motley fool blog

ADS = American Despositary Share, BOE/d = barrels of oil equivalent per day, IP = initial production

Samson Oil & Gas presented at the Rodman & Renshaw Annual Global Investment Conference in New York on September 15th, 2010 at 10:00 AM Eastern time. I listened in to the conference live via webcast and took notes, and have decided to post an update as a result. Before that, though, I'd like to congratulate Samson's Managing Director, Terry Barr, on receiving his U.S. citizenship. Congratulations, Terry.

If you have been following my blog, you'll know that I am quite bullish on Samson's prospects, viewing it as trading at a substantial discount to its net asset value even in the most conservative of scenarios. If you have not yet read my posts on Samson, you can read my most recent update here, with links to my original post available on that blog. A lot has changed about Samson since I originally posted about it. When I first started sharing my research on Samson, the company had more debt than cash, and was burning through what little cash they had quickly due to the development of their Bakken acreage in Williams County. With the closing of the Goshen sale, the majority of Samson's firm-specific risk has been eliminated. With $70 million of cash in the bank, another $10.7 million to come on September 20th, and only $11.1 million of debt outstanding Samson is now in great financial health, and will have more than enough cash to begin the development of its remaining Goshen acreage which targets the Niobrara shale. To put this in perspective, Terry Barr stated at the Rodman & Renshaw conference that Samson's cost basis on this acreage was about $1 million dollars, acquired three years ago, and they just sold it for about $74.4 million, with $63.7 million already having been received. I don't know about you, but I wish I could get a seventy-four bagger in three years. That's a compound annual growth rate of about 320%! Certainly not a bad deal for the company or its shareholders.

Management expects an average of 1,000 BOE/d initial production rate from its wells in the Niobrara. Samson expects to drill one well per 160 acres, giving it a potential of 99 wells at a 50% working interest and another 53 wells at 100% working interest. With an estimated 413,000 barrels of oil ultimately recoverable per well, Samson projects the NPV-10 of this project to be $799 million in the long-term, or roughly $9.69 per ADS, though it notes that this estimate is dependent upon the wells performing to expectation. While the Niobrara is largely untested, there have been several 1,000+ BOE/d wells drilled there recently using hydraulic fracturing techniques like those used in the Bakken, most notably EOGs Jake #2-01H on the Colorado side of the border, which IPd at 1,558 BOE/d and SM Energys Atlas #1-19H on the Wyoming side, which IPd at between 1,200 and 1,500 BOE/d. While shale wells decline quickly from their initial production, EOGs Jake still managed to produce 50,000 BOE/d in its first 90 days, and SMs Atlas has declined to 500 BOE/d after two months. While its still early, if we continue to see results like these it will become clear that Samsons estimates are not unreasonable, and if that is the case the stock will likely become a multi-bagger from current levels over the next few years. However, at current prices, we do not need to depend on Samsons estimates for its Niobrara production to make this a profitable and now relatively safe investment.

Despite the massively positive developments for Samson since I first wrote about it here on the Fool, the stocks price has only increased from $1.15 to $1.28 per share, for a market capitalization of $106.496 million. With Samsons $70 million of cash and $11.1 million of debt outstanding, that gives Samson a current enterprise value of just $47.596 million. After the second closing on September 20th, Samsons enterprise value will decline further to approximately $36.896 million. With $28.9 million of proven reserves even excluding its recent Bakken development, the Bakken project itself, its 4.8% royalty interest in the acreage it just sold in Goshen county, the retained Goshen acreage, and its extensive non-Goshen acreage, this company is a huge bargain at todays prices and continues to trade at a large discount to even its near-term net asset value.


NAV

$70 million cash

$10.7 million cash from secondary closing

$28.9 million proven reserves

$53.4 million Goshen retained acres

$26.5 million royalty on sold Goshen acres (50% of companys estimate)

$33.75 million Bakken development (75% of companys estimate)

($11.1) million debt

($25.69) million worst case tax liability (35% tax rate used)


Summed, that comes out to a near-term net asset value of $186.46 million, or $2.24 per ADS. While I think this is probably a bit conservative based on the tax liability, the discounting of the Bakken development and the royalty interest, it should be noted that the companys own presentations are more conservative they give no value to the Bakken project or royalty interest in the near-term. I changed that because the development of the companys remaining Bakken acreage should be done by the end of the year and they have provided an estimate for its value in the past, and the companys consultants (Enercom) gave them a value of roughly $53 million for their royalty interest. I did, however, choose to discount the Bakken development to be conservative and discounted the royalty interest because we dont know for sure just how quickly the land will be drilled. You can change either of these to whatever makes you more comfortable giving them a value of zero provides us with a near-term net asset value of $1.51 per ADS, which is about as conservative as you can realistically get. Even so, that gives us a near-term net asset value of 18.5% above the current market price of $1.28 per ADS, though again, thats extremely conservative.

In summary, despite the closing of the Goshen lease sale, the companys ADS has increased by just 11.3%. With the uncertainty of the companys financial situation now in the past, I believe that the ADS is a better buy now than it was when I originally wrote about the company, and continue to hold and add to my position on big dips. With money in the bank and the development of the Niobrara coming with two wells to be drilled in the first quarter of next year, I believe that Samson is poised to trounce the market over the next few years and do very well for its shareholders.

If you are interested, you can listen to Samsons presentation at the Rodman & Renshaw conference by clicking here. If youre new to the company, its well worth your time.

Scott

Disclosure: Long SSN