For several years I have been building a portfolio of light oil producers because I expect reasonably high oil prices to be with us (on average) in the future. I have further focused this portfolio on unconventional "tight" oil producers that I think have terrific growth prospects but are priced for little or no growth.
With WTI oil bumping up against $90 which is what I think is a very attractive price for these oil producers I would have expected my portfolio to be doing great.
It isn't. The past couple of months have had a sell-off in the Canadian Resource sector that is pretty much equal to the horror of 2008.
The unconventional producers that I own are cheap, so I keep buying. One unconventional oil weighted producer that I don't own, but would happily is Legacy Oil and Gas (LEGPF.PK). Let's walk through what the valuation looks like using some traditional metrics and how Legacy's valuation compares to some recent asset and company sales:
156 million shares
$430 million in debt
Share price - $5.90
Enterprise Value - $1.35 billion
Valuation Various Metrics
Enterprise Value / Reserves - $1.35 billion / 88 million boe (84% Oil and NGLs) = $15.34
Comment: With oil still at $90 per barrel, that seems exceptionally cheap for reserves that are geared 84% towards oil. Progress Energy (PRQNF.PK) was strictly natural gas producer and it got bought for almost $20 per boe of reserves by Petronas. Even if you assume that most of the future production from the Progress property is going to be sold at Asian LNG prices (justifying a higher valuation than Canadian natural gas prices) Legacy appears very inexpensive on a per barrel of oil equivalent basis.
An interesting comparison for a similarly oil weighted property would be the sale of Petrobakken's non-core Bakken assets which were sold to Crescent Point (CSCTF.PK) for $41 per 2P barrel. At $14.77 per barrel Legacy's reserves many of which are also in the Bakken certainly don't look expensive. They look very cheap since they are being valued at one-third of that Petrobakken (PBKEF.PK) asset sale of similar oil weighted reserves.
Legacy Enterprise Value / Cash Flow - $1.35bil / $240mil (first quarter run rate) = 5.6 times
Comment: This doesn't appear exceptionally cheap, but this is a company growing production per share at a rate of 18% per year and will be growing for the next decade as this drilling inventory gets developed. The Progress acquisition by Petronas referred to above was done at a gaudy 20 times cash flow.
For some additional perspective we can look back to last fall which was also a time of European stress and plunging oil prices. In October 2011 Statoil (STO) acquired pure play North Dakota Bakken producer Brigham Exploration. Here are what the metrics were on that deal:
- The $36.50 per share price equates to an enterprise value for Brigham Exploration of $4.7 billion.
- In Q2 Brigham had 12,000 boe/day of current production, meaning that the price is $4.7 billion / 21,000 = $391,666 per flowing barrel.
- 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
- 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
- The PV10 value of the 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.
Brigham was rolling at annual cash flow run rate of about $270 million when it was acquired which is actually pretty close to where Legacy is. Brigham was bought at almost 17 times cash flow. Legacy is trading at 5 times cash flow implying an upside of about 300% if it was valued like Brigham.
I'm not sure I'm convinced that there is 300% upside if Legacy was acquired today, but it is interesting that the Petrobakken asset sale was at $40 per barrel and Legacy is trading at about $14 per barrel which would also suggest 300% upside.
There are plenty of variables that I likely also need to factor in, but I don't think it is coincidence that both metrics point to a similar kind of upside.
Enterprise Value / Production - $1.35 billion / 17,900 Exit Rate (84% Oil and NGLs) = $76,727 per flowing barrel.
Legacy is almost a pure play oil producer. So was Brigham and so were that assets in the Petrobakken asset sale. Brigham was sold for a wild $391k per flowing barrel, and the Petrobakken asset sale went for $147k per flowing barrel. Legacy is trading for half of the Petrobakken sale and much less than the Brigham sale.
Conclusion on Legacy Valuation
The multiples that an acquirer will be willing to pay (if the seller isn't financially distressed) are going to depend on the growth prospects of the company and the cash generating ability of the property. Oil weighted production is worth more because it has such high netbacks. The Petrobakken asset sale was a pretty well developed property that did not contain the scale of undeveloped acreage that the Brigham sale did. Despite being pretty fully developed the Petrobakken asset sale went for very high multiples per barrel of reserve and production because it is highly valuable oil production.
The Brigham metrics are off the charts because it was both an oil company/asset and had a big undeveloped land base. I would think Legacy would be more comparable to Brigham than the Petrobakken asset sale.
Legacy's drilling inventory includes 1,200 identified location with considerable upside to that number as it excludes Bakken downspacing, Turner Valley Cardium, South Alberta Bakken and Maxhamish all of which will add to that drilling inventory figure.
At a minimum then, I would say that Legacy the company would be worth at least an equivalent to the Petrobakken non-core Bakken asset sale. That would put Legacy's value at two to three times the current share price depending on whether you focus on flowing barrel or barrels of reserves.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.