Voyager Acquisition Of Emerald Raises Questions

| About: Emerald Oil, (EOX)

Voyager Oil and Gas (VOG) has agreed to acquire Emerald Oil (OTC:EMBYF) for 11.6 million shares of Voyager stock and the assumption of $19 million in debt. At the time of the acquisition Voyager shares were trading for $1.77 per share valuing the stock used to purchase Emerald at $20.5 million and the total purchase price at just under $40 million. Emerald Oil's main assets are 10,600 net Bakken acres in Dunn County, North Dakota and 45,000 net acres in the Sandwash Basin Niobrara in Northwest Colorado and Southwest Wyoming. With the acquisition Voyager will have 43,500 net acres in the Williston Basin, including 6,900 net operated acres. The management team of Emerald will be joining the company and Voyager announced it intended to leverage this new management expertise to become an operator, abandoning its non-operator model. Additionally, after the acquisition closes, Voyager will change its name to Emerald Oil.

The first question is what are the assets Voyager is acquiring worth? Emerald has very limited production and its value is in its leases and potential drilling positions. The key asset is the 10,600 net Bakken acres in Dunn County. Kodiak Oil and Gas (NYSE:KOG) has acreage in Dunn and estimates its long lateral horizontal wells have average EURs of 800-900 thousand Boe. These represent some of the best wells in the Williston Basin. If Emerald's acreage is similar to Kodiak's, then a $40 million purchase price would seem reasonable. However, Emerald purchased this acreage for $11.85 million in February of 2012 with a short term loan from a private investor. Did Emerald get a real bargain when they made this acquisition, or is the acreage not as strong as the Kodiak acreage? For comparison purposes U.S. Energy (NASDAQ:USEG) sold approximately 4,700 net non-operated and non-producing Bakken acres in McKenzie County, North Dakota in January of 2012 to GEO Resources (NASDAQ:GEOI) for $16.7 million. Emerald also owns 45,000 net acres in the Sandwash Basin Niobrara play. One of the largest owners of acreage in this area is Quicksilver (NYSE:KWK), which is launching a 7 well test program in 2012. Quicksilver Resources drilled its first horizontal well into the Niobrara Shale in the fourth quarter of 2011. The well produced at an initial rate of 500 barrels of oil per day, and 230 barrels of oil equivalent per day for the first 45 days. If the test wells confirm the initial well, then Voyager will have a substantial opportunity in the Sandwash Niobrara. Emerald paid over $10 million in cash plus shares to acquire most of this acreage in 2011.

The second question is what is the depth of experience of the Emerald management team Voyager is counting on in its efforts to become a multi-rig shale operator? Michael Krzus served as the CEO of Emerald and he will become the CEO of Voyager. He has 29 years of managerial experience with various international exploration and production companies. McAndrew Rudisill will serve as President of Voyager. He has 11 years of investment management experience focusing on the natural resource sector. Paul Wiesner has 25 years experience in the oil and gas industry and will serve as CFO of the combined companies. Finally, Karl Osterbuhr also comes from Emerald with over 20 years of oil and gas experience and formerly served as exploration and operations manager at Delta Petroleum in the Rockies and Gulf Coast Region. This is a very strong operational and financial management team joining a company that previously had only 5 total employees.

The third question is why has Voyager lowered its capital expenditure budget? Earlier in 2012 Voyager indicated it planned to spend $70 million in 2012. Now, Voyager plans to spend $31.2 million between now and the first half of 2013. This includes $21 million on new operated wells originally planned by Emerald. West Texas Intermediate Oil prices have fallen $20 per barrel from the first quarter to an average of $85 per barrel. The differential in the Bakken closed to even in April but spent most of June in double digits with realized prices for Bakken spot oil trading in the $60s. The Bakken spot crude differential has just gone back into single digits with prices near $80. The lower oil prices could have Voyager passing on some of its working interests or some of its operators could have scaled back operations in less prolific areas. The company could also be hesitant to take on substantial new debt in the current environment, which is smart. The strategy could be to prove the Dunn acreage and sell the company to the highest bidder.

The last question is will the new operator model erase the significant discount Voyager and other non-operators like Northern Oil and Gas (NYSEMKT:NOG) are trading at. After adjusting for production and net acreage in other project areas Voyager is trading for $1,431 per acre compared to peers like Triangle Petroleum (NYSEMKT:TPLM) that trades at $4,188 per net acre and Oasis Petroleum (NYSE:OAS) that trades at $4,526 per net acre. It is only via prejudice and bias that non-operators trade for such a steep discount to operators that are sharing the same wells with the same results.

Voyager is a small cap oil company that faces the risk of not being able to successfully integrate its new merger. It also has not proven it can seamlessly transition from a non-operator to an operator. The company also faces the risk that it will not be able to raise sufficient capital to grow the company. But if prices for Bakken oil trend northward, and if Voyager can demonstrate it can successfully drill and complete a couple of horizontal Bakken wells, then the company may see its significant valuation discount to peers disappear.

Disclosure: I am long USEG.

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