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Fundamental Research - To take an unbiased look and let the facts be my guide
  • Why AEZ is not worth what the market is paying, the real math on Goliath  0 comments
    Dec 16, 2009 10:39 AM | about stocks: AOIX

    It is extraordinarily difficult to figure out how much these Bakken plays are worth, given that many of them have at this early point in development only the acreage. They do not yet have reserves or production that allows their valuations to be compared with other resource companies targeting more mature fields. Luckily, American Oil and Gas (AEZ) announced a transaction yesterday that allows us to back into what they and their unnamed industry company think AEZs acreage is worth. According to the December 15, 2009 press release, the industry company will earn:

    25% of Americans working interest in working interest in approximately half of the 60,000 net acres at Goliath by funding 100% of American's interest in a one well drill-to-earn arrangement. American will be carried for and will retain 30% of its original interest in the well and the drill site spacing unit. The industry company will also pay up to an additional $1.1 million to American as part of the agreement.

    Got that? The first part is unambiguous. The industry company will receive 7,500 net acres of AEZs Goliath play (25% * * 60,000 net acres). The second part is a little ambiguous, since it is not clear if American was previously on the hook to pay 100% of the one-well drilling costs in their drill-to-earn arrangement, or only 30% of the drilling cost, in line with their original interest in the well. In any event, we can get a range of the funding commitment of the unnamed party. Since Bakken wells generally cost $5-8 million to drill, the industry party at the low end is going to fund $1.5 million of drilling expense (30% of $5 million) and at the high end $8 million (100% of $8 million). Add in the $1.1million additional upside (presumably based on a blowout success on the well, so not applicable on lower bound valuation) and the industry company is funding $1.5 million to $9.1 million in exchange for 7,500 net acres, or $200/acre to $1,213/acre. This implies that the value of AEZs remaining interest in the Goliath play is between $10.5 million and $63.7 million, or $0.20/basic share to $1.33/basic share. The company and an independent third party just told us that their crown jewel Goliath play is worth much less than the market thinks it is.

    Given that 46,000 acres of Goliath were purchased in 2009(less than 5 months ago) for roughly $3m this property is not worth and is not of the quality the stock is getting credit for.

    June 30, 2009 - 14,600 acres - Goliath - paid $900,000
    July 15th, 2009 - 11,600 acres
    October 2009 - 16,000 acres

    So 46,000 acres purchased in last 5 months in GOLIATH (this accounts for 55% of all their Bakken acres) and now that's worth $180m. Let's be clear, its not.

    Just ask their auditor. From the last 10Q (3Q10Q) "We estimate that the standardized measure of discounted cash flow relating to our share of proved undeveloped reserves approximates $0.9 million, net of our estimated $1.2 million share of drilling and completion costs."

    AEZ is worth $2.50 to $3 a share in the real world and will certainly be looking to sell stock soon.

    Disclosure: Why AEZ is worth much less than its current price.
    Stocks: AOIX
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