Wattenberg Transaction Read Through To Public Companies In The Area

by: Josh Young

Synergy Resources (SYRG) announced it acquired 800 acres in the Wattenberg field, producing 300 boepd, for $20.5 million. This reads through to a value of $68,333 per barrel of oil equivalent produced per day, with no value attributed for acreage.

There are a number of public companies with exposure to the Wattenberg Niobrara (and Codell) play, and while this is a relatively small transaction, it is helpful to review such private market transactions to see how the private market compares to the public market. Considering the volatility of stocks versus the relative stability of the private market, it can be helpful to see if stocks might be relatively undervalued or overvalued.

First, it makes sense to look at Synergy itself to see how the company is valued versus the asset it just purchased. Prior to the acquisition, Synergy was producing 2,400 boepd as of its last disclosure, and according to yahoo finance it has an enterprise value of $730 million. At $68,333 per boepd, this implies a "private market value" of $164 million, implying Synergy stock may be trading for more than 4x the current private market value of its assets, based on this transaction it just closed.

Alternatively, some analysts have said that Synergy may be able to achieve ultra-high growth, getting as high as 7,000 boepd by the end of next year (I am skeptical, but it is helpful to review the "high case" to assess what bullish investors might think the company is worth). If somehow Synergy manages to triple its production in one year, that 7,000 boepd, based on this most recent transaction, could be worth $478 million. This still implies that Synergy stock might have to decline 35% to trade in line with the multiple implied by this recent transaction.

Synergy is the most appropriate comparable because of the dispersed nature of its Wattenberg acreage. Investors in other companies, such as Bonanza Creek (NYSE:BCEI) and Bill Barret (NYSE:BBG) might argue that those companies positions in the Wattenberg might merit a premium valuation due to efficiency advantages from contiguous acreage.

Bonanza Creek produced 17,656 boepd according to its most recent announcement. At $68,333 per boepd, this implies a value of $1.2 billion, versus an enterprise value of $2.4 billion according to yahoo finance. However, an adjustment up to ~$100,000 per boepd for contiguous acreage gets the value closer to $1.8 billion, which is still lower than the $2.4 billion enterprise value, but a lot closer than Synergy's value. Also, if Bonanza Creek continues growing at half of its recently achieved 88% y/y growth rate, at $100,000 per boepd its implied value in a year might be well over its current $2.4 billion enterprise value. This compares favorably with SYRG.

Bill Barrett produced just under 40,000 boepd according to its most recent announcement. Adjusting that number down to account for a higher gas percentage and less favorable economics from gas production gets the company to ~20,000 adjusted boepd. At $68,333 per boepd, this implies a value of $1.36 billion. At $100,000 per boepd, adjusted to factor in the higher value of Bill Barrett's contiguous acreage, this implies a value of $2 billion, versus a recent enterprise value of $2.56 billion according to yahoo finance. And assuming continued growth, Bill Barrett's implied value in a year might be well over its current $2.56 billion enterprise value. This is in line with Bonanza Creek and implies that both BBG and BCEI trade at a much more attractive valuation than SYRG on these metrics.

There are other larger companies active in the area, such as Noble (NYSE:NBL), Carrizo (NASDAQ:CRZO), Whiting (NYSE:WLL) and Encana (NYSE:ECA). However, these companies have much more dispersed asset bases that make valuing them based on their Wattenberg exposure much more challenging. However, of that set, only Noble trades for over $100,000 per boepd, and that is likely because of its exposure to massive natural gas finds in the Eastern Mediterranean, which is in the process of coming on to production and substantially increasing Noble's production base. But the recent transaction is likely helpful in valuing the Wattenberg component of each of these companies asset bases.

Disclosure: I am short SYRG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am short SYRG and may buy or sell any stock mentioned with no further notice

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