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Oil & gas companies are undervalued

July 19th, 2011 · No Comments

We can add another to the list..

You can read about the valuations that BHP Biliton put on Petrohawk here, compared to these, InterOil is valued at a fraction of these (at under 50 cents per Mcf), especially considering the fact that they sell into markets with much higher prices.

PetroHawk Purchase Proves: Oil & Gas Companies Are Undervalued
Michael Filloon

BHP Billiton (BHP) announced its purchase of PetroHawk (HK) this past Friday. This $12.1 billion deal created a 62.49% move upward in PetroHawk’s market cap. Its no secret BHP has been trying to put its cash to work, but this deal provided more upside than expected. PetroHawk was one of the top natural gas players in 2008. In July of 2007, its stock was selling for $15.50 per share. In one year, it was trading up to $47.90. By October of 2008, its stock price pulled back to $9.60. PetroHawk has since made a quick shift to liquids.

PetroHawk has value to BHP for several reasons, but the biggest reason is its large and condensed acreage. It has approximately one million acres, which are well balanced with respect to oil and gas. PetroHawk’s acreage is as follows:

  • Midland and Delaware Basins-325000 net oily acres
  • Hawkville Field-224000 net oil/gas acres
  • Haynesville Shale-225000 net gas acres
  • Lower Bossier Shale-120000 net gas acres
  • Black Hawk-58300 net oily acres
  • Red Hawk-50000 net oily acres

PetroHawk estimates it has the ability to increase liquids production over the next few years.

  • Estimated 2011 Liquids Production of 13%
  • Estimated 2012 Liquids Production of 18% to 22%
  • Estimated 2013 Liquids Production of 24% to 28%

The percentage of oil revenues will increase much more:

  • Estimated 2011 Liquids Revenues of 29% to 33%
  • Estimated 2012 Liquids Revenues of 38% to 42%
  • Estimated 2013 Liquids Revenues of 45% to 49%

PetroHawk’s most valuable acreage is in the Permian and Eagle Ford. 70% of its Permian leasehold is in the Delaware Basin. There are multiple target zones in the Delaware.

  1. Horizontal Wolfcamp
  2. Horizontal Avalon
  3. Horzontal Bone Springs
  4. Commingled Vertical

PetroHawk’s Eagle Ford acreage is also important, as it has more locations per 1280 acre spacing. The Permian and Eagle Ford provides a large number of repeatable drilling locations. Because of this, large condensed leaseholds will be sought. Do not forget that PetroHawk kept its best gassy locations. BHP looks at this resource as a position to work after natural gas prices improve.

Here is a list of companies that have appeal to be purchased:

Whiting (WLL) looks to have value, and would give access to several resource locations. It currently trades for 10 times next year’s earnings. Whiting has 1.3 million net acres in the United States. It is a top oil producer in three states.

  1. #2 Producer in North Dakota
  2. #3 Producer in Oklahoma
  3. #17 Producer in Texas

Whiting has a very good inventory of work. Its Bakken holdings are by far its best asset.

Continental (CLR) almost didn’t make this list as it is a very large oil company and is the largest oil producer in the Williston Basin. It has 868900 net acres here. More importantly, it has 270000 net acres in the Anadarko Woodford. Marathon Oil Corporation (MRO) estimates its Anadarko Woodford locations will have EURs of 750 to 1000 Mboe/well. This is better than the Bakken and Eagle Ford. Continental provides a leading position in two of the best unconventional resource plays in the country.

SM Energy (SM) could get some interest, and I believe has the greatest chance of being taken over. It has 250000 net acres in the Eagle Ford. This Eagle Ford position is in some of the best areas, with virtually all in liquids dominant acres. It also has 120000 net legacy acres in the Bakken. Other important holdings are in:

  • The Wolfberry
  • The Granite Wash
  • The Woodford Shale
  • The Marcellus Shale
  • The Haynesville Shale

Not only does this company have good locations, it is a very well run company.

Sandridge (SD) was recently added to T. Boone Picken’s portfolio. Sandridge is a play on the Permian in Texas and the Horizontal Mississippian in Oklahoma. Even with an active drilling program, it will take years to complete the inventory. The Mississippian has a potential 3400 locations. Its Permian acres contain 7700 possible locations. Sandridge also has gassy assets with a possible 8000+ locations. It also has a large number of drilling rigs to continue its aggressive program. When investing in an oil production company, it is important to have a large number of rigs with horizontal capabilities and a dedicated frac crew.

Oasis (OAS) has 303000 net acres in the Bakken/Three Forks. Oasis tends to be the forgotten pure Bakken player. Its acreage is not as good as Brigham’s (BEXP), but the buyer would pay less of a premium. At fifteen times next year’s earnings and an estimated growth of 37% per year for the next five years, makes it an appealing target.

PDC Energy (PETD) was a pure natural gas company that now is converting to liquids. This small company has interesting acreage that provides upside. Because of the upside to these areas, I believe PETD has value. Oil production is up 34% since 2010. Oil and liquids sales revenue will increase an estimated 50% to 80% in 2011.

PETD has 74100 net acres in the DJ Basin. It has 12800 net acres in the Permian. PETD has a substantial position in the Appalachian Basin. It has 106700 net acres in the Devonian, but more importantly it has 56100 net acres in the Marcellus. PETD has multiple liquids rich plays to develop, which makes it inexpensive at its current valuation. Samson (SSN) will be completing its first well in the DJ Basin sometime this month. Look for this to be a major catalyst to PETD if the production is better than expected.

The purchase of PetroHawk proves companies are willing to pay a premium for long term growth. The large move in these names on Friday has nothing to do with the possibility of other companies being purchased. It has to do with valuation. The street is valuing oil and gas companies too low, and until this valuation is met we will continue to see companies bought. Do not buy a company based on the possibility of take over, buy a company because it has value. It will be interesting if CNOOC Limited (CEO) decides not only to buy into oil companies, but to purchase large companies to secure resources, as this would further stimulate oil producer valuations.

Disclosure: I am long BEXP, SSN.

Tags: Natural Gas · Oil