Another day, another 52-week high for Samson Oil & Gas (AMEX: SSN ) . Since our last look at the firm -- which questioned the assumptions of a paid third-party research report -- there are three material pieces of news worth touching on. After that, I'll give you my current thoughts on the stock's valuation.
A well-connected well servicer
Late last week, Samson announced a joint venture with Halliburton (NYSE: HAL ) covering roughly 40% of its Niobrara acreage in Goshen County, Wyo. Halliburton, whose experience with unconventional drilling and completion techniques -- not to mention its ready access to fracking equipment, which is in short supply -- make it a valuable partner. The company has agreed to shoulder the full cost of two wells in order to earn 25% of 11,277 gross acres currently controlled by Samson and a private operator.
The Halliburton transaction was structured at an implied valuation of $3,275 per acre and leaves Samson with 14,883 net acres in Goshen County, with a 3% royalty retained in the farm-in area. We'll plug these numbers into our valuation a little later.
Let's make a(nother) deal
Two more notable events are Samson's filing of its fourth-quarter financials, as well as Chesapeake Energy's (NYSE: CHK ) Niobrara joint venture announcement with partner CNOOC (NYSE: CEO ) . The former gets us up to speed on the share count and net cash position, while the latter provides another data point for Niobrara transaction values -- $4,750 per acre, or a 45% premium to what Chesapeake, and now Halliburton, have offered to earn on Samson's acreage.
Following the CNOOC deal, investors are perhaps justifiably excited about the takeover potential of smaller Niobrara players such as Samson and Rex Energy (Nasdaq: REXX ) . Let's see what the recent intraday share price of $2.64 implies about investor expectations regarding Samson.
Adding it up
Samson's non-Niobrara oil and gas assets make up a pretty small piece of the pie. I figure they are worth $30 million to $40 million, pre-tax. Tacking on the royalties on Niobrara acreage sold to Chesapeake and Halliburton gets my running total to $55 million to $70 million. That leaves Samson's retained 14,883 net acres, plus its net cash. The transaction values outlined above would suggest this remaining Niobrara leasehold is worth roughly $50 million to $70 million. Investors are pricing in a multiple of this value, however.
By my math, the market is saying Samson's remaining land is worth about $180 million. That implies a per-acre valuation of around $12,000, which is a premium to what undeveloped Bakken acreage sells for. The Bakken is a well-developed oil play in North Dakota, where initial production rates are averaging more than 1,000 barrels of oil equivalent per day. EOG Resources' (NYSE: EOG ) Jake well in Colorado delivered an impressive IP rate of more than 1,500 boe/day, and SM Energy's (NYSE: SM ) Atlas 1-19H well in Wyoming topped 1,000 boe/day over its first week of production, but it's too early to say whether these sorts of results are repeatable in these fields, let alone in other parts of the Niobrara.
CNOOC's per-acre valuation is arguably motivated by non-financial, strategic motivations (learn how to drill this stuff so we can go do it in China), but I'll adopt it for the sake of argument. Based on that valuation, Samson's fully diluted share count of 102 million American depositary shares, and net cash position of roughly $58 million (I would use working capital minus debt in place of net cash here, if I had a balance sheet to look at), I believe an appropriately conservative net asset value estimate for these shares is well under $2.
Could I be completely wrong?
Yes, it's entirely possible that Samson is sitting on a sweet spot up in Wyoming. If so, the shares have room to appreciate further. What bothers me is that very good drilling results appear priced in already. I've invested in my fair share of E&Ps with largely unproven acreage, but I always demand a comfortable margin of safety in case things don't pan out as well as I anticipate. I have and will continue to miss out on the occasional moon shot, but it's the only way I can invest in this speculative sector and sleep well at night.