Ann: Calima 2 Flowing Gas and Light Oil, page-29

This post wont be nearly as popular the earlier post. It's not a popularity contest and I'm nothing but a pragmatist (right Dan?). Hopefully everyone here knows who Benjamin Graham is or at least heard his saying “In the short run the market is a voting machine but in the long run it is a weighing machine.” All I try to do is "weigh" up what CE1's value is, WITHOUT RELYING on the subjective commentary provided by mgmt and parroters but rather mark to market the results.

While the prior post was focused on the results of the well test so far and I acknowledge there is a lot more info to come, there is more than enough to information to continue assessing "how valuable" is CE1. Seems to me like I'm hearing expectations being subtly lowered with commentary of "analogous to Saguaro" being the only comment by mgmt and its just "belief" that Saguaro type lands are valued $3,500 - $5,500 an acre. Force of nature downgraded to tropical depression?? Silly me, I thought CE1 was being touted as a "sweet spot" found with "new seismic mapping" of the Montney.

Fact of the matter is that in one breadth the message is "close analogue" to Saguaro

and then the next breadth says

which gets translated into talk of +/- $5,000/acre and an average of $4,400/acre of undeveloped land

So then to value CE1 I need to try and value the analogue - Saguaro. Which is not easy because there is not market for Saguaro. So then I need to find a proxy benchmark and measure Saguaro to it. Normally I would choose 3 and come up with an average but my holding isn't big and I've got some margin of safety on price.

It's not that difficult to determine the net asset value of a company
(a) developed land ... that's easy its the PV of the commodity produced ... so most conservative value is to use PDP NPV10 from Reserves
(b) Infrastructure ... again that's easy ... replacement cost of asset gives best indication (but who gives that to you in the financial reports)
(c) undeveloped land ... that is not at all easy ... and it takes lots of capital to get out the value contained in the land
(d) take off any liabilities owed (such as any debt and abandonment obligations)

So what's Saguaro worth? Making the assumption its fully drawn on its debt facility ($105M) - (does that make them distressed?) - and that is included in the $600M invested into the business ... what might they be purchased for?? (the equity value since the formula is Total Assets = Total Equity plus Total Liabilities). So look for a listed peer comparison. Since I'm a big believer in the primary asset being the value driver, then I want to find a competitor with roughly the same value of 1P Reserves (in dollar terms as not all BoE's are equal).




First thing you should notice is, the listed company has a much higher BT NPV10 value per PDP BoE ($12.67/BoE) than Saguaro ($8.06/BoE).
Why?
Because Saguaro is much more gassy ... or put another way .... the competitor is far more "liquids rich". You can also find that out in the reserve reports but we are looking at "comparable value" so I needed a base line $/value number for a BoE. The other thing to look at here is the Operating Netback each company has in $/BoE.

Second thing to notice is, what the Proved Undeveloped is "worth" (i.e. 1P - PDP). Competitor is at $8.65/BoE & Saguaro is at $3.31
Whoa! What just happened there you might ask?
It takes capital, lots of capital to develop oil and gas reserves (I'm talking development and not exploration). The competitor has so far developed about 15% of its 1P reserves. Saguaro has developed 22%. That alone tells you that Saguaro has already invested much more into infrastructure (pipelines and gas processing plants) and the competitor has yet to make them. Second thing is the "richer the gas" the more expensive the processing - this is in reference to the "deep-cut" gas processing plant needed to extract the full value of the gas stream in particular C5+.

So if I just stuck with the 2P Proved+Probable value for moment we would have
Saguaro = $1,913M - $105M + $200M (Infrasructure) + $??? (undeveloped land ... the other 73% since their 2P covers 27%)
=$1,988M + undeveloped land value

TSX Comp = $1,394M - $26M + $100M (infrastructure) + $??? (undeveloped land ... the other 53% since their 2P covers 47%)
= $1,468M + undeveloped land value

The listed competitor closed this week with a market cap of $385M .... which implies
Market Value Equity ($385M) = Total Assets - Total Liabilities ($26M)
therefore
Total Assets = $385M + $26M = $411M .... which does not compute well with $1,468M + undeveloped land value.

That tells me the weighing machine requires more substance ...not fluff. Lets go to the real substance then, 1P PDP.
TSX = $170M (PDP) - $26M + $100M (infrastructure) + undeveloped land = $274M + undeveloped land
if this is true ... then undeveloped land = $411M - $244M = $167M (80 sections = 52,200 acres) = ~$3,200 acre

Applying the same weighing now to Saguaro
Saguaro = $268M - $105M + $200 + Undeveloped Land = $363M + undeveloped land (114,094 acres x .73 = 83,288 acres)
So how to value the undeveloped acres? Well, in the reserves the TSX competitor $/BoE is 50% higher than Saguaro. If I extend that to land then Saguaro land is worth about $2,150/acre
Values Saguaro equity then as ~$542M


Now that exercise relies on several factors. Is the market weighing machine accurate? (the danger of just using one company as a proxy benchmark). However, IMO the answer ($3,200/acre) is reasonable but conservative given that it is in a super rich condensate area. Another factor is the reserves report itself. While you can compare them directly they are estimates. At least in the reserves report, the NPV does not take into account corporate costs (so SG&A expenses, Finance costs, ...) so we get a clear view of asset value. Buyer has different corporate cost structure. And lastly is the infrastructure valued accurately. Both have gas plants and expansions underway.

All I know is, the voting machine might be in control at the moment, but the weighing machine is usually wins out. Me personally, if an offer were made at $2,150 acre (so ~$160M ... so about 11 - 13cps) I would be out and y'all would never have to read another post (maybe)


Oh yeah, one other thought bubble ....

As far as LNG goes, only one side of the story is being discussed on this forum ... anyone here hold say STO or WPL in particular? LNG Canada and the other still planned plants are further adding to global LNG supply. And how's the supply side of LNG at present?

"LNG prices collapse because of “onslaught” of supply. Prices for LNG in Asia collapsed by more than 50 percent from their 2018 highs as a wave of new projects have come online. “LNG supply growth of 22 mtpa in 2018 proved too much to handle. Now, we expect another 46 mtpa supply in 2019 and 27 mtpa in 2020, with most of the volumes coming from the US,” Bank of America Merrill Lynch wrote in a report."

Like all commodity markets, producers are price takers. Cheap Montney gas and location advantage (closer to Asia) makes LNG exports a reality. One company's revenue is another company's expense.

Good luck next week/month. Remember whose voting and whose weighing.