sandridges trust suggests good upside in rfe

SandRidge Mississippian Trust II was priced yesterday at $21 - the high end of its indicated price range.

26m common units were issued representing 52% beneficial interest in the fund. The trust will have a total of 49.725 units.

This provides a valuation of $1.04b on the 53,000 acres in the trust.

Backing out the 273 well locations, 67 completed 206 to go at $3m per well. The Trust implies a blended valuation for unproven acreage at $8000+, where there is 1 PDP for every 3 PUD.

Considering that shares do not benefit from 100% of net working interest and well costs (maybe 2-3 year inventory) are paid in advance, the true valuation is nearer $10-11,000 per acre.

Further take into consideration that this is uncontrolled, effectively JV acreage, it would be reasonable to place $3-4000 per acre on top of this for control, where the owner is an adequately capitalised Oil major.

This compares very favourably to RFE’s current acreage valuation, implied by market of ~$3667 per acre.

i.e

MC = 310m

Less cash = ~35m

EV = 275m/75,000 acres

= ~$3667/acre NB no value given to gas assets

It is also worth noting that RFE's initial oil/gas ratio's are looking better than those included in the Trusts assets.

Therefore the pricing on the trust easily suggests a RFE valuation 3-4 times current levels and this is before any new acreage is added.

IMO it's only a matter of time before these numbers are put in front of the institutions and this arbitrage in acreage value is closed.