Triangle Petroleum's Hidden Value

Domestic oil companies are one of the hottest trades in the energy space right now. For this reason, investors are prepared to pay a premium to get their hands on shares of the best producers.

However, one company has been missed by much of the rally and appears significantly undervalued. This company is Triangle Petroleum (NYSEMKT: TPLM  ) .

Three in one
Triangle is essentially three companies in one. The company has three subsidiaries, wholly owned Tusa (an exploration and production company), RockPile (a wholly owned energy services subsidiary), and Caliber Midstream (of which Triangle is the majority owner.) 

Tusa is Triangle's most interesting asset. Tusa is targeting rapid production growth from its Williston Basin acreage. The company is currently in the middle of a four-rig drilling program aiming to drive production up to 12,600 barrels of oil per day in the best-case scenario by the second half of 2015.

For the most part, Triangle's RockPile subsidiary is doing most of the drilling work, although Tusa is not RockPile's only customer. During the first quarter of this year, RockPile completed five wells for Tusa and five for third parties. By the fourth quarter, management expects around 64% of RockPile's business to be with third parties.

New customers
Rock Pile won't have trouble finding new customers. The Bakken formation is one of the hottest regions for oil exploration within the U.S. right now.

One of the region's biggest players is international player ConocoPhillips (NYSE: COP  ) . This international oil behemoth has put U.S. shale at the forefront of its development plan and holds approximately 626,000 net acres in the Bakken region.

Over the next few years, Conoco plans to invest $4 billion in Bakken development. The company is targeting production of 55,000 barrels of oil equivalent per day by 2017, up from production of 24,000 BOE per day reported during 2012 and 39,000 reported last year. Triangle and Rock Pile should be able benefit from this growth, either directly or indirectly. 

Earnings growth
Back to Tusa. With its planned drilling program, management expects Tusa to report adjusted EBITDA of $225 million at the high end for fiscal 2015. Tusa's fiscal 2014 has just ended, and the company reported adjusted EBITDA of $112 million for the period. RockPile's EBITDA is also expected to expand 75% year on year.

However, Caliber Midstream is expected to report the strongest growth. The subsidiary's EBITDA is expected to jump 400% year on year by the end of 2015. This growth is thanks to an aggressive expansion planned by Caliber's management. The expansion aims to provide essential infrastructure for Tusa and Triangle within the Williston Basin.

Triangle is also pursuing growth through acquisitions. The most recent acquisition by the company is 46,100 net acres in a contiguous area of Williams County, ND and Sheridan County, MT.

The additional acreage will add 1,175 barrels per day of production to the company's existing output, taking production on a pro forma basis to 9,575 barrels per day.

Additionally, the new acreage has potential for a further 252 drilling locations and 4.4 million barrels of reserves.

On a pro forma basis, this now brings Triangle's proved reserve base to 47 million barrels with a further 611 drilling locations. That's a 14% increase in current production and 11% increase in proved reserves. The acquisitions have increased the company's drilling inventory by five to eight years.

In total, Triangle acquired these assets for $125 million, a tad over $2,700 per acre and approximately $28 per barrel of proven reserve.

Valuation
Despite Triangle's attractive growth prospects, the company is seriously undervalued based on a sum-of-the-parts valuation. Management has actually put together a valuation of the separate businesses within a corporate presentation. The valuations are based on estimated 2015 EBITDA forecasts and current enterprise values, although it would seem that this has gone unnoticed.

Management estimates that RockPile is worth $6.66 per Triangle share, while Caliber is worth around $2.50. In total, these assets are worth $9.16 per share; this places a value of $2.4 per share on the E&P business, based on the share price at time of writing.

That's an exploration and production company with current production of 10,000 barrels per day, targeting 12,000 by year end, that's worth $206 million. This is around 1.8 times its historic EBITDA and approximately 0.9 times estimated EBITDA. Peers currently trade at 5 times their forward EBITDA.

Foolish summary
Based on a sum-of-the-parts valuation, Triangle is undervalued. The company's subsidiaries, which are predicted to notch up a solid rate of growth this year, are worth approximately $9.2 per share. This means that the company's exploration and production business is one of the cheapest on the market, despite output growth. 

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