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.
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