This will be our last post for this series on Bellatrix (NYSE: BXE, TSE: BXE). We will, however, continue participating in the comments sections--especially with this post since it includes the results of our models (which are available for download here under "Miscellaneous Material"). Since it would be too cumbersome to dive into all of the assumptions with a list of 50 or more bullet points, we have decided to save most of this for discussion in the comments section, focusing mostly on the results and an overview of the analysis in the post itself.
Model Construction and Calibration
We started by creating a model using the Spirit River type curve and parameters from the December 31, 2015, Canadian reserve report (price, operating costs, etc.). We then calibrated the model to the results of the reserve report to estimate other unknown parameters. To a significant extent, the calibration process is focused on estimating the timing of production and changes in expenses overtime. Since prices, total costs, total revenues, and other items are given, the relative timing of these items can be approximated by adjusting them to match the reported PV10 value, since this incorporates the time value of money.
Forecasted Ferrier field production and net new wells based on DDI's calibrated model. Source: Deep Drilling Insights (DDI).
Comparison of DDI's calibrated model outputs to Canadian reserve report. Source: DDI.
Next, we estimated the inventory of undrilled well locations that are likely to match (on average) the type curve. Below is the map we used with our own annotations. The red lines are the locations we think will match the type curve. The blue lines are locations that we think may be viable in the next 5 to 10 years, but that we do not think will match the current type curve. In some areas we did not draw in any locations based on our general assessment of the acreage (see Part 1 and Part 2). We also did not add locations in the eastern acreage block because of how the area is populated with only a few old vertical wells and two horizontal "test" wells. We suspect these test wells did not yield results attractive enough to spur more development in the area. The final result was roughly 40 gross locations that we think will match the current type curve. To be generous in our analysis, and to match BXE's 2017-2019 production guidance, we will use 54 net locations for our forecast.
Source: Slide 15 of BXE's January presentation with red and blue locations added by DDI.
Using the current futures curve in our calibrated model, pricing differentials for the first 9 months of 2016, and 54 net locations we get a valuation for the company's core asset of $293 million. This represents about $0.72 CAD per dollar (NYSEARCA:CAD) of debt outstanding.
(Both the calibrated and futures-based model files are available for download.)
Let's quickly review just a few key assumptions:
- We are assuming the Notikewin, Falher A, Falher B, and Wilrich cannot be targeted as separate zones and still produce the same Spirit River type curve (see Part 1 and Part 2).
- We are assuming areas with thinner contours in the company-provided contour map and sparsely populated with current and historical wells are unlikely to match the current type curve.
- We are assuming the current futures curve is an accurate forecast of future commodity prices.
- We have not yet included any option value for the currently uneconomic Cardium assets.
- We have not yet included any value for the Alder Flats gas plant.
- We are assuming the price differentials for the first 9 months of 2016 will stay flat.
If this analysis has any blind spots, we think they would most likely have something to do with assumptions 3 through 6.
While the results of our analysis may seem exaggerated or shocking, the U.S. and Canadian reserve reports themselves seem to support just what we are saying:
On March 18, 2016, Bellatrix filed a U.S.-compliant reserve report with an effective date of Dec. 31, 2015 (i.e. matching the Canadian report that referenced in the 2015 AIF). U.S. reports are required to use historical prices from the previous year and hold them flat. We were unable to find the exact prices used stated anywhere within the U.S. report itself, but we were able to find the prices from the forecast archives of the reserve auditor's website for the "constant" price forecasts created "as per SEC regulation". Based on comparing the escalated price forecasts from the archives to the escalated price forecasts that was actually used in BXE's Canadian report, we feel that the constant price forecasts are also likely very close to what was actually used with only a few minor adjustments. We consulted the "December 2015" forecasts for both the escalated and constant price forecasts. In the case of the constant price forecasts, it explicitly shows January through December prices being averaged to attain a price for the Dec. 31st effective date generally used in year-end reserve reports. Here are the prices for the constant, SEC-compliant forecast (in CAD):
Canadian Light Sweet
Western Canada Select (WCS)
Source: Sproule's (reserve auditor) "December 2015" constant pricing forecast.
In the U.S. report, reserve increases from "Extensions" and "Discoveries" came to just 698 Mboe (not even enough to match the reserves for a single well under the Spirit River type curve). [There appear to have been no increases due to "In-Fill Drilling" since this category was excluded entirely from the U.S. report.]
In contrast, Canadian reports use forecasted prices provided by the reserves auditor. Here are the prices used in the Dec. 31, 2015 Canadian report as reported by BXE in its 2015 AIF:
Source: BXE's 2015 Annual Information Form.
Notice how quickly the prices escalate in the beginning. Here are the year over year percentage increases:
Source: DDI (table), BXE's 2015 AIF (underlying data).
Not surprisingly, under this kind of pricing forecast, the reserve increases from Discoveries, Extensions, and In-Fill Drilling in the Canadian report was much higher than the figure in the U.S. report: 12,818 Mboe (the equivalent of 13 PUD locations under the Spirit River type curve).
You might be wondering why we are focusing on reserve increases from Discoveries, Extensions, and In-Fill Drilling. This is because these numbers tell us whether the reserve auditors see the locations adjacent to newly drilled wells as economic or not. When reserve engineers update a reserve estimate, they look at what wells have been drilled since the last estimate, and then they add the adjacent locations as proved undeveloped ("PUD") reserves . . . if they are deemed economic. In this case, BXE's reserve auditor (Sproule) looked at the same locations under two different pricing assumptions and came up with two very different answers.
We should also point out that the PV10 for the Canadian report was $820 million, while the PV10 for the U.S. report was just $364 million (here we're using the Standardized Measure, but because future income taxes were estimated at $0.00, the Standardized Measure would be the same as the PV10).
Now, it's fair to say that the U.S. price assumptions are too pessimistic. And it's also fair to say that the Canadian price assumptions are too optimistic. But keep in mind that neither of these estimates factor in the current debt load and the associated interest payments. Reserve reports also usually exclude a large amount of G&A expenses.
With this in mind, is it really so hard to imagine that BXE has little, if anything, to offer its current equity holders?
(Please feel free to download the models and challenge/question the assumptions, approach, etc. in the comments section below.)
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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