This Oil Stock's Gotten Ahead of Itself

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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.

Chesapeake Energy is a Motley Fool Inside Value choice. CNOOC is a Motley Fool Global Gains pick. Motley Fool Alpha owns shares of Chesapeake Energy. 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 profile or 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. The Motley Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (6)

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 February 01, 2011, at 9:32 PM, Chipper39 wrote:

    one has to assume that you hold a short position in SSN which in my opinion is obvious with your seemingly negative approach to this stock...rather annoying as a loyal investor to have someone continually publishing their perceived negativity of a solid company making great decisions for their own personal benefit...should be illegal...!!


    An honest investor!

  • Report this Comment On February 01, 2011, at 10:10 PM, jsb1949 wrote:

    I find it interesting that you fail to disclose your position, either long or short. Otoh, I'm assuming you are not long a stock you seem to dislike. If you are short the stock and just trying to enhance your profits, wouldn't it be more honest to disclose your position?

  • Report this Comment On February 01, 2011, at 11:02 PM, sami2002 wrote:

    Whenever Toby writes about SSN...ILMAO!!! The way he tries to express as this stock worth nothing is hilarious. I'm sorry for you Toby...for continuously trying to short sell. If you read his last article lot of numbers were I wont even spend time validating his assumptions. Can Toby give us the sources where he got this numbers? May be from a intern!!!

    I hope someone also puts in a complain to fools or SEC about selfish opinions.

  • Report this Comment On February 02, 2011, at 12:36 AM, bronzeback5 wrote:

    A fool and his money will soon be parted

  • Report this Comment On February 02, 2011, at 2:21 AM, brownbearguide wrote:

    Is Toby really Alsteele on the yahoo message board. This article is a bunch of mumbo jumbo. See ya at $3.50 next week......

  • Report this Comment On February 02, 2011, at 8:33 AM, XMFSmashy wrote:

    jsb, I repeat:

    Fool contributor Toby Shute doesn't have a position in any company mentioned.

  • Report this Comment On February 02, 2011, at 8:44 AM, XMFSmashy wrote:


    I didn't say it's worth nothing. I think it's worth around $170 million. That's a lot more than nothing.

    The sources for my numbers in this article are as follows:

    Samson / Halliburton JV details:

    CHK / CNOOC transaction valuation:

    CHK / SSN transaction valuation:

    Asset values: My estimates (i.e. opinions, not facts)

    Diluted share count (inc. options) and net cash:

  • Report this Comment On February 02, 2011, at 11:06 AM, Chipper39 wrote:

    you probably should consider writing about the whole story vs. just the things you can attempt to put a negative slant on...rediculous! reflection of the negative side of our world today...consider looking at yourself in the mirror in the morning and see if you like what is looking back at you.

  • Report this Comment On February 03, 2011, at 11:10 AM, mdquinn10 wrote:

    What research did you perform for this article? In the past I have seen some intelligent, well written and well reasoned articles by MF analysts. This is not one of them. There are presentations on SSN's website that will provide information for this writer and some well articulated and substantive articles written by Zman that provide good analysis of this company. I suggest that MF mgt do a better job of reviewing articles prior to publication. This dribble will not encourage anyone to invest in your newsletters.

  • Report this Comment On April 24, 2011, at 10:39 AM, mitchjl wrote:

    SSN closed at $3.49 April 21.IMO expect to see $6.00 very soon.I then will judge my position.

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