Buy recommendations Cimarex Energy (XEC) and Birchcliff Energy (OTCPK:BIREF) have the lowest Enterprise Value per acre of undeveloped land among Small Cap Independent Producers in our coverage.
Billion dollar deals by global companies attest to the appeal of that North American resource potential for which we attribute little specific worth in the McDep Ratio. Most recently, Norway’s Statoil (STO) and China’s CNOOC Ltd. (CEO) invested in the Texas Eagle Ford Shale at upwards of $10,000 an acre. Territory in the same trend likely cost less than a tenth as much two years ago before Petrohawk (HK) drilled the first Eagle Ford well, according to the Texas Railroad Commission. To exaggerate a bit in order to illustrate the significance of the prize, Cimarex’s undeveloped property at $10,000 an acre would be worth $40 billion dollars, some six times enterprise value. Conversely, much of the acreage may turn out to be no more than the farmland, ranchland or moose pasture it is today. Meanwhile, exploratory lands are part of the qualitative upside to quantitative estimates pegging Small Cap Independent Producers at a median McDep Ratio of 0.97. Cimarex and oil-oriented Whiting Petroleum (WLL), Berry Petroleum (BRY) and Denbury Resources (DNR) are leading the stock price trend with current quotes above the 200-day average.
Cimarex Creates Value in the Midcontinent, Permian and Gulf Coast
Cimarex has a surprising amount of unexplored land at some four million acres. The company has had particularly good results in demonstrating how it can create value by drilling prospective land. The Cana Shale play in western Oklahoma may be the largest contributor to reserve growth currently. The Cana wells are big and reproducible, characteristics global acquirers like to see. Also in the Midcontinent region, the Granite Wash formation may assume greater significance as it responds to horizontal drilling with multiple stages of fracturing. High-volume Gulf Coast wells are exceptionally profitable while the life of each well may be short. The Midcontinent and Gulf Coast wells produce natural gas primarily with generous portions of associated oil that is often the largest contributor to revenue at today’s high ratio of oil price to natural gas price.
The company known as predominantly a Midcontinent natural gas producer five years ago has nimbly adapted to changing commodity price to becoming predominantly an oil producer by revenue. Contributing to that timely shift, Cimarex’s activity in the oil-rich Permian Basin is approaching half of its total corporate effort. Underneath some of its million and a half acres in west Texas and New Mexico, Cimarex has been early in the revival of the Bone Springs formation, including portions known as the Avalon Shale to connote previously unexploited resources.
Birchcliff Creates Value in the Alberta Montney
Building a large, concentrated, yet manageable land position in the Montney formation of Northwest Alberta is an explicit aim of Birchcliff Energy. Management emphasizes that it has rights to some 130 sections (83,000 acres) with a high likelihood of adding to reserves. Proven and probable reserves have been attributed to 77 net sections of land. Our valuation is tied to proven and probable reserves with little importance for the additional 130 sections.
The Montney formation regularly attracts new deals, mostly for acreage, going back to Royal Dutch Shell (RDS.A)’s acquisition of Duvernay in July 2008 for $6 billion. Depressed pricing for natural gas, the main product of the Montney formation, may appeal to the timing instincts of buyers looking for an attractive price today for likely higher future value.
Originally published on October 15, 2010.