Samson Oil & Gas: Currently Undervalued - Even in Most Pessimistic Scenario

Jan.17.11 | About: Samson Oil (SSN)

Over the last year, I have been actively buying and selling three sectors. The first is uranium; the second is fertilizer; and the third is oil drillers in the Bakken Shale: Brigham Exploration (BEXP), Oasis Petroleum (NYSE:OAS), and Northern Oil & Gas Inc. (NYSEMKT:NOG). The third hasn’t produced the best profits, but not many sectors have done better than uranium.

I like the Bakken for several reasons. The first is the size; the second is that it's highly levered to oil; and the third is locale. While preparing Brigham: Outstanding Drilling Results in the Bakken Shale, I ran across information on Samson Oil & Gas (NYSEMKT:SSN). After some exploring, I found it had three wells already in the Bakken, and a small market cap of $70 million. For the year, this company was already up over 400%. I got even more interested after reading their November 2010 AGM Presentation. Samson has all of their oil and gas assets in the United States, and they are trying to reduce their exposure to natural gas and increase oil. This included the sale of their Rockies assets and 24 thousand acres in the Niobrara Shale in Wyoming for $74 million. At the time of this presentation they had $11.1 million in debt and $76 million in cash. This sale has provided much needed capital for Samson to develop their oil rich Bakken and Niobrara locations.

It also decreased their exposure to lower margin natural gas. Not only did this sale provide Samson with $3275 per acre, but also provided them with a 3.8% royalty interest in the project sold to Chesapeake (NYSE:CHK). So not only did this sale provide immediate liquidity to develop the oily section of their Niobrara holdings, but it also provides cash flow from operations as Chesapeake pays a royalty to Samson.

As I looked further into Samson's website, I found two interesting reports done by Enercom. The first was done in August. Just before the report was completed there was a fairly large jump in stock price. I could be wrong, but valuation with respect to Samson may be low based on their history as a natural gas producer, and even with the recent run up in stock price, their newfound oil positions look to create further value in the long term.

The Enercom report found some very interesting and bullish reasons to own Samson. The most important was the long term NAV. Enercom gave three different scenarios with respect to how Samson should be valued. The information is highlighted on page 16 of their report. To quote from Enercom's report:

Using a net asset valuation methodology, we are estimating Samson's risked long term NAV per basic ADS to range between $3.30 and $11.57 per basic share, contingent on the company's operated drilling program and the pace of the development of the sold Niobrara acreage in which the company retained a 3.8% overriding royalty interest.

They go on to say

We have not attributed any value to Samson's exploration portfolio; however, future drilling successes represent incremental value catalysts.

Even in the most pessimistic scenario, the share price at close on Friday of $1.95 looks to be low when using a long term metric.

When looking through the report, I think near term there could be a huge catalyst on the completion of the 3-D seismic survey that Samson is paying $2.5 million to produce. Due to the large numbers of wells being spud in the Niobrara, Enercom believes news from any number of these companies - APC, CHK, EOG, NBL, QEP, REXX, and SM - could provide catalysts to push Samson's stock higher.

Enercom uses a methodology of comparing other companies located in the Bakken and Niobrara formations to develop what they believe Samson's value to be. The list of companies includes and is not limited to: CHK, EOG, NBL, REXX, SM, KWK, CRZO, CLR, and PQ. These companies were all used to develop what Enercom believes Samson's value should be.

Even if you believe that the Enercom report is much too optimistic with respect to Samson's value, I encourage everyone to read the report. It gives a good idea of how valuable oil rich shale can be to smaller companies with respect to long term growth.

Disclosure: I am long SSN, NOG, BEXP.