Why Is Samson Soaring Today?

Onshore oil plays are the hottest thing going in E&P land. Companies like Occidental Petroleum (NYSE: OXY  ) and Hess are throwing billions of dollars at Bakken acreage. The little guys who got in early, like Northern Oil & Gas (AMEX: NOG  ) , are raking it in.

Another early entrant in both the Bakken and emerging Niobrara play is Samson Oil & Gas (AMEX: SSN  ) , an Australian explorer with a dual listing on the ASX and AMEX. The American ADSes trade at a ratio of 1 for every 20 ordinary shares. At yesterday's closing price of A$0.093, you would expect the ADS to trade at around $1.85 today. For some reason, though, the shares have spiked by 18% in American trading, on no news.

This is just the most recent of a series of spurts in the share price since late December, when Samson traded for less than half the current valuation. What the heck is going on here?

And now for a paid promotional message
While there has been chatter on various message boards about Chesapeake Energy (NYSE: CHK  ) and other companies planning to spend a bunch of money in the vicinity of Samson's Niobrara acreage in Southeastern Wyoming, the most obvious catalyst is a research report issued by EnerCom on Dec. 29. Samson acknowledged this report's potential share price impact in its response to an inquiry by the ASX late last week.

You may know EnerCom as one of the outfits that hosts conferences in which E&P companies seek to drum up investor interest. The company also acts as an investor relations consultant. Samson is a client, and this report was generated as part of that engagement. Strike one against the report's objectivity, but let's dig a little deeper.

Howdy, Niobrara

EnerCom steps through Samson's interests in the Bakken and Niobrara, discussing recent results by the company and other operators like Noble Energy and EOG Resources (NYSE: EOG  ) , estimated well economics, and Samson's development plans. The report then proceeds to a valuation, the bulk of which stems from Samson's Niobrara interests.

This is where the report veers into fantasyland.

Garbage in, garbage out
Let's stick to Samson's 16,379 remaining operated acres in Goshen County, Wyoming, following an asset sale to Chesapeake late last year. The company says it plans to put 7,882 acres in a 50/50 joint venture, while the remainder will be 100% Samson-operated. At 160-acre spacing -- Samson's stated development plan -- that would result in 102 gross potential locations, or 78 net potential locations. Samson says it's identified 152 gross locations, however, so the EnerCom report takes 151 of those (did they leave one out to be conservative?) and sticks them into its "Most Likely Case" model. The inputs here already look funky, but let's continue.

The EnerCom report next takes Samson's estimated ultimate recovery (EUR) for Niobrara wells of 413,000 barrels of oil equivalent (413 mboe), then multiplies that by net locations, to come up with net unrisked reserves of 42.1 million barrels of oil equivalent. That 413 mboe number is aggressive compared to estimates offered by Rexx Energy (Nasdaq: REXX  ) and other Niobrara operators. Rexx's low case is 200 mboe, and its high case is 350 mboe. That's also on 320-acre spacing, on which you'd expect to see more oil drained by each horizontal well, assuming the operator drills longer laterals. So I'm not crazy about that 413 mboe assumption.

The next step is to assign a present value (known as PV-10 in the oil patch) per well. The report lists Samson's 100% working interest wells as worth $9.5 million. That's pretty outlandish. These things are only estimated to cost $3.5 million to drill and complete once the kinks are worked out. $9.5 million equates to $23 per barrel, which is a rich reserve valuation, unless you believe in $90+ oil stretching into the indefinite future. Even Samson, in its own investor presentation, says its wells have a PV-10 of $18.90 per barrel, or $7.8 million. EnerCom's report juices that figure by more than 20%.

So now we have a total PV-10 value of $970.3 million, or $11.66 per share. The EnerCom report applies a risk factor of 50% to this number -- i.e., cuts it in half -- resulting in a risked NAV estimate of $5.83 per share for 12,438 net acres in the Niobrara. That's $39,000 per net acre, or more than 10 times what Chesapeake paid for a piece of this play a few months ago. As for the report's "Optimist Case," let's not even go there.

The Foolish bottom line
The purpose of this commentary is not to weigh in on Samson's current valuation. While my back-of-the-napkin estimate suggested $1.60 per share back when the shares were at $1.30, oil prices have run higher, and I also may not have given the firm enough credit for the overriding royalty interest it retains on the acreage sold to Chesapeake. Fair value could be closer to $2 per share -- but again, that's not the point.

All I want to convey here is that the EnerCom report's numbers look pie-in-the-sky to this guy, and that most of those inputs, save for the PV-10 values, were provided by the company itself. Compared to an E&P like GeoResources (Nasdaq: GEOI  ) , which presents extremely conservative valuation guidelines to investors, Samson strikes me as very promotional. That's a trait I personally tend to avoid when thinking about partnering up with a management team.

Chesapeake Energy is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profileor follow his articles using Twitter or RSS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Motley Fool Alpha owns shares of Chesapeake Energy. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2011, at 10:49 PM, raiconlan wrote:

    this guy shorts these stocks and then does one sided hatchet jobs there is a lot more to this company in terms of production and profitability than the enercom report covers Toby Shute just did a hatchet job on Hyperdynamic two days ago and the short interest shot up right before he published this piece is self serving and one sided

  • Report this Comment On January 18, 2011, at 11:34 PM, LEGMAKER wrote:

    Enercom used three different estimates for Samson(SSN), based on best case, worst case and a midline estimate. Even if he didnt like the most optimistic numbers, he could have at least discussed the whole report. He leaves things out, just so he can have something to write about. Check out this link http://seekingalpha.com/article/246864-samson-oil-gas-curren...

    Might give more info.

  • Report this Comment On January 19, 2011, at 12:28 AM, raiconlan wrote:

    he also left out that they have 70 million in cash from the sale to chesapeake he know this is a 3-4$ stock in three or four months he's going to short it and then cover and go long.

  • Report this Comment On January 19, 2011, at 11:18 AM, sami2002 wrote:

    Thanks for this articles...you are real example of unprofessional analyst...who downgrades for short sell. Please read all the reports clearly and also talk about demand of the stock in the market and please see the net position.

    http://moneycentral.msn.com/ownership?symbol=SSN

    For short term investors, the stock momentum and growth is critical and I see a upward potential of minimum 4.50 to 5 USD in 2-3 months.

    For long term investors, this share might not jump to 600%-700% rightaway in next 12 months...but it will take atleast 2 year - 3 year.

    Please check tony's score his pick:

    http://www.peopleandpicks.com/profile/shiningb

    Also read his profile...he likes short selling!! Not investment in the right stock at right time!

  • Report this Comment On January 19, 2011, at 11:53 AM, sami2002 wrote:
  • Report this Comment On January 19, 2011, at 12:00 PM, sami2002 wrote:
  • Report this Comment On January 19, 2011, at 12:15 PM, birge1 wrote:

    oops! seems one reference to production per well was in the millions of barrels. but mboe is only thousands of barrels. have to edit check every word in the article before publication.

  • Report this Comment On January 19, 2011, at 12:53 PM, mflies wrote:

    You have to love how Motley Fool picks this as a "hot stock" on January 13th and now turns around and tries to create panic. No mention of the 70 million in cash shows how much BS you are spewing Toby... I hope the SEC investigates your tactics.

    SSN has 70 million in cash (amazing how this didn't make it in to his article) and remains as one of the smartest oil plays for its price out there.

    Toby I hope you lose your bankroll and you get bent over one of these oil barrells as a result of your misguided jibberish.

  • Report this Comment On January 19, 2011, at 3:45 PM, TMFRosetint wrote:

    Guys, calm down. I have been as big of a fan of this company as anyone, but that doesn't give me the right to come to this article and bad mouth Toby.

    Has he made a few bad calls? Sure, but so have we all. I personally can't come out with a long-term valuation for this stock at much less than $3.00 per share even using conservative numbers but obviously there's room for a difference of opinion.

    Something some of you may wish to consider is that what was written in this article and what was writted by Rich Duprey several days ago are *not* the views of the Motley Fool in either case. This is not a matter of the Motley Fool "pumping, then bashing" the stock. It is the case of two different people holding differing opinion of the stock, one of which wasn't so much an opinion as a quote from me and one other member of CAPS.

    Chill out people, if you can't take a critical opinion without frothing at the mouth and being emotional you shouldn't own the company in the first place.

    Best wishes,

    Scott

    Disclosure: Long SSN

  • Report this Comment On January 19, 2011, at 3:52 PM, dargus wrote:

    I want to talk to Sampson! Fly me to the moon like that lady Alice Cramdon.

  • Report this Comment On January 19, 2011, at 4:50 PM, sami2002 wrote:

    Toby has put lot of incorrect numbers here so I would recommend you to read the actual report here below:

    http://www.samsonoilandgas.com/IRM/Company/ShowPage.aspx?CPI...

    HallShadow - It is not matter of opinion when the analyst publishes certain article which is read by 1000s of people. Toby has not made few bad calls...it is very close of half.

  • Report this Comment On January 19, 2011, at 6:58 PM, raiconlan wrote:

    It's not a matter of opinion if he is indeed setting up short positions with confederates and giving those people advance knowledge of his article look at the jump in short activity on HDY right before his article was published I have the link but you need a scottrade account do your own homework there is a connection between his article and the short activity increase on HDY that isn't opinion that's conscious stock manipulation and if he covers his HDY short and goes long before the 27th when their JV exclusive negotiations ends he doubles his gains sells off and shorts and then writes another bogus article it makes motley fool look the fool

  • Report this Comment On January 26, 2011, at 11:10 AM, mflies wrote:

    Hey Toby,

    How’s your short position doing for you now? Hope you get bent over a barrel on this one since it is soaring again on joint venture news..Way to not do your research! (Ohh... btw... I hope it is an oil barrel preferably!)

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