U.S. Shale: NAV Analysis Of Denver-Julesberg Basin (Niobrara) E&Ps - 2018 Q1 Update

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Includes: BCEI, PDCE, SRCI, XOG
by: Andre Kovensky

Summary

PDC Energy and Extraction Oil & Gas are overvalued on an NAV basis but undervalued on a DCF basis.

SRC Energy is over-valued on a NAV basis and DCF basis.

Bonanza Creek Energy is over-valued on a DCF basis but under-valued on a NAV basis.

This report updates with 2018 Q1 results my initial report on the U.S. shale Denver-Julesberg Basin (Niobrara) E&Ps. For definitions of terms and explanations of methodology, please reference the initial report published on 5/7/2018, "U.S. Shale: NAV Analysis Of Denver-Julesberg Basin (Niobrara) E&Ps" covering PDC Energy (NASDAQ:PDCE), Extraction Oil & Gas (NASDAQ:XOG), SRC Energy (NYSEMKT:SRCI) and Bonanza Creek Energy (NYSE:BCEI).

Summary Results

Here is a summary of the results I will describe in this report:

Since my last report on the Denver-Julesberg Basin group, there have been no material events or changes to my analysis.

Regarding the specific companies and my investment views, in my prior report I stated PDCE and XOG were overvalued on an NAV basis but undervalued on a DCF basis. That statement still stands. I also stated SRCI was overvalued on an NAV basis and DCF basis. That statement still stands. Finally, I stated BCEI is undervalued on an NAV basis and about fairly valued on a DCF basis. Now I believe BCEI is overvalued on a DCF basis but still undervalued on an NAV basis.

The Denver-Julesberg Basin group suffers from a low weighting to oil production. Their high exposure to NGLs is problematic, as I have reduced my long-term NLG pricing assumptions. And their price realizations for oil and NGLs are weaker than most other basins. There is no compelling reason to own any E&Ps in this group. I have no positions in any of these E&Ps.

I continue to assume commodity prices in 2018 are $65 WTI oil at Cushing and $2.75 natural gas at Henry Hub. I reduced my assumption for NGLs at Mont Belvieu from $35.75 per barrel to $32.50 per barrel. In 2019 and beyond, I assume $62.50 oil, $31.25 NGL and $2.75 natural gas, with NGL pricing decreasing from $35.94 in my prior report. These commodity prices are before basis differentials.

Share prices are as of June 29, 2018.

Oil & Gas Resource Potential

Chart 1 below shows the Proved Reserves and potential resource from future drilling sites for each company as well as by geography for the companies I research.

There are no material changes to the information in the above table.

Oil & Gas Drilling and Completion Costs and Profitability of the Production

Chart 2 below shows the D&C cost per adjusted BOE for each company and the various geographies.

By changing my assumption for NGL prices, all companies’ D&C Costs per Adjusted BOE were slightly impacted. Otherwise, there were no material changes to the above information since my last report.

Chart 3 below shows EBITDA excluding hedging per BOE for each company and the various geographies for the past four historical quarters and my 2018 full-year estimate.

WTI at Cushing averaged $62.87 in Q1 2018, versus $55.40 in Q4 2017. At the same time, NGL prices decreased to $30.87 per barrel in Q1 2018 from $32.12 in Q4 2017.

From Q4 2017 to Q1 2018, XOG and SRCI realized about a $2 increase in EBITDA per BOE. PDCE realized about a $1.50 increase in EBITDA per BOE. BCEI realized about a $5 increase in EBITDA per BOE. As a whole, though, the group still suffers from production weighted too heavily to NGLs and nat gas, resulting in low profitability relative to other basins.

I have updated Permian Basin basis since the last report. I am now assuming $12.50 in basis for 2018, but I am also including basis hedges put on by the various E&Ps. Thus, the 2018 EBITDA excludes commodity hedging but it does include basis hedging. As a result of this and my reduction in NGL pricing, 2018 EBITDA per BOE for the Permian Basin-Midland group is down from $35.91 in the last report to $33.46. And the Permian Basin-Delaware group is down from $33.05 in the last report to $30.57.

Chart 4 below shows (1) the price discount or premium to WTI at which basis hedges, if any, are struck, (2) the % of Permian production with basis hedges and (3) the Permian price discount or premium at which oil is forecast to be sold in 2018 relative to WTI at Cushing taking into account basis hedges. Also, if an E&P has firm transportation agreements out of the Permian such that they will receive WTI at Cushing or Gulf Coast pricing, the below numbers take this into account.

PDCE is the only E&P in the group with Permian acreage. It has protected 46% of Permian oil production around $0.10 below WTI at Cushing, but the remainder of production will be sold at spot WTI at Midland pricing. Therefore, PDCE should realize a $6.77 discount to WTI at Cushing on Permian oil production in 2018.

Due to the changes in basis differentials, assumed NGL pricing and any other changes to 2018 production or expenses, 2018 estimated EBITDA per BOE changed as follows compared to the prior report: PDCE -$1.22, XOG -$1.95, SRCI +$1.56 and BCEI -$1.37.

E&P Equity and Enterprise Values

Chart 5 below shows the equity value and enterprise value for each E&P and various geographies.

There are no material changes to the above information since my last report.

Relative and Absolute Valuation Analysis

Chart 6 below shows the two calculations to value future drilling sites for each E&P and the various geographies.

Of the two analyses, I place more weight on EV Less PV-10, since the reservoir engineers calculating PV-10 have significantly more detailed information than I do. There are no material changes since my last report.

Chart 7 provides the production growth rate assumptions for the E&Ps and various geographies.

There are no material changes since the last report.

Chart 8 provides the levered and unlevered DCF analysis equity results.

Since the last report, DCF analysis implied stock prices changed as follows: PDCE -11%, XOG -22%, SRCI -12% and BCEI -31%. The declines are due primarily to decreasing expected future NGL prices. In summary, based on DCF analysis, PDCE and XOG are undervalued and SRCI and BCEI are overvalued.

Chart 9 provides leverage and free cash flow metrics for the E&Ps and the various geographies.

There was little change from the last report for PDCE, XOG and BCEI other than a bit higher leverage ratios and worse cash flow ratios resulting from lower 2018 EBITDA expectations. Conversely, SRCI is forecast for a small increase in 2018 EBITDA, and thus the company’s leverage and cash flow ratios increased modestly.

Chart 10 provides commodity hedging metrics for the group.

To derive the above numbers, I calculated swaps, 2-way collars and 3-way collars separately. Also, remember that my assumed commodity prices of $65 oil, $32.50 NGL and $2.75 nat gas impact the collars and thus the average prices realized in the above table.

PDCE, XOG and BCEI are comparably positioned. For PDCE, 72% of oil production is hedged at $53.63. Its reported EBITDA will decline by 13% due to $131 million in hedging loss settlements. For XOG, 84% of oil production is hedged at $54.98. Its reported EBITDA will decline by 13% due to $120 million in hedging loss settlements. For BCEI, 67% of oil production is hedged at $55.39. The company’s reported EBITDA will decline by 13% due to $22 million in hedging loss settlements. SRCI is the best positioned, with 44% of oil production hedged at $60.15. Its reported EBITDA will decline by 4% due to $18 million in hedging loss settlements.

Chart 11 provides price realizations by commodity during 2018 Q1 for the group.

Oil price realizations for the group are weak, with discounts to WTI at Cushing ranging from $3.25 for PDCE at the low end to $7.31 for XOG at the high end. As PDCE announces 2018 Q2 results, the decline in Permian basis differentials should result in larger discounts to WTI at Cushing.

NGL price realizations for the group are also weak, with discounts to benchmark OGIS prices ranging from $7.54 for BCEI at the low end to $11.72 for SRCI at the high end.

Nat gas realizations vary across the group. BCEI has very strong realizations at only a $0.07 discount to the benchmark Henry Hub price. XOG’s realizations are average at a $0.54 discount to benchmark pricing. PDCE’s and SRCI’s realizations are somewhat weak at $0.88 and $0.71 discounts, respectively, to benchmark pricing.

Conclusion

Since my last report, there have not been any material changes to my views on the Denver-Julesberg Basin group. The companies still suffer from a low weighting to oil production. Their high exposure to NGLs is problematic, as I have reduced my long-term NLG pricing assumptions. And their price realizations for oil and NGLs are weaker than most other basins. There is no compelling reason to own any E&Ps in this group.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: 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 authors opinions expressed herein address only select aspects of potential investments 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 authors recommend 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 authors cannot guarantee its accuracy. Any opinions or estimates constitute the authors best judgment as of the date of publication, and are subject to change without notice.

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