Valuing publicly traded equities is not an exact science. I've never had much interest in discounted cash-flow analysis that projects cash flows out for forty years. A little tweak in an assumed growth rate changes the valuation derived from such an analysis by large amounts.
My valuation approach is to try and use common sense. If I want to buy something as heavy as an elephant I immediately pass on anything that looks like a mouse. If I'm not sure if I understand something, I try and take a pass.
But the best tool I know of that is available to help me value a company is to look at what other companies in the same industry, with the same assets are sold for to arm's length profit motivated buyers.
With that in mind, I would like to look at the price just paid for Bakken oil producer Brigham Exploration (BEXP) and compare it to Bakken oil producer Petrobakken (PBKEF.PK).
Here we go.
- Statoil (NYSE:STO) just paid $36.50 per share for Brigham Exploration. That equates to an enterprise value of $4.7 billion.
- Petrobakken currently has an enterprise value of just under $3.5 billion.
Price Per Flowing Barrel
- Brigham Exploration is currently producing 21,000 boe/day. With a $4.7 billion enterprise valuation that equates to $223,000 per flowing barrel.
- Petrobakken with a $3.5 billion enterprise value and 43,000 boe/day of production is being valued at $81,000 per flowing barrel. By year end Petrobakken is expected to be at 47,500 per day which will be $73,000 per flowing barrel.
- Petrobakken is trading at one third of the Brigham deal on a flowing barrel basis.
Multiple of EBITA
- For the six months ended June 30, 2011 Brigham had an EBITA of $137 million. On an annual basis that would be roughly $280 million. That would be an EBITA multiple of $4.7 billion / $280 million = 16.79 times
- At $85 oil and the year end exit rate of 47,500 barrels per day of production Petrobakken is going to have EBITA of $850 million. With a $3.5 billion enterprise value Petrobakken is trading at a $3.5 billion / $850 million = 4.11 times
- Petrobakken is trading at one quarter of the Brigham deal on a multiple of EBITA basis
Multiple of Proved Reserves
- Brigham (as of the December 2010 reserve report) has 67 million barrels of proved reserves. A $4.7 billion valuation suggests Statoil is paying $4.7 billion / 67 million = $70 per barrel of proved reserves
- Petrobakken (as of the December 2010 reserve report) has 103 million barrels of proved reserves. With a $3.5 billion enterprise value Petrobakken is being valued at $34 per barrel of proved reserves.
- Petrobakken is trading at one half the valuation of proved reserves and is also subject to more conservative Canadian reserve booking requirements.
Multiple of PV 10 Value of Proved Reserves
- The PV10 value of Brigham's 67 million barrels of proved reserves is $1.1 billion. The $4.7 billion purchase prices suggests that Statoil is paying $4.7 billion / $1.1 billion = 4.27 times the PV10 value of proved reserves.
- The PV10 value of Petrobakken's 103 million barrels of proved reserves is $2.8 billion. With an enterprise value of $3.5 billion Petrobakken is being valued at 1.25 times the PV10 value of proved reserves.
Petrobakken is trading at less than one third of the valuation being applied to the PV10 value of Brigham's proved reserves.
Sum These Various Metrics Up
- Price per flowing barrel - Petrobakken is trading at one third of the Brigham valuation
- Multiple of EBITA - Petrobakken is trading at one quarter of the Brigham valuation
- Multiple of Proved Reserves - Petrobakken is trading at one half of the Brigham valuation
- Multiple of PV10 Value - Petrobakken is trading at less than one third of the Brigham valuation
I don't know exactly what Petrobakken is worth. But common sense tells me that an acquirer would be willing to pay a lot more than the current share price.
Petrobakken is just like Brigham. They are both companies that have years and years of drilling locations ahead of them and both companies sit on vast amounts of oil. That is why the multiples of flowing barrel of production and EBITA being paid for Brigham are so high.
You can't value these companies using the same approach as you do for a conventional oil and gas producer. Much of the value is in the huge land positions that these companies have in unconventional resource plays. And much of that doesn't show up in proved reserves because most of the undeveloped acreage isn't booked as proved reserves.
It isn't just Petrobakken that is massively undervalued right now. The entire sector in Canada is. Pick an unconventional producer and I almost guarantee it is trading at 50% or less than what an acquirer would pay.
All it takes is some common sense to see it. And some patience to wait for Mr. Market to figure it out.
Disclosure: I am long PBKEF.PK.