For a major oil and gas company to meet its production growth targets, it takes a lot of capital and a little luck. If it can't meet those production goals through exploration, the company may go out and buy a company or two. For example, when ExxonMobil (NYSE:XOM) wanted to get in on the shale plays in Alberta last year, it bought Celtic Exploration for $2.6 billion. The deal bolstered the company's holdings in the area by about 139 million barrels of oil equivalent of proved and probable reserves, a much-needed boost for a company that has struggled to meet its production goals as of late.
Like investors, major oil companies are always looking to get value out of their purchases. Today, let's look at a way to value a company for an acquisition and see if there are any companies that could be on he block for potential buyout.
Getting bang for your buck
While there are certainly some very complicated methods for evaluating an energy company, a quick and dirty method is to see how the enterprise value of the company (all equity and debt minus cash) compares to the total proved reserves on the company's books. For example, Berry Petroleum (UNKNOWN:UNKNOWN), which was just acquired by LINN Energy (NASDAQOTH:LINEQ) for a final price tag of $4.3 billion, had just over 274 million barrels of oil equivalent in proved reserves. This means that the company paid about $15.33 per barrel of oil equivalent for the company's reserves. Based on an S&P Capital IQ screen of exploration and production companies with a total enterprise value between $4 billion and $45 billion, an average company in this space would have an enterprise value per barrel of oil equivalent of $21.53. So based on this metric, it appears that LINN didn't overpay for this asset.
There is also one thing to consider when using a metric like this. Companies evaluate barrel of oil equivalents based on a BTU equivalency, but gas and oil spot prices trade at very different rates than this basis. For example, a gas-heavy company like Ultra Petroleum (NASDAQ:UPL) would have a value of about $9.69 per barrel of oil equivalent. This is misleading because over 95% of its reserves are in gas. Keep this in mind if you do this kind of calculation on your own.
Using this method for evaluating companies, let's take a look at a couple companies that could be selling at a deep discount.
Devon Energy (NYSE:DVN)
Some people might see Devon's $11 billion in debt as a little too much bulk for a $28 billion. But with an enterprise value of $8.97 per barrel of oil equivalent, Devon could be a great deal for someone who wants a well-diversified portfolio. Overall, Devon itself is pretty well-diversified, with about 47% of proven reserves in oil and natural gas liquids. One of the possible reasons for the lower price tag may be that the company has 68% of all its proven reserves in the Midcontinent region, mostly in either more mature gas plays like the Barnett Shale or speculative plays like the Anadarko Woodford formation.
While some plays may be speculative, they also may be very promising; the Anadarko Woodford may be the next great American shale play, so some of the majors who missed the boat on the Bakken or the Eagle Ford might be able to get in on the ground floor on this one. A $28 billion price tag might seem excessive for an acquisition to anyone, but remember that Exxon paid almost $41 billion for XTO Energy back in 2009, so a company at Devon's size, and certainly at this price, is attainable.
Canadian Natural Resources (NYSE:CNQ)
Considering how much energy investors want to be in oil right now, its rather staggering that Canadian Natural Resources is selling at such a discount. Despite proven reserves that are over 86% liquids, the company is still valued at only $10.47 per barrel of oil equivalent. One of the major reasons for such a low value is that the proven reserves the company has are in crudes that are more expensive to produce, namely in situ oil sands and enhanced oil recovery for heavy oil. Not only are these types of extraction more expensive to produce, but the lack of takeaway capacity has many Canadian tar sands trading at a deep discount to other North American crudes.
It's possible that this company could be an ideal takeover candidate for a company that wants to get into the oil sands business, but $43.6 billion is a lot of money to fork over. Once Keystone XL comes online and oil sands can easily make it to the Gulf, oil sands prices will probably get up to other local crude prices.
Chesapeake Energy (NYSE:CHK)
There has been a lot of talk about how Chesapeake is undervalued by the market, but there isn't always an exact value for the company associated with that statement. For those curious about how much of a discount it is trading for, perhaps an enterprise value of about $11.34 per barrel of oil equivalent might give you an idea. Granted, about $4.63 of that per-barrel price is debt and only 30% of its total reserves are in liquids. But for a company that is in the top three for land holdings in eight of the United State's top shale plays, there is a lot of upside and pretty decent value despite the $31 billion market value.
What a Fool believes
Several major oil companies are in a precarious position. Overall production growth has been relatively stagnant and cash reserves are filling up. In order to meet their growth projections, they very well may need to look at a company like the ones mentioned above to inorganically bump their numbers. While the enterprise value per barrel of oil equivalent lends a little perspective to the value of these companies, it certainly doesn't tell the whole story, but this metric should at least stoke some interest.