Usually, when one of our names gets acquired, we applaud loudly. Especially when it's one of our top five holdings in the ZLT as was the case with HK back in July 2011 and with Brigham Exploration (BEXP) Monday. Both will be missed to be sure, but we like profits as much as anyone, and the show must go on.
However, Monday's announcement that STO is acquiring Williston E&P player BEXP in an all cash deal was less cause for celebration than normal. To be sure, 20% in a day is nice, as is the 374% gain over the cost of our core position that the $36.50 buyout price yields. But when we think of the sizable acreage position, potentially over two thousand future drilling locations that will come from higher density drilling, the as of yet untested shallower and deeper zones, the production that is likely to quintuple over the next five years...as we think of all that we are somewhat morose over the price tag - which, while high on current metrics of production and reserves, seems to leave a lot on the table of the not too distant future.
We do recognize that private market transactions are the ultimate arbiter of public valuation, but think some points are worth noting as it pertains to the growing list of small and mid cap names still in the field of play.
First, A Note Of Thanks. Bud Brigham and his team have been pioneers in this play. Over the last three years they have shared well by well data helping to educate investors and the public about the potential here. Ever since they decided to really focus on the Williston, they were one of the names I didn't worry about mucking up on the drilling, logistics, completion or guidance angles of the story and they provided a level of transparency that is refreshing. Being under-promise and over-deliver types didn't hurt my opinion of them either. So thanks guys for a great, if all too short, ride.
Acreage Price Tag Makes Other Names Look Cheap. BEXP has long had a premium position among the Bakken Players. Both on the east (Ross) and west (Rough Rider) sides of the Nesson Anticline, Brigham has proven up substantial amounts of acreage as more than economically viable for both the middle Bakken and the Three Forks.
At 375,800 net acres total (235,200 of them self proclaimed as derisked) with record IPs in both zones in both areas, the takeout price comes to $12,500 per acre. Among the Bakken Players, that puts it in the upper tier on a dollar per acre basis. To be sure their acreage is good, they run a tight ship with many infrastructural efficiencies yet to be reaped, but is it really worth that much more than the others? Many of the positions in fact overlap with one operator's Rough Rider being another's Red Bank or Indian Hills.
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On that basis, here's how the other names would be valued...
But should they be so large? If one has a track record of acquiring acreage in areas that are currently drilled such that they are rapidly put under the drill bit and not just bought "in the way of the play's migration", maybe the discounts should not be so large. I'd offer that in the case of NOG, the short seller depressed price is overly discounted, especially when you "production adjust" price per acre based on estimated 4Q11 levels and when you note that over half of NOG's acreage will be held by production, let alone a higher percentage that will be delineated by the work of offset operators, by year end.
The name more than doubled its proved reserve base in the first seven months of the year despite a delayed drilling and completion schedule due to weather, and that's with Ryder Scott at the helm on the reserve figures. Over the course of the second half they are set to more than double production and with the filing of the 10K early next year I guess the shorts, who remain overlarge in the name, will begin to scramble for the exits. If not, then look for more M&A thoughts on this cheap and increasingly held by production name.
Turning to KOG, the name appears somewhat fairly valued on the raw acreage basis in the chart above, but production adjusting its 4Q production acreage valuation reveals the hockey stick effect of their volume growth in clear detail as they move from nearly the same acreage multiple as the BEXP buyout price in the first chart above to near the bottom of the range for the operated names and second cheapest only to TPLM in the chart below.
TPLM is over cheap due to Greece, the weather earlier this year, the shorts, the slightly off the top current oil prices, their current non-operated status and a lot of unproven acreage and despite a big cash position that equates to well over half the current share price. While they are still in their infancy as Bakken Players go with the operated drill bit, they are a size acreage holder and bring with them a management and operations team with a wealth of experience.
While other metrics among the "Bakkens" are skewed to the high side of what you normally think of as rationale metrics for E&P players (TEV per flowing barrel calculations are well over $100,000 per BOE and TEV/Proved Reserves seem excessive on the surface as well), this is attributable to the early innings nature of the play. The fact that many of the names are growing in the triple digits for the next few years warrants higher than traditional multiples, especially since they are doing so in a flat to falling per unit operating cost environment and that at some point, they will be seeing reduced completion costs as well.
One area where the Bakken Players do stack up well with traditional E&P metrics is on out-year cash flow per share multiples and many of the names are exceedingly cheap despite the expectation that they will double company volumes and reserves every six to nine months for the next few years. So turning to cash flow you again see many of the ZLT Bakken Player names on the low end of the list, with names like CLR, which is perpetually seen as a buyout candidate by some people with TV shows due to its huge acreage position, at the most expensive end of the list, except for the deal price that took BEXP away from us.
WLL is always cheap and part of that is due to higher cost non-Williston production, part is attributable to their large size and lower than peer group growth rate, and part is likely due, of late, to concern over their non Sanish areas. This concern is likely overdone. They are certainly not getting credit for anything outside of the Basin (Niobrara, Bone Springs), but the bar is set very low for the 3Q report and the weather is behind them as well. Should be interesting.
On the other end of the spectrum is KOG who is set to grow production over 300% this year with triple digit growth next year and multiple successes outside of Dunn County and still we're at the bottom of the multiple pile in the chart above. Curious. Look for news there this week from their Smokey area.
Everything else has been covered in the monthly Bakken Players update including production and production per share charts, a bunch of valuation metrics, and per BOE cost charts, so check with the last one for details along those lines.
Nutshell: Right now I am thinking the BEXP deal is pretty much a non-event as mergers go (sorry to see them go, but I mean as it pertains to the peer group) and as such, no change in thinking by me on the rest of the names. We are likely to punt the core position from the ZLT on Tuesday and leave the trading positions added over the Spring and Summer when the group was busy weakening in large part due to weather in the Williston and fear over the global growth environment.
By leaving about half of the position on the table we have limited downside and can participate should a domestic E&P or Major decide to spine up and offer a competing bid in the next few days. It's probably unlikely but I'm not in a great rush to redeploy capital at present except back into other core names at any rate. I may add to our OAS and KOG positions in the coming days if the group decides to settle in a bit with the market. I published a BEXP model last week on the Zman's Energy Brain site that would have been included in a new free report soon, but that is moot now. Tune in later this week for OAS and KOG models.