Oil Patch Quick Pitch: GeoResources

Last week, we took a quick look at oil and gas producer Resolute Energy (NYSE: REN) and the potential value on offer there. Continuing in the same format, let's check out one of Resolute's partners in the Bakken, GeoResources (Nasdaq: GEOI).

GeoResources is the latest entity run by Frank Lodzinski, a serial moneymaker in the oil patch. Three past ventures have made initial investors three to 10 times their money. The biggest score appears to have been the sale of Texoil to Ocean Energy (a company that later merged with Devon Energy (NYSE: DVN) to form the country's largest independent E&P). That's a great way to secure shareholder loyalty, as demonstrated by the fact that the Vlasic family (of Vlasic Pickles fame) has backed five different Lodzinski vehicles since 1988.

So what does this latest company bring to the table? Here are some essentials:

Data from Capital IQ, a division of Standard & Poor's, and from company presentations. Production and reserve numbers exclude the company's partnership interests.
Boe = barrels of oil equivalent.

On a first pass, we see that GeoResources is valued at around $70,000 per flowing barrel, and at a bit more than $15 per barrel of proved reserves. For an E&P weighted slightly toward oil (56% by reserves and 54% by production), these measures are roughly in line with median peer valuations. Now let's turn to the assets.

In GeoResources' southern region, major areas of activity are the Giddings field in Texas and the St. Martinville field in Louisiana. The company also manages two drilling partnerships in Oklahoma and Texas. The company has dialed back drilling in the gas-weighted portion of the Giddings field, where economics are less than compelling at present, while the St. Martinville shallow oil project is just getting under way. This looks like the most economic project in GeoResources' entire portfolio, with rates of return pretty much off the charts at $40-plus oil prices.

Up north is GeoResources' Bakken play, where the company has 37,000 net acres, nearly two-thirds of which are operated and joint-ventured with Resolute. Oasis Petroleum (NYSE: OAS) and Brigham Exploration (Nasdaq: BEXP) have reported strong results at locations just south of this acreage. Hess (NYSE: HES) recently backed up the truck in this area as well, by acquiring American Oil & Gas (AMEX: AEZ). The JV plans to drill at least three Bakken wells beginning this month. In addition to the operated JV, GeoResources holds many small non-operated interests in wells being drilled by third parties, and also has a waterflood project that's looking to add a few million barrels of incremental reserves to a past producing field in North Dakota.

Production and reserves are currently split roughly 70/30 between the southern and northern regions.

Based on five-year NYMEX forward prices at mid-year, GeoResources calculates that its proved reserves sport a pre-tax present value of $384 million, or $16 a barrel. That seems reasonable, given that more than 80% of these reserves are proved developed. So does the firm's estimated value of $85 million for unproved property, which assigns $2,000 per acre in the Bakken, and book values everywhere else. If I knock 15% off of these combined values for the cash cost of future income taxes and corporate overhead, that's $399 million in after-tax present value for proved and unproved assets. Adding working capital and the book value of equity in the two drilling partnerships, and subtracting total debt and asset retirement obligations, gives me an estimated net asset value (NAV) of around $328 million. Adding 2.1 million options and warrants to the share count gives us a fully diluted NAV estimate of around $15 per share.

GeoResources is trading right around our NAV estimate, albeit one that doesn't give a whole lot of credit to the firm's considerable unproved upside potential. I generally look for a wider margin of safety, but given the track record and shareholder alignment of management (board and management own or control around 36% of shares), investors may do quite well here.