Nathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In October 2012, the giant ExxonMobil (NYSE: XOM)acquiredCeltic Exploration (TSX: CLT), a Canadian oil and gas producer.
Excluding the part of Celtic that was not sold to Exxon, Exxon paid $2.92 billion for 26,600 barrels of oil equivalent per day (2012 exit production) that were heavily natural gas-weighted (75% natural gas), and approximately 120 million barrels of oil equivalent of 2P Reserves, as of Celtic's latest report in December 2011. Eventually, Exxon paid $109,700/boepd (75% natural gas) and $24.33/boe of 2P reserves. The cash value per-share represented a 35% premium to Celtic’s price. Celtic owned 842,188 net acres with 689,893 acres net undeveloped.
That was definitely a great deal for Celtic's shareholders with very rich transaction metrics. On a second note, Imperial Oil (TSX: IMO)which isExxon's subsidiary and Canada's second-largest integrated oil company, said in November 2012, it would pay C$1.55 billion ($1.56 billion) for a 50% stake in Celtic Exploration after the unconventional oil and gas producer is taken over by Exxon Mobil Corp. This acquisition will allow Imperial to diversify its strong resource base in Canada with an attractive liquids-rich natural gas play.
Imperial owns a dominant position in the Alberta oil sands and it wants to expand in the liquids-rich Montney and Duvernay shales in Alberta. This transaction ignited my interest and made me dig deeper into Celtic's area to find potential acquisition targets or neighboring players who are significantly discounted to Celtic's valuation. This is how I unearthed Crew Energy (TSX: CR).
Land and Valuation
Crew has established a sizeable land position of 1,006,294 net acres of land (70% undeveloped), focusing on four plays (Lloydminster, Princess, Septimus and the Deep Basin) that offer the shareholders exposure to large accumulations of oil and liquids rich natural gas. Most of its properties are adjacent to Celtic's properties.
Crew produces 27,000 boepd (52% oil and liquids) currently and its production growth is forecasted to accelerate throughout 2013 with a target exit rate of 29,000 to 30,000 boepd (54% oil and liquids) and an annual average of 27,500 to 28,500 boepd.
The company's proved and 2P reserves are 85.1 MMboe and 153 MMboe (40% oil and liquids) respectively (December 2012). The Enterprise Value (EV) is $1,03 billion currently. Thus, Crew trades as low as $40,000/boepd, $12.1/boe of proved reserves and $6.73/boe of 2P reserves. It is clear that there is a huge valuation gap between Celtic and Crew which is strengthened by the fact that Crew is more oil-weighted than Celtic. With estimated Funds from Operations (annualized) at $180 million, Crew has a decent D/CF ratio of 2.1x.
Magnum Hunter Resources (NYSE: MHR)is another company with a balanced production between natural gas and oil. It produces 18,500 boepd (58% oil and liquids) with 73.1 MMBoe Proved reserves (63% oil & liquids) and an EV at $1.5 billion currently. Thus, Magnum trades for $81,000/boepd and $20.52/boe of proved reserves despite the fact that it sports a D/CF ratio as high as 8.8x, assuming Funds from Operations (annualized) at $90 million.
1) Waterflood: Crew has 8 waterfloods underway and 5 waterfloods planned in 2013. Crew's existing waterfloods have been very successful in stemming declines in pools where they have been implemented. Longer term, the Company is targeting decline rates to be reduced to the 20 to 25% range.
2) Acquisitions: Crew strengthened recently its position on the highly prospective Montney formation and it has an exclusive option to purchase an additional 140 sections (91,000 net acres) of land again from Terra Energy, principally located in the Altares and Attachie liquids-rich areas of the Montney play.
3) Hedging: Crew's ability to invest has been enhanced by the company's 2013 hedging program, with 48% of forecasted natural gas production and 37% of forecasted liquids production hedged at attractive prices.
4) Share Repurchase Program: The company initiated a buyback program on May 14, 2012 and will terminate it on May 13, 2013. When the program was announced, the share price was hovering at $6 which is another indicator for the current undervaluation.
Based on its current valuation, Crew is a company that an investor can not afford to overlook. It deserves a greater attention from those value seekers who can separate the hype from the fundamentals and look for home runs with strong potential in the energy patch.