recently bought $74 million of properties from Chesapeake Energy (CHK), and within a few months resold the non-core, non-producing half of the properties for $74 million, leaving effectively no net cost and a mark implying the remaining properties are worth at least another $74 million. This was material to Gastar, and has helped reprice the stock from $2.70 before the announcement to a recent $3.30 per share.
The $0.60 per share stock move implies a $36 million revaluation in the company, less than half of the gain to Gastar from the totally unexpected resale of the asset. So if the market was efficiently pricing Gastar at $2.70 prior to the sale, the appropriate post-sale stock price could be $3.90.
However, Gastar may have been mispriced prior to the asset sale. Gastar was trading at approximately ~5.3x 2013 EV/EBITDA, vs. peers trading at 8x to 16x 2013 EV/EBITDA multiples. The lowest valued Marcellus peer, Rex Energy (REXX), trades at 8x, which appears to factor in some substantial benefit from recent development in the Utica Shale. At the high end of the comp valuations, Cabot (COG) is trading at ~16x and Range Resources (RRC) is trading at ~13x, driven by excellent results in their respective core areas in the Marcellus.
Gastar has similarly excellent acreage in the Marcellus, as I detailed in this previous article. Proportionate to its enterprise value, Gastar produces substantially more and is valued substantially less than these peers, despite similar highly productive wells. Historically, this was due to a less-than-stellar balance sheet and accompanying liquidity concerns. However, with the recent $74 million sale, Gastar has no bank debt and tens of millions of dollars in cash to fund its capex program.
And similar to more highly valued Rex Energy, Gastar has another high-performing field to deploy its capital into beyond the Marcellus. Rex has the Utica and Gastar has the Hunton, where Gastar's recent Midcon 2-H well had economics that easily match some of the best Utica wells, with more results forthcoming.
Beyond EV/EBITDA, Gastar's stock price has started to catch up with peers (even as its valuation has lagged significantly), but on a two-year basis it is still trailing its peers. As can be seen from the following chart, its stock is down 20% over the past two years, while the lowest performing peer, Range Resources, is up 20% and its best performing peer, Cabot, is up over 100%.
Click to enlarge image.
This leaves room for Gastar to "catch up" both on a price and EV/EBITDA multiple basis, and implies that the market had been pricing Gastar's stock too low even prior to the excellent resale of some of the Chesapeake assets. Gastar has extended the date of the sale of its East Texas assets by another two weeks, until the end of July 2013. This would bring in an additional $40 million-plus while only slightly reducing production and EBTIDA. It seems unlikely that Gastar would have agreed to this second extension if they did not believe the sale would actually go through. After the slam-dunk Chesapeake deal, there is no need for them to do so. This makes me think it is likely Gastar will go through with the sale, which would further increase the EV/EBITDA discount Gastar trades at to its peers, and would indicate a potential further increase in the stock price.
Finally, days like July 16 should remind investors that valuations do matter. Market highflier Tesla (TSLA) cracked, trading down over 15% intraday. Tesla has run up under totally unreasonable expectations and on the prospect of potentially being bought out by a Big Three automaker, among other reasons. Even after the drop, it is trading at 15x price to sales (not my favorite metric, but it highlights how nonsensical Tesla's valuation is) vs. GM's 0.3x. Tesla deserves to trade at a higher multiple; however, considering the underperformance of the electric car market in general (GM loses tens of thousands of dollars on every Volt it sells), and the long thesis on Tesla being contingent on Tesla being able to profitably sell mass-market cars, it seems the market has way overshot Tesla's valuation.
The difference between Gastar and Cabot's valuation is less extreme, and Cabot has profitable, growing business in a way that Tesla doesn't -- but valuations do matter. Eventually, the market shifts from "voting machine" to "weighing machine" and Gastar should rise relative to its peers, and the 5.3x vs. 16x differential should close somewhat.