Valuation Metrics to consider

Thought I'd dedicate a thread to just this topic. Before doing so, this report (Nov-18) from the Canadian Energy Research Institute is worth more than a casual read ... especially Ch 3 & Ch 5. It's an especially good read because it is focused on NGL's ... for which LNG is not a consideration. We're (I'm in the queue) going to know soon enough what the product mix is likely to be.

CERI-Report-Nov-2018

Just as an example of some "lateral thinking" from Black Swan (see pg 55)

"AltaGas has entered into a definitive agreement with Black Swan Energy Ltd. to acquire 50% ownership in certain existing and future natural gas processing plants of Black Swan (the Aitken Creek Processing Facilities) ... The 50/50 infrastructure joint venture, combined with existing and new AltaGas-owned and operated liquids handling infrastructure, will further strengthen AltaGas’ northeast BC value proposition and energy export strategy that includes gas processing, liquids handling, field fractionation, and propane export via AltaGas ’Ridley Island Propane Export Terminal (RIPET). The long-term processing agreement for use by Black Swan of AltaGas’ processing capacity at the Aitken Creek Processing Facilities will be underpinned by a reserve dedication and area of mutual 56Canadian Energy Research Institute November2018 interest encompassing approximately 30% of the Black Swan Montney lands"

While sell-side analyst research is available (e.g. Morgans Nov Report) perhaps we can put forward some other views.

Acreage Valuation Method and Reserves Valuation Method (since CE1 has begun drilling) still remain most useful at this point.

So @Motors and I have probably bored y'all to death with this but is vitally important to make sure that the context is correct. 

(a) I've given my view on the PONY acquisition of UGR - Not remotely relevant

(b) Another that I feel is way off (but promoted by CE1) is COP (which I own .. and love) acquiring undeveloped acreage adjacent to their property at Blueberry. While it is undeveloped ... and therefore "useful" it is a long way away at 65Km south. They paid a hefty price at CA$4,460/acre (~AU$4,645/acre). IMO ... not relevant

(c) Velvet Energy's (VE) Sep'18 acquisition of Iron Bridge Resources (IBR) has some merit. VE eventually paid CA$142M for IB at ~CA$2,860/acre and since they had some production & reserves at 12.2X concensus EBITDA (which if you follow this metric is extremely high ...translation expecting great things!!! (or overpaid if you're a cynic)). VE is PE backed by Warburg Pincus, Trilantic Capital Partners, 1901 Partners Management and Canada Pension Plan Investment Board. It's in CE1 slide deck, but its also a fair distance away - in West Central Alberta - 49,600 net acres of operated acreage with substantial "resource potential". The EBITDA multiple is a bit of misdirection ... asset disposition in 2017, water problems in 2018, $9M investment in another company as part payment, ... so it was messy.

Normally, I would have stopped at that but a few other things caught my eye. Remember now, we are still in Montney but in Alberta (and rocks don't recognize provincial boundaries). Some things are different --> see the CERI report. Alberta is Canada O&G. So what was attractive about IBR??? ... in some respects it resembles CE1 strategy

* Energy focused hedge fund assembles position and puts in its own mgmt team

* Sell off the non-core assets (2017) ~leaving C$25M available and concentrate on the remaining Montney play acreage (49,000 acres).

* For whatever reason, acreage around IBR was being acquired at a significant premium to the value that market was attributing to IBR (40cps mid 2017, rising to 80cps end 2017 and falling back to 40cps mid 2018) - which is being observed with CE1 and is the investment case put forth by Mgmt and @Motors

* 2 new wells drilled using different well design and completion design, delivering good results and resulted in (steep) share price appreciation.

* Days after releasing updated flow data, next door neighbor, private equity owned Velvet Energy, announced an unexpected hostile cash offer

This is the "asset play" in a nutshell I guess.  What happened next? Well you know the eventual outcome (acquisition) but the steps

(i) being a hostile bid (at ~CA$2,300/acre initially) another bidder enters and an auction ensues

(ii) reject, claiming undervalued (surrounding land being acquired at up to CA$10,000/acre) to get the offer increased

(iii) raise further funds for more drilling (now face drilling/development risk)

VE did raise their bid to ~CA$2,860/acre which was accepted.

The relevance may be more in the story than the acreage as I believe this area to be more of light oil play than a gas/NGLs play. For me the "obvious" suitor is Black Swan to block up at least part of their northern area (as noted in earlier post).

(d) Chinook Energy (CKE) ... not part of any 2017/2018 transaction but interesting nonetheless. Small company (no LTD debt) EV of ~CA$32M. They have 44,733 net acres (EV/acre = CA$715/acre), PDP = 8.1MmBoE (EV/PDP = $3.95/BoE), 1P reserves of 18.6MmBOE (EV/1P = $1.72/Boe) and 2P Reserves of 33.9MmBoe (EV/2P = $0.944) with a 86% gas and 14% liquids mix.

CKE is interesting because of its rough size equivalent and that it's plan is to keep plugging away and to try and develop their land - but without any scale and earlier missteps its not doing so well.

The big question is how is their drilling going? At 14% liquids that may not be good enough (IMO) given their location (which you can easily determine from CE1, Saguaro presentations ... east of Polar Star).

(e) Black Swan (BSE) ... this is where I'd like to see CE1. BSE has been innovative with the RIPET deal with Altagas. Almost impossible to value BSE from the outside (private co) but if we use look-through based on boepd of production we get a relative idea. PONY produces ~42,000 boepd with 9% being NGLs. BSE produced ~26,000 boepd but with 20% NGLs (of which 50%-60% is the highly desirable C5+ stream ... think condensate & premium). That means I need to uplift BSE to be comparable to PONY. I'm going to use 25% uplift in production to accommodate for their premium product. So now for comparison BSE has normalized production of 32,500 boped. PONY's EV is ~ CA$1.08B so their EV/boepd = $25,715 (high for a mostly gas producer) and the implied EV for BSE is 32,500 x 25,715 = $836M. BSE holds 230,000 net acres which means CA$3,633/acre!!!  But before we get to excited not all acres are equivalent ... but it is a good indication of potential value if the premium can be sustained. Using the look thru EV derived from PONY, then with BSE's PDP of 55MmBoe their EV/PDP = CA$15.2/BoE (OK for 80% gas & 20% NGLs) and with 2P of 423MmBOE their EV/2P = $1.98/BoE (that's a good number IMO for their mix). Compare that to PONY - but last reserves statement is Dec'17 with PDP = 117MmBoe and you get EV/1P = $9.23/BoE (on the low side IMO) and 2P =967MmBoE and you get EV/2P = $1.12/BoE. With a total of 201,000 net acres PONY's EV/acre = CA$5,373/acre. 

I've chosen EV in the multiples to take into account debt (which both use but can't tell the mix of debt and equity in BSE). From a shareholder perspective that has pluses and minuses. Just means they are leveraged. Both BSE and PONY have attractive qualities (but I give the nod to BSE). Some things to think about as drilling proceeds.

GLTA