Exxon Mobil to BuyCeltic Exploration: Natural Gas Stocks Soar | BeatingTheIndex.com

Exxon Mobil Acquires Celtic Exploration

Congratulations to the shareholders of Celtic Exploration CLT.TO 27.06 [0.00]. Exxon Mobil is paying $24.50 for each Celtic share which represents a 35% premium to yesterday?s closing price. CLT?s management won?t be retiring?any-time?soon as shareholders will be getting 0.5 shares for each share held in a new spinco led by current management.

The news lit a bunch of natural gas weighted producers on fire today! They all had one element in common ? no it?s not the natural gas production ? it was the Montney land base. Exxon paid about $3,000 per acre for CLT undeveloped land, it was clearly looking to establish a foothold in the Motnney liquids rich resource play.

?This acquisition will add significant liquids-rich resources to our existing North American unconventional portfolio,? Andrew Barry, president of Exxon Mobil Canada, said in a separate statement.

The most important aspect of this deal lies in Celtics quality asset base of?~875 net sections in the Montney and ~165 net?sections in the Duvernay.

In the junior sector, the following stocks exploded upwards:

  • Artek Exploration +23%
  • Yoho Resources +19%
  • DonnyCreek Energy +11%
  • Delphi Energy +11%

The intermediate sector saw the same reaction:

  • Nuvista Energy +13%
  • Cequence Energy +12%
  • Perpetual Energy +8%
  • Birchcliff Energy +8%

What?s all the excitement about? Well, if you apply the transaction metrics on these stocks you will see why investors are drooling. The upside potential in share price appreciation is HUGE.

The deal is valued at $3.1 billion according to the news release:

Including the amount to be paid for Celtic?s outstanding convertible debentures and including?Celtic?s bank debt and working capital obligations, the transaction is valued at approximately?C$3.1 billion (excluding the estimated value of Spinco shares).?

Celtic was guiding for an exit production rate of 29,900 boepd (76% gas). The company held 138 million boes of 2P reserves as of the latest reserves report. That means the transaction metrics per barrel of 2P reserves and flowing barrel of oil equivalent are roughly?(no adjustment for land, spinco production and spinco reserves) the following:

  • $22.30 per boe of 2P
  • $104,000/boed

What happens when you apply these metrics on some of the stocks above? Let?s see what this hypothetical scenario results in:

Company

Last Price

EV/BOED Target

2P Target

Delphi Energy

DEE.TO 1.44 [+0.01]

$5.96

$6.83

Cequence Energy

CQE.TO 1.89 [-0.03]

$4.51

$7.84

Perpetual Energy

PMT.TO 1.23 [-0.03]

$14.47

$12.26

Yoho Resources

YO.V 2.89 [+0.06]

$6.02

$6.13

Like I said, the upside is huge. But before you rush your orders in, remember that there?s no guarantee these stocks will be taken out in the near future using similar metrics. ?After all, the premium was ?only? 35% relative to the multiples you see above. There?s also an important fact that should not be ignored here, in 2012, our 4 stocks reported profit netbacks ranging between $4 and $12 per barrel thats dismal in case youre wondering and explains why theyre trading so cheap.

GoodBye Celtic, Hello Spinco!

The highly profitable oil weighted stocks get ignored while their natural gas weighted peers get a little bit of attention. There?s a trade in natural gas going into the winter and so far its been rewarding. Todays takeover certainly boosted the whole sector and shed the light yet again on the strategic Montney liquids rich resource play (remember the upcoming LNG export facilities on the coast of BC), I would not rule out a competing bid!

How are you playing the natural gas trade?

27 comments to Exxon Mobil Acquires Celtic Exploration

  • NLR2

    Someone should buy Painted Pony. Haha. I need a bit of a pick me up. Did not see this run on nat gas companies occurring as one can see from my oil weighted holdings. Oh well we will have our day in the sun. On a more positive note Pinecrest presentation from the Cannacord conference today was very interesting. They said that they are downspacing to 8 wells per section in anticipation of waterflooding. They can drill a well for 4.5 million let it produce for a year to achieve pay back then convert it to a water injector for 150,000 and achieve between 50-100% increase in reserves for the producer. I like that, haha.

    • Mich

      NLR, only a matter of time for PPY :)

      Thanks for reminding me to listen to PRYs presentation. Their CFO confirmed their water-flood is working and theyre on track to exit according to guidance. I like the extra info you provided!

      Hopefully well get our day in the sun going into 2013.

  • Jorge Casablanca

    Dear Mich,

    What is your opinion about Arsenal Energy (AEYIF)? This recent article below from SeekingALPHA at the headlines of Yahoo (AEYIF) is positive for this North Dakota Bakken company

    http://seekingalpha.com/article/926491-david-and-goliath-of-the-u-s-based-bakken-formation

    After PRQ (Progress) holders, CLT holders are also the luckiest holders on Earth although they most likely do not even appreciate it. They could never imagine such valuations for a buyout before.100,000 $/boepd for their gassy company (77% nat gas!) which also has a debt/FFO annualized ratio higher than 3 !

    Have you seen the long term debt/FFO ratio of KOG (Kodiak Oil)? It is higher than 5 !!!

    That being said, ARN (Arcan) holders then have serious reasons to believe for a buyout for more than 2 $ per share as the oily ARN (97% oil) trades for only 80,000 $/boepd currently.

    Keep up your good efforts.
    Thanx in advance.
    JC

    • Mich

      Hey JC,

      I dont follow AEI closely but I can tell you they are undervalued like many junior peers. Their debt is somewhat high and I believe they need to add more meat to the bone ie increase their drilling inventory. Besides that, if the market decides to focus on its profitable liquids weighting, theres no reason why the share price should not increase from here.

      Very hard to give an opinion on ARN, its a blackbox company. We need to wait for Q3 report as there are a lot of variables in play. SCS is the better bet in my opinion as they are backstopped by a major shareholder. Moreover, management can be reached for information. ARNs team thinks theyre running a private company

      Cheers,

      Mich

  • Lee Rot

    Mich, Canacol (CNE.TO or CAAEF in USA) said recently that it will make a reverse split 1/10. So the total outstanding shares proforma fall within your criteria.

    What do you think of CAAEF now after the recent acquisition of Shona which gives a new company with 32 MMBOE 2P Reserves and 3,3 million net acres of land (1,1 million net acres in the heavy oil area)?

    I believe Canacol will be acquired by the majors (XOM, SHELL, SINOCHEM, CNOOC, PRE.TO) which operate at the areas adjacent to Canacol land.

    Lee

    • Mich

      You maybe right Lee about CNE. The bigger they grow, the more attractive they become to majors.

      Where did you read about their rollback plan?

      Cheers,

  • Lee Rot

    and not to forget that CLT deal (after PRQ deal in Montney again) underscores the value of TT.TO (Terra Energy) which is so grossly undervalued currently with a ridiculous valuation!

    The market has totally overlooked Terras MONTNEY land
    Never mind I keep buying and average down.

    Lee

  • Lee Roth

    If you read the latest press release of CAAEF, you will find all the info there Mich.

    I also read at the latest corporate presentation that SCS would initiate its water flood operations in H2 2012. Do you know more? Have Second Wave started it?

    Both their Beaverhill Lake and their Pekisko formation accept water flood according to their presentation.

    Cheers,
    Lee

    • Mich

      Thanks for the tip Lee regarding CNE.

      As for SCS, Water-flood ops start in Q1-13 if Im not mistaken. Hopefully SCS share price moves as we close on the 2013 program.

      Cheers,

  • Lee Roth

    Mich, have you seen CORAL HILL lately? CORAL HILL produces 2,400 boepd currently which is about 10% less than SCS.

    According to their website, CORAL HILL has 76 million shares outstanding which are valued around 7-8 $ currently based on some private info I have.

    So assuming CORAL is publicly traded, CORAL HILL has a current market cap of $550M excluding any bank debt or convertibles it hasI can not have access in such info obviously.

    So the minimum EV of CORAL HILL is around $550M today.
    I really do not get how SCS has an EV around $160M today.

    Life is so weird sometimes.

    • Mich

      Lee,

      NLR2 gave the answer below. So I will only add the following:
      you could have the best assets in the WCSB but if you dont have the money to drill and grow, its game over.

  • NLR2

    According to Liquidity Source, which is a service that allows people to trade the grey market Coral Hills is at $4.25. So the market cap would be 323,000,000 currently. So thats a $227 million dollar drop from whenever your 7-8 dollar figure is from. There is no activity at Swan Hills period. Check out the National Bank report. SCS is undervalued but unless the bank expands there credit lines or oil spikes they are stuck inside cashflow for the foreseeable future. Plus they dont even call the shots CPG does so they cant even set the pace of development. Arcan and SCS arent cheap because of the asset or the companies themselves its because they are basically broke. They have already used all available leverage and cash to try and accelerate growth and failed. Brookfield should combine ARN and SCS and recap them. Haha. Also I emailed Doug Penner at ARN last night and he got back to me very promptly so maybe they are turning over a new leaf and becoming more shareholder friendly. I think the BHL players will work out at some juncture but I dont think they will ever get back to where they were even a few months ago.

    • Mich

      Thanks for chipping in on SCS and ARN NLR2. I also dont think they will ever get back to where they were a few months back. Besides minor bounces here and there, CG potential is almost nil unless someone takes them out of their misery.

  • woody

    back to the value of land doesnt tt terra have montney and duverney
    any rumours is cas holding out or is the land not is sweet spot some is up by painted pony i think, if it really is undervalued that much wouldnt someone have increased their holding by now with this celtic takeover valued so high

  • Jorge Casablanca

    Folks, in terms of SCS and Coral I read the arguments from both sides and my remarks are:

    1) Even if CORAL HILL has a grey market cap of C$323M (excluding debt), the minimum EV of CORAL is C$323M which is DOUBLE the current EV of SCS although CORAL has lower production than SCS. Both can dilute at will ANY TIME, so CORAL has not any advantage versus SCS.

    2) SCS claims vigorously at the Q2 2012 report that it can grow even within a cash flow budget. It can even hire 2 rigs effective Q1 2013. Obviously noone reads anymore the reports but this is a typical sign of the times. All are guru by nature instead.

    3) SCS has drilled only 16,8 out of 90 net UNRISKED BHL locations. This is written in Q2 2012 report that this poster NLR2 declines to read as it is quite clear.

    4) CPG calls the shots. So what ?! This is great as CPG can negotiate better and lower the costs and hit the best spots as well. I own CPG for 3 years now and I know it better than anybody of you. Great success rates wherever it drills let alone in proven plays like BHL.

    5) Brookfield will never be involved with ARN as ARN and SCS are apples and oranges. ARN has 3 times the debt of SCS and ARN has a DCF=5 while SCS has a DCF=2,2 same like LEG and many other companies around.

    6) SCS owns the sweet spot and it hits wells of 1,000+ boepd and higher even if this IP lasts for 60 days. ARN hits wells of 500 boepd instead. Only in Saudi Arabia, you hit wells of 1,000+ boepd that last 5 months.

    7) The gassy CLT (76% nat gas) was sold to Exxon 25x its CF annualized although it had a DCF=3,5.

    Disclosure: No position in SCS, ARN, Coral.

    • Mich

      JC

      1) of course both can dilute, but the scope of dilution wont be the same as one is at the mercy of the market and the other is not.

      2) Claims are what they are, CPG calls the shots, period.

      3) SCS could have 900 net locations but if they dont have the money to drill, the market sharks will tear it appart.

      4) No its not great for SCS because CPG may choose to drill other areas in their inventory for land retention or better economics

      5) We agree on ARN and SCS not being the same. ARN is in distress, period. SCS has more chances of surviving.

      6) The sweet spot for SCS is a big plus and they can grow from CF drilling it.positive for SCS

      7) I fail to see how this is related to the BHL play, CLT was bought for its Montney+Duvernay land base, out of scope.

      Cheers,

    • NLR2

      I would say its fairly clear that I have read SCS reports. Did you know that SCS has sold shares in their Judy Creek facilities to their partners, and apparently spent the money already. Also did you know that the IP does not last for 60 days, maybe 7. The type curve that SCS uses says that average production through IP30 is 550 BOE/d, through 180 days is 200 and after that is 120 boe/d which will not remain constant. According to the National Bank report SCS debt to cashflow is 3.4 times as compared to Leg at 2 times, so your also wrong their. The ability to hire rigs is fantastic but the real issue will be what their cycle time is from drill to production the 60 days they had been at before shutting down drilling or the 14 days they had been at previously. I would think closer to 60 since the 14 day time frame blew up their balance sheet. If they continue to have to take 2 months to complete a well and shut down operations for half the year they will have a hard time achieving anything better then modest growth.

      Also the production figures that you are using for Coral Hills are from August 2011 so are very very out of date. They said at that point they were running five rigs so I would hazard a guess that their production is significantly higher then that of SCS. Coral Hills farmed in on SCS land package so they control 30% of it I believe. Plus all their other land through out the play. Which I would say explains their higher valuation.

      I dont actually think that Brookfield will combine the two companies. I was trying to be funny, which is a point you missed. My bad.

      SCS will be fine and their Q3 and forward numbers will appear much better as Edmonton pricing has been stronger and their cost saving initiatives ie electrification and pipelining will have an effect.Also they will probably get an increase in reserves and a bump in their credit facility. I just dont think its fair to compare SCS to Coral Hills or to make out like its a no risk slam dunk investment. Any heavily debt laden O and G junior is far from that.

      Sorry Mich for the long winded reply.

      • Jorge Casablanca

        Dude NLR2,

        your response negates itself in many points so I will not actually spend time to prove it worthless. I just want to mention that on the one hand you recognize that Edmonton pricing has been much stronger in Q3 and Q4 surpassing WTI for $2-3 (and SCS sells at Edmonton IF you read Q2 report)

        on the other hand you can not do the easy math and figure out by yourself (but you believe a paid analyst instead) that SCS will have FFO ~ $11M in Q3 due to the significantly improved pricing for Edmonton (I exclude the cost savings from electrification and pipelining which will be more obvious in Q4 and later), thus $45M FFO annualized which gives a DCF ratio= 2,2.

        Sorry but I have more constructive things to do than debating your other points which are also missing a lot of accuracy.
        Have a nice weekend.
        JC

        • Mich

          JC,

          Whats your figure for Q3 average production?

          IMO, they wont even average 3,000 boepd this year.I think your figures are too optimistic for SCS.

          I agree with NLR on this one.

          I wont complain if youre right though, I have a few trading shares at $0.80

          Cheers,

          • Jorge Casablanca

            Dear Mich,

            SCS has said that Q3 production will be stable in comparison with Q2. Thus I expect it to be around 2,600 boepd.
            However the FFO in Q3 will rise vs Q2 because:

            1) SCS sells in Edmonton which surpassed WTI in Q3 for the first time after many months of lagging. The differential of $10 with WTI is over.

            2) Natural Gas has also risen in Q3 vs Q2 (when it hit its lows) although only 20% of SCS production is in nat gas.
            By the way, the nat gas price keeps rising in Q4, so this will impact positively the FFO of Q4 as well.

            Cheers Mich !
            Best Regards,
            JC

            • Mich

              JC,

              I agree with you on the figure for Q3, in fact I doubt they would average more than 2,700 boepds for the whole year. That translates into roughly $35M in CF and a DCF ratio ~ 3.0x.

              Lets wait and see what their guidance is for 2013 once they release their Q3 report. It will be interesting :)

              Cheers,

              Mich

  • Jorge Casablanca

    and as I read the water flood in Beaverhill Lake is coming for SCSor maybe it is already there.

    This water flood means a 50% minimum increase at the oil production for a cost as low as 100,000-200,000 $.

    EOM

  • Lee Roth

    Hey Mich, do you remember when I was telling you how grossly undervalued RE.TO (Rock Energy) is just few days ago? My comments are still there at your comments section.

    You were telling me instead that heavy oil is boring and the market may never recognize the value of RE.TO and I will most likely have to wait too long for the pps to rise etc.

    Despite all this I bought at 95 cents few days ago and it is C$1,21 today with strong momentum upwards despite it was falling like a rock few weeks ago. Momentum changed in record time.

    I believe a successful investor has to buy fundamentals and numbers while the herd buys what the media or a paid analyst say instead. Warren Buffet thing? Yes. SCS will be another example like RE imo.

    Cheers,
    Lee

    • Mich

      Lee,

      Come on man, the only stock we probably agreed on was RE.TO, thats the one I told you was the safest undervalued stock to own. You usually pick stocks overloaded with debt and/or with dismal netbacks.

      Theres no telling when a stock moves and fortunately for you Rock is moving. It is moving because the whole sector is getting some love.

      SCS and RE cannot be comparedSCS is not even drilling, they are at the mercy of CPG while RE is in a totally different ball game.

      Heavy oil is BORING ie no sex appeal like the unconventional plays. I am invested in heavy oil through PXL.

      Cheers,

      Mich

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