As an investor in energy equities my ideal scenario is to buy a company that has the following characteristics:
- Is significantly undervalued by the stock market.
- Has a management team heavily invested personally in the company.
- Provides upside in addition to the undervaluation through exploration targets or technological advances.
- Has a management team that will continue to do smart things and over the years grow the intrinsic value of the company.
- Is not overleveraged.
I can make a decision to buy, and then keep learning about the company as time passes and management continues to increase intrinsic value. Over time, because I know the company well I will be able to buy confidently on market selloffs and accentuate my long term returns.
That is the ideal game plan.
However, it is only human nature to want to buy a significantly undervalued company and then have that value realized quickly through a takeover. One company that I’m very familiar with and have owned for several months now appears likely to be taken out at a big premium to the current share price.
Takeover Candidate – Westfire Energy (WFREF.PK)
How do I know Westfire is a candidate for a takeover? Because the company said so:
“WestFire Energy Ltd announced that its Board of Directors has decided to initiate a process to identify, examine and consider a range of strategic alternatives available to WestFire with a view to enhancing shareholder value. Strategic alternatives may include, but are not limited to, a sale of all or a material portion of the assets of WestFire, either in one transaction or in a series of transactions, the outright sale of WestFire, or merger or other transaction involving WestFire and a third party. For the purposes of considering strategic alternatives, WestFire has established a special committee consisting of independent directors, John Brussa (Chair), Christopher Fong and Roger Thomas and WestFire's Executive Chairman, Ed Chwyl (being a non-voting member) to oversee the process. WestFire has engaged Cormark Securities Inc. as its financial advisor in connection with the process. The Board of Directors has determined that WestFire's shares trade at a significant discount to the value of its underlying assets, especially given its high quality, low cost, operated asset base, which generates operating netbacks that are top quartile in industry, its strong balance sheet, its fully funded 2012 capital expenditure program, its large undeveloped land position and its multi-year drilling inventory with over 1,000 net prospective locations in its three core Viking light oil resource play project areas at Redwater and Provost, Alberta and Plato, West Central Saskatchewan.”
Prior to this announcement Westfire shares were under $5. Post announcement shares are well over $5 but still represent a large discount to what I think Westfire could be worth in a takeover.
Estimate of Westfire Intrinsic Value
Net asset value of Westfire as at June 30, 2011:
- PV10 Proved and Probable Reserves - $767 million
- Net Debt - $58 million
- Net Asset Value - $719 million
- Fully Diluted Shares – 88 million
- NAV per share - $8.17
Based on this Westfire is significantly undervalued just based on the already booked reserves.
Now the real big upside kicker -- here is what Westfire has in terms of risked Viking drilling opportunities:
- 285 Redwater drilling locations with an estimated $2.5mil NPV each.
- 432 West Central Saskatchewan locations with a $1.3mil NPV each.
- 78 Provost drilling locations with a $1.7mil NPV each.
Multiply those together and add them up and the total I get to is $1.4 billion. Only 148 of those almost 800 locations have been booked in the reserve numbers.
Based on already booked reserves Westfire has a lot of upside. Throw in the 650 locations which haven’t been booked and each of which is likely worth a couple of million each and the upside starts looking a little silly.
In my opinion there is no way Westfire gets sold for less than the net asset value of its booked reserves of $8.17 per share. When you consider that the vast majority of Westfire’s drilling locations are not included in that net asset figure and a takeover price well above $10 seems likely.
That is pretty much a double from the current share price.
I’m not sure why Westfire is in such a rush to realize full value by shopping the company. I would have thought that this is one company that could increase value per share considerably over the next few years by continuing to improve recoveries of their Viking play.
But I won’t complain if I wake up and find the company sold for $10 per share. I’ve got plenty of good ideas where I can reinvest the proceeds.
The most likely acquirer could be Penn West Energy (PWE), which already holds large land positions in the Viking play.
Disclosure: I own Westfire Energy personally and for my subscription newsletter. I am long WFREF.PK.