Second Wave Petroleum: The End

Second Wave Petroleum announced it has received a buyout offer for a ‘significant premium’; Brookfield Bridge Lending Fund which owns more than 47% of the company is paying $0.30 per share to take SCS private. Its game over for SCS shareholders leaving Arcan Resources as the next buyout waiting to happen, the question is at what price?

Second Wave Petroleum SCS.TO 0.295 [0.00] last traded around $0.13 before this offer, a very long way from the $3 level it saw just last March in 2012. Obviously, the 100% premium is a joke given the destruction of shareholder wealth in this company; suffice to say the end was nigh and the writing was on the wall a long time ago.

The company exited 2012 with 1,813 boepd (65% liquids), way off from its guidance less than a year ago. Just take a look at the image below; something went terribly wrong along the way.

scs guidance flop

guidance from the presentation of June 2012

SCS is simply another junior that could not thrive let alone survive in the world of unconventional oil & gas; the high cost/high decline rate of its wells can be blamed but not as much as management which had an opportunity to sell and turned it down back last year. The company exited 2012 with a $115M debt on $75M bank line (revised lower from $105M) putting its debt to cash flow ratio on an annualized basis for Q4 at more than 10x!

Let’s move on to what matters here, what would Arcan Resources ARN.V 0.45 [-0.005] be worth using these metrics? What kind of significant premium can shareholders expect? first a quick look at current valuation:

SCS @$0.30

ARN @$0.70

Basic O/S:

84 million

97.8 million

Outstanding debt:

$115 million

$330 million

Production (Avg Q4):

1,813 boed (65% oil)

3,978 boe/d (99% oil)


$0.30 per share or $25.2 million + debt = $140.2 million

$398.5 million based on ($0.70 SP)




At first glance, it looks like ARN is fully valued except I did not take the following data in consideration:

  • If I assigned $10,000 /boe of gas, the adjusted ev/boed??is $113,500 per borrel of oil.
  • If the company delivers on its average production of 4,300 boed (lower-range of company guidance 4,300-4,700), the potential target price will be different.??

Potential??take-out??price using EV/BOE $113,500

4,000 boed

4,300 boed

$1.27 per share

$1.61 per share

Of course if ARN does hit its mid-range guidance of 4,500 boed (99% oil) the estimated take out price rises would be: $1.85 per share, unlikely in my opinion because the company has a history of under-performance.

So what about EV/2P metric (enterprise value divided by proved + probable reserves)?

ARN @$0.70 38.7 mmboe $10.29/boe
SCS @$0.30 11.9??mmboe $11.78/boe

Applying the same valuation of SCS @ $11.78 per boe produces a potential target take out price of $1.28 per share for ARN.

In my opinion, $1.25 is a very reasonable take out target in the near term, ie until the company proves it can average 4,300 boepd or more.?? With a history of misses and under performance, it’s best to be conservative with ARN especially since the timing of a buyout is ??totally unknown.

At $1.25, there’s about 80% upside in theory for investors that bought at or below $0.70 obviously. This is all fun number crunching because other elements can come into play. Both CPG and PBN own shares in ARN, will this result in a higher price than $1.25? Will they sit on their positions waiting for the company to get cheaper (betting on further under-performance) ? After all, trading at more than 10x debt to cash flow ratio, why wouldn’t ARN succumb as well to the high debt/high decline nature of its play?

SCS investors were lucky to recoup some of their losses with this offer, this take-out ending was expected but the share price at which it happened could have totally been avoided. In my last post, I expected Brookfield to rescue the company, it was the optimistic scenario except I never envisioned $0.30 to be the price. With a tough market for juniors, several juniors could share the same fate or worse. Until they reach a production scale that can support organic growth from internally generated cash flow, you will have to keep your financial models updated in order to avoid these companies.

What do you think of ARNs potential Take over price?