Waldron Energy (WDN.TO) : Discovering Value in the Canadian Oil Patch
The truth is that the Canadian energy companies are much cheaper than the U.S. peers although the Canadian land has the same (or more as some analysts say) upside potential. This makes the Canadian companies more attractive targets than the American pricey ones. Statoil (STO) acquired Brigham (BEXP), but this is the exception and not the rule as the reality check shows.
Why would one buy a U.S. company that trades 10 times the funds from operations (FFO) when he can find a Canadian one that trades just five times the FFO?
Why would one pay $200,000/boepd when he can find the same upside potential paying $100,000/boepd for the same production percentage in oil and natural gas?
This is why I believe that the energy companies of the Bakken formation in North Dakota (KOG, NOG, OAS, TPLM, WLL, etc.) are not acquisition targets currently because they trade with very high valuations of $200,000/boepd and higher. This inflation gets even worse when we see that the aforementioned North Dakota operating companies are not a pure 100% oil and liquids weighted but they have a percentage of natural gas, too. I also believe there is a highly speculative oily bubble there in North Dakota and we will see big disappointments in the future from the drilling results of the specific companies of that area which will impact the respective valuations dramatically.
All that being said, I focus on the Canadian energy patch more than on the U.S. one, and this is how I found Waldron Energy (WDN.TO)(TTYGF). Waldron has a bit over 2800 boepd production with 28% oil that will grow much higher than 30% by year end as their recent oil-focused drilling results are very encouraging. They have hit an oil well with around 700 boepd production (65% oil) and their oil plans focus on three targets currently:
1) The Crystal area where they hit the latest oil well.
2) The Duvernay formation in the East Shale Basin where the drilling activity has heated up lately and Waldron holds 75 net sections (Ricinus/Crystal/Ferrybank areas) which are adjacent to the highest land sale prices paid to date.
3) The low-cost Belly River and Ellerslie light oil pool in Ferrybank.
The insiders have already put a lot of skin in the game (they own 18%) having bought higher than C$1. However, after the recent drilling results, they added big, and the directors and officers have committed to approximately $1 million of the private placement. If this is not a bullish sign I do not know what it is.
The fund of the Canadian energy guru Ned Goodman has bought a 14% stake in Waldron in prices higher than the current one. He bought big thru a placement at 3,95 C$ in June 2011 when the nat gas price was higher than today. I do not know whether he added during the recent placement at 0,57 C$.
Waldron trade less than twice the annualized Funds from operations which is over $10 million ($2.5 million per quarter especially now after the 60% rise on the natural gas price and an increasing oil production effective in the second quarter).
With a current enterprise value of $51 million and a 2800 boepd production (28% oil and liquids), Waldron trades as low as $17,000/boepd currently.
The price to book value is as low as 0.3 and the NAV is C$2.43.
It is also worth mentioning that:
"During the three months ended March 31, 2012, the Corporation's average selling price for natural gas was 5% higher than the average AECO Daily Spot benchmark price per Mcf due to the Corporation producing natural gas with a higher heating value to AECO. The Corporation anticipates this premium to be between 4 - 6%..."
Another sign of confidence due to the increasing oil results is that the credit facility remained unchanged despite the huge drop in natural gas price in the first quarter 2012 that affected in a negative manner the credit lines of the majority of the energy companies. "The Corporation currently has combined credit facilities of $41.0 million. The current facility was reviewed and renewed in April 2012. The next review date for the credit facility is Sept. 1, 2012."
Taking into account that EV = Market cap + Long term debt + convertible notes, let's see the U.S.-based and the Canadian peers from the Toronto board (15 MMcfe/d= 2500 boepd):
Celtic Exploration (CEXJF) with 24% oil and liquids trade at about 100,000 $/boepd. They jumped a lot recently after their good results in Kaybob area where the very oil-productive (80% oil) TriOil Resources (TOL.V)(TRIAF) operates too. However, I'll analyze TriOil Resources in another article.
Peyto Exploration (PEYUF), with 10% oil and liquids, trades at about $70,000/boepd.
Forest Oil (FST) with 32% oil and liquids trade at about $50,000/boepd.
Contango Oil (MCF) with 25% oil and liquids trade at about $55,000/boepd.
Birchcliff Energy (BIREF) with 25% oil and liquids trade at about $50,000/boepd.
Yoho Resources (YOHOF) with 25% oil and liquids trade at about $40,000/boepd.
Cubic Energy (QBC), with less than 10% oil and liquids and negative stockholder equity, trades at about $45,000/boepd.
Tamarack Valley Energy (TNEYD) with 32% oil and liquids trade at about 45,000 $/boepd.
Dundee Energy (EUGFF) with 29% oil and liquids trade at about 45,000 $/boepd.
Quicksilver Resources (KWK) with 20% oil and liquids trade at about 45,000 $/boepd.
EXCO Resources (XCO) with less than 10% oil and liquids trade at about 40,000 $/boepd.
Gastar Exploration (GST) with 20% oil and liquids trade at about 32,000 $/boepd.
Sonde Resources (SOQ) with 30% oil and liquids trade at about 35,000 $/boepd.
Lone Pine Resources (LPR) with 29% oil and liquids trade at about 35,000 $/boepd.
Advantage Oil (AAV with only 6% oil and liquids trade at about 35,000 $/boepd.
Anderson Energy (AXLFF) with 35% oil and liquids trade at about 35,000 $/boepd.
Cequence Energy (CEQXF) with 15% oil and liquids trade at about 30,000 $/boepd.
Fairborne Energy (FAIRF) with 19% oil and liquids trade at about 30,000 $/boepd.
Delphi Energy (DPGYF) with 27% oil and liquids trade at about 30,000 $/boepd.
Double Eagle Petroleum (DBLE) with only 7% oil and liquids trade at about 30,000 $/boepd.
Geomet (GMET) with less than 10% oil and liquids and negative stockholder equity trade at about 30,000 $/boepd.
On top of that, Progress Energy Resources (PRQNF) with only 16% oil and liquids was sold to Petronas for 110,000 $/boepd!
Some of the companies are medium-range producers like Peyto (PEY.TO) or Progress Energy Resources (PRQ.TO) or EXCO (XCO) so one could accept that these companies trade with a premium to Waldron's $17,000/boepd. First, the valuation gap between Peyto and Waldron is tremendous and eventually inexplicable and second, the majority of the companies above are junior and small producers of the same size or smaller than Waldron. In addition, all the energy companies above incurred losses during the last quarters as a result of the declining natural gas price so the losses are not a Waldron's-exclusive thing.
All that being said, if Waldron had the lowest valuation of $30,000/boepd it should trade at 1,35 CAD today.