We've poked and prodded Gulfport Energy (Nasdaq: GPOR ) extensively over the past two weeks. I think we finally have enough ammunition to take a shot at valuation.
From Louisiana, with love
Let's start with Gulfport's legacy assets on the Gulf Coast -- its West Cote Blanche Bay (WCBB) and Hackberry fields.
Average transaction multiples in the industry are currently running around $65,000 per flowing barrel, or $15 per barrel of proved reserves. The recent purchase of EXCO Resources (NYSE: XCO ) assets by Encore Acquisition (NYSE: EAC ) is one example.
Applying these multiples, the WCBB is worth $201 million to $214 million. Given the age and location of the field, plus the high percentage of undeveloped and "developed non-producing" reserves, I would discount the midpoint of this range -- but not too heavily, because the WCBB's "oiliness" largely offsets its other shortcomings. Let's knock off 10% and call it $187 million.
Similar multiples applied to Hackberry yield a range of $24 million to $43 million. Gulfport spent $5 million on a 3D seismic survey in 2005, which underlines Hackberry's prospectivity, and makes me inclined to weight the play's reserves more heavily than current production. Giving a two-thirds weighting to our reserves metric provides an estimated value of $37 million. Adding the seismic program (at cost) bumps our estimate to $42 million.
Permian and other production
In putting a price tag on the Permian, we need to consider Gulfport's recent follow-on acquisition, which boosted its acreage position by about 50%. Weighting our reserve and production metrics equally, and increasing July production and 2008 proved reserves by 50% each, yields an estimated value of $122 million.
In May, Gulfport sold 12,270 net acres in the Bakken, producing 190 barrels per day, for $13 million. Applying a similar value to its retained acreage, we get $7 million, and to its retained production, we get $9 million -- so call it $8 million. Talisman Energy (NYSE: TLM ) sold Bakken assets at a similar valuation earlier this year, adding confidence to this estimate.
Gulfport's equity investment in a pair of Wexford Capital-controlled ventures in Thailand is carried on the books at $4 million. I'll go along with that.
Our running total sits at $363 million.
Great balls of bitumen
Next is Gulfport's 25% stake in Grizzly Oil Sands. To value Grizzly, which has no production, we'll look at both transaction multiples and public company valuations.
Conveniently, a high-profile deal was recently announced between privately held Athabasca Oil Sands Corp. and PetroChina (NYSE: PTR ) . The deal sees PetroChina taking a 60% stake in two of AOSC's prized projects for $1.7 billion. That gives the newcomer a net interest in approximately 3 billion barrels of recoverable resources, according to AOSC.
Despite the temptation, it would be a serious mistake to slap this $0.57/barrel transaction multiple on Grizzly's 4 billion barrel estimate, for at least two reasons. First is that this estimate was generated by Grizzly, not independent engineers.
Second, size matters. AOSC's defined resources are highly concentrated within certain flagship properties. MacKay River, for example, is expected to ramp up to 150,000 barrels per day. Dover is even bigger, ranking just behind Suncor's (NYSE: SU ) Firebag and ConocoPhillips' (NYSE: COP ) Surmont project in scope. See deep-pocketed investor drool.
In contrast, Grizzly's properties are diffuse and smaller in scale. The biggest single-property bitumen accumulation that the company has reported, at Silvertip, is only 831 million barrels in place. Economically recoverable reserves would be a sliver of that number.
Taking a different tack
A more appropriate multiple for Grizzly would be drawn from the public company valuations of other pre-production oil sands players.
One such company (too small to name here) controls about 140,000 acres, sports just under 100 million barrels of proved, probable, and possible (P3) reserves at its most mature in situ project, and has an enterprise value (EV) not far north of $50 million. The firm's P3 reserves are thus valued by the market at around the same multiple PetroChina paid for AOSC's contingent resources. This highlights the valuation chasm between big deposits and modest ones, the latter of which are strewn all across Athabasca.
Applying the same EV/acreage multiple to Grizzly's 511,000 acres, or the same EV/P3 reserve multiple to Grizzly's 387 million barrels, would yield a value of $198 million at the midpoint.
Grizzly is probably worth more than $198 million, though. We've yet to take into account the significant delineation drilling performed since the 2007 reserve estimate was released.
Connacher Oil & Gas, a company advancing its second in situ project, had 443 million barrels of P3 reserves on its 98,000 net acres of oil sands leases at the end of 2008. That marked an 83% year-on-year increase. Assuming Grizzly's recent drilling has been equally productive, the next reserve report will show 708 million barrels of P3 reserves, providing a high case valuation of $379 million, or $95 million net to Gulfport's interest.
Drumroll, please ...
Plugging in our low and high estimates for Grizzly, we're looking at a total sum-of-the-parts value for Gulfport of $412 million to $458 million. Taking the company's current market capitalization and adding net debt yields an enterprise value of around $426 million. Close enough for jazz, as they say.
I thus find myself in uncanny agreement with Mr. Market on the value of this oil stock. If you disagree with us, please share your analysis in the comments below. And for handy reference here are the prior five parts of this series: