First things first: Does Samson Oil and Gas (NYSEMKT:SSN) deserve the last two-week long moon shot? Hard to say as it very much depends on what's behind the move. Months ago, I had a $2.25 back of the envelope near term NAV on the name and you can scroll on down to see that it's been adjusted slightly downward to account for a higher than expected share count. For a run through of my past pieces please use the pull down menu at upper left on the main ZEB site and target SSN. Some thoughts to bring those reports up to speed:
In The Niobrara (Hawk Springs Project)
- Comments from Chesapeake (NYSE:CHK) at its last conference presentation in early January that it has a data room open on its Niobrara position and is nearing a joint venture that seemed to have added more fuel to a fire under SSN shares that began in late December. That was when we last added shares to one of the ZLT portfolios on December 29. This happened to be the same day that a sellside firm released its second report on SSN. That report stepped somewhat "out there" on the aggressive assumptions curve.
- But getting back to CHK, they have a history of buying early and at first, pretty low in new plays and then joint venturing for a much higher dollar per acre deal with a significant carry, and that seems to be their plan here as well.
- CHK is currently drilling at least three wells and may have completed all three (definitely two of them) on the Goshen County acreage it acquired from SSN for $3,275 per acre by the time of its 4Q call.
- In the meantime, SSN has shot a 60 square mile 3D survey and should have some of the data in hand at present. First, this will help pick well locations (looking for the really naturally fractured wells at first). Second, the shoot covers their acreage and also acreage in and around their position and to pick off additional leases (they're looking to add about 4,000 more acres this year).
- The next news here should be well results from (in order of closest to furthest from SSN's position): The Goshen County CHK wells, Noble (NYSE:NBL), EOG Resources (NYSE:EOG), Rex Energy (NASDAQ:REXX) and SM Energy (NYSE:SM), all in February 2011 with the companies' 4Q releases.
- SSN's first well should be at TD by the end of 1Q11.
- Rumors in the market have for quite some time pointed to a potential drilling JV with Halliburton (NYSE:HAL). Just a rumor and management won't comment. Perhaps the comments by SSN that they plan to engage in longer term stimulation and drilling contracts in Goshen to avoid the delays they've seen of late in the Williston are the basis for the HAL rumors.
- Skip to the bottom of this piece for a couple of different ways to view valuation methodologies and note that I lean toward a more conservative take on well results until we have, um, well results. So more risking of acreage than some others out there running their own NAVs, wider spacing than the company currently sees and lower EURs.
In the Bakken (North Stockyard Project)
- Completion delays: Williston Basin tightness has pushed back completion of their 4th and 5th wells a number of times (now listed as 1Q, had been set for November and December, then late December.
- 2011 could/should see their first Three Forks test as well as possibly a second well per section test in the Bakken.
- Look for them to add at least another six sections worth of leases here in the first half of the year.
Nutshell: No news out of the company but a sell-side report at the end of last year and speculation that the name may be in play helps to drive a doubling of the shares in a two week stretch. At the time the Enercom report came out I said the assumptions looked less than conservative. We may get to 160 acre spacing and 500 or 700 MBOE per well down the road but with no modern completions in the area and with a few less than stellar 1950s to 1970s vintage verticals that's just too sky high for me to buy off on.
The stock has run hard as little minnows are apt to do amidst lots of speculation, a low share price and an absence of any real hype deflating news. My sense that a pause is in order and we took some profits yesterday (1/5 of total core position sold up 192% and all of the trading position (taken at the end of October) and sold for a double) in case they don't immediately continue to trek toward the moon. Should CHK announce a JV with a large player like a CNOOC (NYSE:CEO) or a BP (NYSE:BP) with its 4Q results that implies a 3x or more increase in its recent purchase from Samson on a price per acre (several of CHK's have left stub values in excess of 4x their entrance price), then look for SSN to head higher still.
Likewise, should CHK comment further on Niobrara reserves running in the 500,000 BOE range per well, look for SSN to post another leg up. Both of these are real possibilities and given the run, my core position is still quite enough to benefit from such a rally. But should the stock enter a digestive phase, that allows the shares to come back into a more reasonable, pre-actual-Niobrara-results, valuation range of say $1.75 to $2.00, then I'll be looking to add back that trading position with our recent quickly found gains.
The following table provides my base case back of the envelope near term NAV. Note that I don't get to the current price. Alternative case 1 and 2 are based on a read of a possible CHK JV influenced acreage stub value and a reserves-in-the-ground valuation respectively. Case 2 is deliberately conservative to SSN and certain sellside estimates. The proof of higher values will be in the drilling.
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