In a previous article, I proposed a different method of valuing oil and gas exploration and production companies. The conventional measure of Enterprise Value (EV) divided by Barrels of Oil Equivalent Per Day (BOEPD) production is profoundly misleading because it values oil production at a 6:1 ratio to natural gas production. Because natural gas is actually priced at a 35:1 ratio, natural gas-weighted companies are credited for more than the value of their production and look much cheaper than they actually are. The other problem is that not all oil production is alike. Heavy oil produced far from market centers isn't worth that much, whereas light oil near major markets is.
In this article, I'm updating the data, using two measures that help adjust for the disparity in oil/gas pricing ratios. The first measure is EV/adjusted BOEPD - the EV divided by the daily production with the natural gas counted at a 35:1 ratio instead of a 6:1 ratio. The second measure is EV divided how much net the company actually makes (the netback) on its daily production. For good measure, I also include consensus estimates on risked net asset value per share.
|(OTCQX:COSWF)||Canadian Oil Sands||106,755||2,824||98%|
Where the Bargains Are
Overall, the Canadian exploration and production sector looks extremely cheap right now, even after accounting for the huge discount in Canadian oil and gas prices versus the U.S. and world prices. For comparison, for oil-weighted properties in the U.S. typically sell well above $100,000/BOEPD. The upstream MLP Pioneer Southwest (PSE) is being bought out by its parent for more than $250,000/BOEPD.
A few notes on specific companies are in order. As in the previous valuation, Pinecrest looks very cheap. However, it has been hobbled by an extremely high decline rate (35%), which requires it to spend heavily to maintain production. Its waterflood efforts may improve that.
PWE doesn't look that cheap on a EV/BOEPD/Netback basis because its netbacks are very low - only $28 versus $50 for Lightstream. However, the real value in PWE is its untapped reserves; trading at only 61% of its estimated NAV, it's a bargain.
Overall, I suspect any of these companies that are trading near 60% of NAV and have market caps of less than $2 billion would be prime takeover candidates. That means Strategic, Pinecrest, Lightstream and Zargon. The recent takeovers of Nexen by CNOOC (CEO) and Novus by Yangchang Petroleum underscore this possibility.
At some point, one of the super major oil companies like Exxon (XOM) or Chevron (CVX) will realize it's cheaper to replace reserves by buying one of the larger Canadian companies like Penn West or Talisman than it is to drill in deep water or in risky parts of the world. So ultimately, I think PWE and TLM are takeover candidates too.