Bellatrix: An Energy Company With 250% Upside

Oct.23.11 | About: Bellatrix Exploration (BXE)

We Canadians are such friendly folks. When Chinese company CNOOC (NYSE:CEO) tried to buy American oil company Unocal a few years back, the American government started kicking up such a fuss that the Chinese were basically forced to drop their bid.

When Chinese company Sinopec (NYSE:SHI) announced the acquisition of Canadian oil and gas producer Daylight Energy (OTC:DAYYF) last week, Canadians stood up and asked “who would you like to buy next”?

I mean we wouldn’t want to offend our Chinese friends.

You have to admire the Chinese. While most of the developed countries of the world find themselves struggling under crushing debt loads, China, much like Warren Buffett, sits on mountains of cash. And like Buffett, China is willing to invest that cash with a long term investment horizon in mind. Seemingly every month there is some sort of deal where China is buying up oil reserves that will feed its growing economy in future years.

While the American government’s energy policy currently seems to be doing nothing, China’s policy is to lock up oil reserves today because in the future, oil will be in short supply.

Sinopec acquires Daylight Energy

China has previously made several deals in Canada that involve oil sands assets. This month marked the first full acquisition of a Canadian oil and gas producer.

On October 9, 2011, Daylight Energy announced that it was being acquired for $10.08 per share by the Chinese company Sinopec. Sinopec also assumed roughly $800 million of debt in the deal, meaning the transaction valued Daylight at about $3 billion. The Daylight stock price prior to this transaction was about $4.60, so the deal was a quite a premium.

For that $3 billion Sinopec received:

  • 36,800 boe/day of production
  • 63% of that production is natural gas

  • Projected 2011 funds flow from operations of about $340 million

  • First Half operating netbacks of $26.40


  • Price per flowing barrel $3 billion / 36,800 = $81,521
  • Price per funds flow $3 billion / $340 million = 8.82X

Let me tell you that as the owner of shares in several unconventional, light oil-focused companies, seeing Sinopec pay $81,000 per flowing barrel for a company heavily weighted towards natural gas is encouraging.

China Would Love Bellatrix Exploration

Bellatrix Exploration (BLLXF.PK) is a company that is benefiting enormously from the oil industry breakthroughs in horizontal drilling with multi-stage fracturing that has unlocked previously trapped oil and gas reserves.

Prior to these technological improvements, Bellatrix was basically a natural gas producer sitting on land with oil in place but not economically recoverable. Now that land that Bellatrix is sitting has tremendous value because that oil is recoverable through the application of multi-stage drilling with horizontal fracturing.

Wouldn’t you love to wake up tomorrow and find out that the land you own has gone up 10X in value because of someone else’s technological breakthrough?

Bellatrix is positioned in three plays that are stacked upon each other. The Cardium, the Notikewin and the Duvernay.

Here is the company profile:

  • 115 million fully diluted shares outstanding

  • $4.43 stock price

  • $90 million of debt and convertible debentures

  • Enterprise Value of $600 million

  • Target 2012 Exit Rate Production – 19,000 boe per day (17,000 boe per day average in 2012)

  • Target 2012 Cash Flow From Operations - $165 million

Valuation Estimate

To get a sense of what Bellatrix might be worth, I’ll apply the metrics in the Daylight deal ($81,521 per flowing barrel and 8.82 times cash flow), keeping in mind that Bellatrix is almost 50% weighted to oil, while Daylight is only 33% oil.

  • 19,000 boe/d production x $81,521 = $1.55 billion or $12.68 per share

  • Current Bellatrix share price $4.43

  • 2012 cash flow $165 million x 8.82 = $1.45 billion or $11.87 per share

  • Current Bellatrix share price $4.43

Drilling Locations

Bellatrix is a small company with a huge inventory of drilling locations. It is going to take a lot of capital to develop these resources, which is why Bellatrix makes for a logical match for the Chinese. Here is a list of the cmpany's drilling locations and the net present value per drilling location in its three main properties:


  • 400 net locations

  • $6.5 million NPV10 per location

  • $2.6 billion

  • $22 per share


  • 174 net locations

  • $10 million NPV10 per location

  • $1.7 billion per share

  • $15 per share


  • 215 net locations

  • $14 million NPV10 per location

  • $3.0 billion per share

  • $26 per share

Add those together $26 (Cardium), $15 (Notikewin) and $26 (Duvernay) and it equals $67 per share. Compare that to the current $3.65 share price.

Now, those valuations are pre-tax numbers and you have to give them a haircut to reflect the fact that they aren’t going to be all drilled tomorrow (to reflect present value). But even 10% of the $67 figure is almost double the current share price.

I should mention that the Duvernay is very new and carries more risk than the other plays simply because it doesn’t have much of a drilling history. Land sale prices offsetting Bellatrix have skyrocketed this summer showing the industry believes they understand the play.

I think the fact that Bellatrix will be acquired is a no-brainer. Whether the acquirer is from Asia or from somewhere else I don’t know. One thing I do know, and that is the higher production goes, so too goes the asking price for the company.

Disclosure: I am long BLLXF.PK.