The Next Home Run in the Energy Sector

Nathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On a land base of more than 1.8 million net acres, Long Run Exploration (TSX: WFE) is actively drilling both the Montney and the Viking formations in Canada. Long Run Exploration was created when Guide Exploration and WestFire Energy merged in late 2012. So, this is a new entity that owns the 5th largest land position in the Montney behind giants like PetronasEncanaCanadian Natural Resources Limited and ExxonMobil.

Can Long Run reward the investors who stick with it ? Is a price appreciation around the corner? Let's dig deeper into this company to find it out. 

A roller coaster loaded with value 

Technically, this is a roller coaster stock that has been fluctuating for months in a tight range from ~$3.80 to ~$5. The performance of the TSX/S&P Venture Exchange index hasn't helped it break out to the upside because this index has lost approximately 30% since Long Run was created.

However, the value seekers have to take a deeper look into this Canadian producer. Long Run's enterprise value is $814 million, while the production is 24,250 barrels of oil equivalent per day, or boepd, (50% oil and liquids) and the proved reserves are 53.7 million barrels of oil equivalent, or MMboe, (41% oil and liquids).

This results in $33,600/boepd and $15.16/boe of proved reserves. Both key ratios are very low compared to the typical trading multiples of its peers with a balanced commodity mix as shown at the table below.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>EV</strong></p> <p><strong>($  million)</strong></p> </td> <td> <p><strong>Production</strong></p> <p><strong>(boepd)</strong></p> </td> <td> <p><strong>Proved Reserves</strong></p> <p><strong>(MMboe)</strong></p> </td> <td> <p><strong>Per  Boepd</strong></p> </td> <td> <p><strong>Per Boe</strong></p> </td> </tr> <tr> <td> <p><strong>Synergy</strong></p> <p><strong>Resources</strong></p> </td> <td> <p>540</p> </td> <td> <p>2,256</p> <p>(55%  oil/liquids)</p> </td> <td> <p>13.63</p> <p>(49%  oil/liquids)</p> </td> <td> <p>$239,400</p> </td> <td> <p>$39.62</p> </td> </tr> <tr> <td> <p><strong>PDC Energy</strong></p> </td> <td> <p>2,350</p> </td> <td> <p>18,500</p> <p>(54% oil/liquids)</p> </td> <td> <p>178.7</p> <p>(52% oil/liquids)</p> </td> <td> <p>$127,000</p> </td> <td> <p>$13.15</p> </td> </tr> <tr> <td> <p><strong>Trilogy Energy</strong></p> </td> <td> <p>4,300</p> </td> <td> <p>36,100</p> <p>(46% oil/liquids)</p> </td> <td> <p>70.6</p> <p>(38% oil/liquids)</p> </td> <td> <p>$119,100</p> </td> <td> <p>$60.91</p> </td> </tr> <tr> <td> <p><strong>Rosetta</strong></p> <p><strong>Resources</strong></p> </td> <td> <p>3,800</p> </td> <td> <p>50,300</p> <p>(63% oil/liquids)</p> </td> <td> <p>227</p> <p>(52% oil/liquids)</p> </td> <td> <p>$75,500</p> </td> <td> <p>$16.75</p> </td> </tr> </tbody> </table>
 
 
Despite the fact that Synergy Resources (NYSEMKT: SYRG) is a junior producer, it is one of the most overvalued energy companies in North America. The company trades well above its book value (PBV=3.5) and its valuation metrics are sky high. 
 
Its operations are in the Denver-Julesburg Basin where Synergy holds 230,000 net acres. Its acreage is largely unproven because all of the company's production to date comes only from its small acreage in the Wattenberg Field. The company has been developing its acreage vertically for years, but it participated in March 2012 in its first horizontal well which was drilled by Noble Energy. 

PDC Energy (NASDAQ: PDCE) targets the Niobrara and Codell plays in the Wattenberg field in Colorado, the Utica shale in Ohio and the Marcellus shale in West Virginia. After selling its natural gas assets in Colorado for $200 million, the company plans to use the proceeds in Wattenberg and Utica.
 
However, the company's debt is very high and the debt/cash flow ratio (annualized) will remain well above 2, even if all the proceeds from the asset sale above go to the debt holders. In short, I can definitely pass this company, although PDC Energy carries a more affordable valuation than Synergy. 

Trilogy Energy (TSX: TET) has an inventory of conventional and unconventional locations in Canada. Trilogy holds 630,000 net acres, targeting from the Montney and Cardium to the emerging Notikewin and Duvernay shale plays.
 
Fundamentally, Trilogy isn't for the bargain hunters. The income seekers won't like it either because it pays a very poor dividend. On the positive side, Trilogy has one of the highest insiders' ownership (52%) in the energy patch. 

Rosetta Resources (NASDAQ: ROSE) is a player in the Eagle Ford shale where it holds 67,000 net acres. After a strategic acquisition from Comstock Resources, Rosetta expanded to a new core area in the Permian Basin. Rosetta expects to grow its production significantly by year end, and more importantly it doesn't have any debt issues because its D/CF ratio (annualized) remains below 2. 

Long Run Exploration and the long term horizon 
 
Long Run currently trades at a price to book ratio of 0.77. However, there are several potential catalysts that can ignite Long Run, driving its share price higher.

1. A joint venture for the core plays: Thanks to its massive land base, Long Run has a very big inventory of Montney and Viking oil drilling locations to grow production for years to come. Long Run doesn't need to reinvent the wheel to grow. To maximize the "bang for the buck," the company can make a joint venture with a big player.
 
A few months ago, Petronas and ExxonMobil acquired Progress Energy and Celtic Exploration respectively, taking a large position in the Montney shale play. The Viking formation is also an attractive acquisition target because it is repeatable and scalable with low operating costs and high netbacks.  

2. Waterflood program: Long Run continues to be on-track to achieve full-year guidance of 25,000 boepd. Long Run will focus development both on Viking and Montney, applying enhanced oil recovery, or EOR, techniques, which are a key component in maximizing the value from these two formations.
 
The first results have exceeded management's expectations, and Long Run believes that this pressure maintenance program will improve recoveries, lower natural gas/oil ratios, and enhance overall projects economics. Long Run is working towards a second EOR pilot on Montney, and plans to implement a pilot water injection scheme on Viking before year end. 

3. Duvernay: Long Run has widely distributed Duvernay rights of over 300,000 acres. In late 2012, PetroChina made a joint venture with Encana. PetroChina gained a 49.9% interest in Encana's 445,000 acres in the Duvernay play for total consideration of C$2.18 billion.
 
Long Run could be next to capitalize on its Duvernay position in a win-win situation. In early 2013, the company re-completed its first vertical Duvernay well with encouraging initial results. 

Foolish round up 
 
Long Run has a very attractive valuation, and the patient investors will most likely benefit greatly by positioning themselves into this company at the current levels. The stock flies under the radar and the market has turned a blind eye thus far. But this can change any time.
 

If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.


Nathan Kirykos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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