By Roger Choudhury and the Investment Underground editors
We searched for exploration and production (E&P) companies with undervalued natural gas reserves. We think Exxon Mobil's (XOM) purchase of XTO, in addition to the flurry of deals completed by Chesapeake (CHK) has put a floor on valuations, going forward. The best deals around include the lowest cost producer in Marcellus, Range Resources (RRC), and Wyoming, Ultra Petroleum (UPL).
We think mixed oil and gas players in the deepwater, such as ATP Oil and Gas (ATPG), are also likely to fare well, given that there remains plenty of commodity price upside from here. GMX Resources (GMXR) and SandRidge (SD) tipped their hats toward oil in the near-term by introducing themselves to significant oil plays. The names we found are below.
GMX Resources (GMXR) announced on January 28 that it would buy 67,724 net acres of horizontal oil resources within the core development areas of the Bakken / Sanish-Three Forks Formation in the Williston Basin (Bakken) and the Niobrara Formation in the Denver Julesburg (DJ) Basin. The 67,724 net acres is includes 26,087 net acres in the Williston Basin, North Dakota and Montana targeting the Bakken/Sanish – Three Forks Formation and approximately 41,637 acres in the DJ Basin in Wyoming targeting the Niobrara Formation. In addition, this provides 342 additional horizontal drilling locations. The purchase is to be made in $1.8 million in cash and up to 2.7 million shares of stock.
The Company is a smaller operator with around 42,000 net acres in the Haynesville shale in the eastern Texas counties of Harrison, Marion and Panola. At December 31, 2010, the Company‘s total proved reserves are 319.3 BCFE, which a decrease of ~10% from 355.3 BCFE, a year back. However, the Company also announced that year-end 2010 Haynesville/Bossier reserves were 234.1 BCFE, an increase of 208.2 BCFE compared to year-end 2009. This is an increase of 804%. For Cotton Valley Sand, Travis Peak, and other non Haynesville/Bossier reserves, on December 31, 2010, they stood at 85.2 BCFE, which is a decrease of 244.1 BCFE compared to reserves of 329.4 BCFE at December 31, 2009.
Last year, GMXR shifted from vertical drilling in the Cotton Valley Sands to horizontal drilling in the Haynesville Shale. As a result, the company had to remove substantial proved undeveloped reserves from its books on the Cotton Valley due to its switch to the Haynesville Shale below it, cratering the share price. We think a buyout would come in around $700 million on the low end or $12 per share given GMX acreage and infrastructure at current gas prices. Devon (DVN), legacy XTO (XOM), Apache (APA) and EOG Resources (EOG) all have acreage in East Texas and are looking for acquisitions opportunistically. GMXR acreage, with no impending lease expirations and the ability to place well heads near pipelines due to its Cotton Valley experience, is a potential target. You can read more of our explanation of why it’s a buyout target here.
SandRidge (SD) announced on April 4 last year that it will acquire Arena Resources for $40 per share or $6.2 billion. This represented a 17% premium for Arena shareholders.
This also positioned SandRidge as one of the largest producers of West Texas conventional oil and gas. The oil opportunities will come primarily from drilling and development of shallow, low risk reservoirs located on the Central Basin Platform, a part of the Permian Basin in West Texas. The combined company will have over 200,000 net acres in the Permian Basin and 5,700 identified locations to drill primarily in the shallow San Andres and the Clear Fork formations. Additional upside exists with down spacing and future secondary and tertiary potential. SandRidge also owns low risk natural gas properties in the Pinon Field, and significant exploration opportunities in the West Texas Overthrust.
As for business relationships, the company has a good history with Occidental Petroleum (OXY), which processes SD's oil, liquid gases and other production at its Century Plant. The company reports that almost two-thirds of SD's Permian Basin production is crude oil, with 20% natural gas and the remainder natural gas liquids. 17 of 23 rigs are operating in the Permian, with 5 at Mid-Continent and 1 at the Overthrust (Pinon).
CEO, Tom Ward, a co-founder of Chesapeake (CHK) and its COO through 2006, sold shares recently but retains a significant stake. Further, the CFO departed following losses on derivatives contracts related to oil and gas hedging. Notably, Fairfax Financial (FRFHF.PK) holds a 10% stake in the company. We think a buyout would come in around $9-10 billion including debt, or over $10 per share. We think Occidental is interested in SD's assets and it is simply a matter of price and timing.
More recently, the company sold its Wolfberry assets in the Permian basin for $155 million on January 6, 2011. The divested properties are producing ~1,600 Boe/d, and had estimated proved reserves of 2.37 MMBoe, as of December 31, 2009. The proceeds will be used to pay down outstanding borrowings under the company's credit facility. The company is aiming to raise $600 to $800 million in additional capital by the end of 2011.
The company sold its assets in Bone Spring for $110 million on December 10, 2010. With these and the initial public offering of its royalty trust, the Company expects to have raised between $500 and $550 million. You can read more of our explanation of why it’s a buyout target here.
ATP Oil and Gas (ATPG) was incorporated in 1991. The company engages in the acquisition, development and production of oil and natural gas properties in the Gulf of Mexico and the UK and Dutch Sectors of the North Sea. At the end of 2009, the company owned leasehold and other interests in 62 offshore blocks and 104 wells, including 19 subsea wells, in the Gulf of Mexico. ATP operates 93 (89%) of these wells, including 95% of the subsea wells. It also has interests in 11 blocks and 3 Company-operated subsea wells in the North Sea. As of December 31, 2009, ATP had estimated net proved reserves of 135.2 MMBoe, of which 91.3 MMboe (68%) were in the Gulf of Mexico and 43.9 MMBoe (32%) were in the North Sea. As of December 31, 2009, the Company’s proved reserves in the deepwater Gulf of Mexico accounted for 62% of its total proved reserves.
In the third quarter of 2010, the company sold a 67% working interest in the deep operating rights of one of its Gulf of Mexico properties to a third party for an undisclosed amount resulting in a $15.0 million gain. In addition, ATP retained a 10.005% overriding royalty interest that decreases to 1.6675% following the conclusion of deepwater royalty relief.
On April 16, 2010, the company acquired Entrada (Garden Banks Block 782) for $232,100. Previous exploration drilling on Garden Banks 782 found logged hydrocarbons, and Entrada is in the vicinity of existing infrastructure owned by others.
The company presents at EnerCom’s The Oil & Services Conference today in San Francisco followed by another presentation on Tuesday, March 1 at the JP Morgan Global High Yield & Leveraged Finance Conference in Miami Beach. For our full long thesis on ATPG from last year, see here.
Ultra Petroleum (UPL) reported on Monday that it has 4.4 Tcfe of total proved crude oil and natural gas reserves at the end of 2010. This is a 13% increase from 3.9 Tcfe as reported at the end of 2009 in leases over 110,000 acres in the Green River Basin of Wyoming and 480,000 over the Marcellus Shale in Pennsylvania.
During 2010, the company increased its inventory of natural gas drilling locations. It began the year with 7,222 undrilled locations, and participated in 363 wells. It then added 1,286 new locations, ending the year with an undrilled inventory of 8,145 locations, which is the 13% increase from 2009.
On February 8, 2011, the Company received regulatory approval for additional five acre density development from the Wyoming Oil and Gas Conservation Commission. In effect, this offers five acre density drilling on essentially all of the lands that UPL owns interests in Pinedale. Furthermore, an additional ~1,500 five acre locations are now eligible for booking to proved reserves. This equates to over 2.5 Tcfe of net reserves.
"By removing the three year limit and incorporating the recent down spacing order in Wyoming, our proved reserves would increase to approximately 8.9 Tcfe. The PV-10 value is $11.4 billion using a $6.00 per Mcf natural gas price," stated Michael D. Watford, Chairman, President and Chief Executive Officer.
The Green River Basin, where UPL has significant experience producing gas and selling through the Rockies Express pipeline, is a promising multi-layer zone with deeper zones likely to add significantly to existing proved reserves. UPL has well over 100 exploratory wells in the Marcellus with a third already producing gas for sale. We think a buyout would come in around $10-11 billion including debt, or above $60 per share.
Range Resources (RRC) is an independent gas and oil company operating in the Southwestern and Appalachian regions of the United States. The Company increased its proved reserves by 42% to 4.4 Tcfe in 2010. The Company also added 1,410 Bcfe of proved reserves through the drill bit, and 125 Bcfe were obtained through acquisitions. Positive performance revisions added 108 Bcfe, while price revisions grew proved reserves by 40 Bcfe. Moreover, the Company sold properties with 189 Bcfe in proved reserves, while the Company’s total production was 181 Bcfe. As a result, year-end 2010 proved reserves was 4.4 Tcfe, which was up by 42% from the 3.1 Tcfe at year-end 2009, while proved developed producing reserves increased 25% to ~2.0 Tcfe.
Regarding sold properties, they were primarily associated with the Company’s legacy Ohio oil and gas properties. These properties included 3,300 producing and non-producing wells.
CEO, John H. Pinkerton commented, "With the 2010 results now in hand, we have achieved double-digit growth in production and reserves per-share, on a debt-adjusted basis for five consecutive years. Given our Marcellus Shale position, where much of our acreage has now been de-risked, coupled with our other projects in the Nora field in Virginia, Midcontinent and Permian Basin, we have more than 1.4 million acres that hold tremendous resource potential. As a result, we are extraordinarily well-positioned to continue to achieve double-digit, per-share growth at low cost for years to come."
"Our 42% increase in proved reserves, 931% production replacement and $0.72 all-in finding cost is a direct reflection of Range owning a very large acreage position in the Marcellus Shale - a giant field that has industry-leading economics. The above results were achieved despite selling 189 Bcfe of reserves and removing 230 Bcfe of undeveloped reserves that we no longer expect to drill within the next five years. Additionally, we took a modest position by recording, on average, less than two offset drilling locations in the Marcellus for each existing well and no undeveloped reserves were included for the Upper Devonian and Utica formations."
Chesapeake Energy (CHK) announced on Monday that it would sell ~487,000 net acres of leasehold and producing natural gas properties in the Fayetteville Shale play in central Arkansas to BHP Billiton Petroleum (BHP) for $4.75 billion in cash. This includes existing net production of approximately 415 MMcfe of natural gas equivalent per day and midstream assets with approximately 420 miles of pipeline.
The company began 2010 with estimated proved reserves of 14.254 tcfe and ended the Q3 2010 with 16.223 Tcfe, an increase of 1.969 Tcfe, or 14%. It is also the second largest producer of natural gas and a Top 20 producer of oil and natural gas liquids in the US. It owns interests in approximately 45,100 producing natural gas and oil wells that are currently producing approximately 2.8 Bcfe per day, 88% of which is natural gas. Its strategy is focused on discovering and developing unconventional natural gas and oil fields onshore in the U.S., primarily in its "Big 6" shale plays: the Barnett Shale in the Fort Worth Basin of north-central Texas, the Haynesville and Bossier Shales in the Arkansas-Louisiana-Texas area of northwestern Louisiana and East Texas, the Fayetteville Shale in the Arkoma Basin of central Arkansas, the Marcellus Shale in the northern Appalachian Basin of West Virginia, Pennsylvania and New York and the Eagle Ford Shale in South Texas.
The company also has substantial operations in the liquids-rich plays of the Granite Wash in western Oklahoma and the Texas Panhandle regions, the Niobrara Shale and Frontier Sand plays of the Powder River and DJ Basins of Wyoming and Colorado, as well as various other liquids-rich plays, both conventional and unconventional, in the Mid−continent, Appalachian Basin, Permian Basin, Delaware Basin, South Texas, Texas Gulf Coast and Arkansas−Louisiana−Texas regions of the U.S. We have vertically integrated our operations and own substantial midstream, compression, drilling and oilfield service assets.
The company announced earlier this year that it is extending our strategy to apply the horizontal drilling expertise gained from its natural gas plays to unconventional oil reservoirs. The goal is to reach a balanced mix of natural gas and liquids revenue as quickly as possible through organic drilling, rather than through acquisitions. This transition is already apparent in the mix of natural gas and oil and natural gas liquids wells it drills. In 2010, the company expects that ~31% of drilling and completion capital expenditures will be allocated to liquids-rich plays, compared to 10% in 2009, and it is projecting that these expenditures will reach 65% in 2012. The company now owns approximately 3.1 million net leasehold acres in unconventional liquids-rich plays.
Chesapeake Energy reports today. The estimate is $0.63 per share.
For some other energy investing ideas, see our article on 2 ways to profit from the Middle East uprisings here.
Disclosure: I am long GMXR, ATPG.