Call me crazy, but I find merger and acquisition transaction multiples to be a better indication of intrinsic value than what Mr. Market thinks on any given day.
And I feel a bit crazy, because over the past six months my portfolio has taken a kicking. I don’t like it, but I can endure it and while I wait for intrinsic value to be realized.
How bad has it been? I wrote this article for GuruFocus which detailed how the TSX Venture Exchange index was down 43% in six months. And that index includes a lot of gold producers which have not fallen nearly as much small energy stocks.
I think the entire energy sector in Canada is seriously undervalued. The smaller companies are simply dirt cheap. In the past week larger oil companies are starting to take advantage of the opportunity Mr. Market is presenting on both sides of the border.
In Canada, Sinopec acquired natural gas weighted producer Daylight Energy for a 120% premium to the prior day trading price.
In the United States, Statoil just announced an acquisition of Brigham Exploration that was at a 70% premium to the low price that Brigham’s stock hit earlier in October.
I’d like to look at the prices paid for these companies so that I can use them to assess what other similar companies might be worth to an acquirer.
Sinopec Acquires Daylight Energy
On Oct. 9, 2011, Daylight Energy announced that it was being acquired for $10.08 per share by the Chinese company Sinopec. Sinopec also assumed roughly $800 million of debt in the deal, meaning the transaction valued Daylight at about $3 billion. The Daylight stock price prior to this transaction was about $4.60, so the deal was a quite a premium.
What is more interesting to me is what Sinopec was buying for $3 billion:
- 36,800 boe/day of production
- 63% of that production is natural gas
- Projected 2011 funds flow from operations of about $340 million
- First Half operating netbacks of $26.40
Price per flowing barrel $3 billion / 36,800 = $81,521
Price per funds flow $3 billion / $340 million = 8.82X
Sock those metrics away and go have a look at a bunch of Canadian junior oil weighted producers. $81,000 per flowing barrel that is weighted 2/3d’s towards natural gas. Yes, Daylight has a nice land position in the Duvernay resource play that needs to be considered, but most of the smaller unconventional producers have similar undeveloped land positions in the Duvernay, Swan Hills, Cardium, Nordegg, Montney, etc.
And speaking of what an oil weighted producer might be worth…..
Statoil Acquires Bakken Focused Producer Brigham Exploration
Statoil (STO) is acquiring Brigham Exploration (BEXP) for $36.50.
The $36.50 per share price implies an enterprise value for Brigham Exploration of $4.7 billion.
- Brigham has 21,000 boe/day of current production meaning that the price is $4.7 billion / 21,000 = $223,810 per flowing barrel.
- Brigham had an EBITA of $137 million through the end of June. That would be under $300 million for the year. With an enterprise value $4.7 billion / $300 million = we are talking about 15X EBITA for 2011 and roughly 10X expected EBITA for 2012
- The PV10 value of Brigham’s 67 million barrels of proved reserves is $1.1 billion. The $4.7 billion purchase prices suggests that Statoil is paying $4.7 billion / $1.1 billion = 4.27 times the PV10 value of those booked proved reserves. In other words the booked reserves represent only a portion of Brigham’s value in the eyes of Statoil
As I have written before. There is a lot of value in undeveloped land in these unconventional resource plays.
Again, take these multiples and go do some due diligence on other unconventional resource focused producers. I can’t find many that don’t seem to have 100% upside if you are considering the multiples paid for Daylight and Brigham.
Hey, as I mentioned, I might be crazy. But Statoil probably isn’t. You can’t just look at the PV10 value of booked reserves for these companies and think you are properly valuing them. Statoil just paid 4 times the PV10 value of Brigham’s booked reserves because of the value that resided in the 1,000 other drilling locations on Brigham’s Bakken land base.
The Brigham deal gives you an idea of the value of an oil weighted unconventional producer with a large inventory of drilling locations. The Daylight deal gives you an idea of what a gas weighted name with debt challenges can be sold for.
I’ve got my fingers crossed hoping some of my unconventional producers get taken out for a similar valuation. Then I can reinvest the proceeds in those that are still undervalued.
This is a volatile sector to invest in, but with prices of many companies within shouting distance of their 2008 lows, yet oil still at $86 and not $36 like in 2008, the valuations are bordering on nonsensical.