vastly underpricedLongview has been overly punished over the last 3 years, while the company did not deliver on all its promises since its IPO in Q2/2011, Longview remains solidly profitable.
Operating Net backs:
2011 - $36.36
2012 - $29.81
2013 - $32.82
2014 - $38.2*
*Estimated
Based on the latest available F&D costs for proved reserves including future development capital for the last 3 years which averaged $27.45, the company delivered proven reserves recycle ratios between 1.09 and 1.325.
Between 2010 and 2012 Net P+P reserves increased from 31.77m barrels to 33.36m barrels. Proven reserves have increased in the same period from 17.42m to 18.74m. Most importantly reserves per share remained constant to positive; however those were offset by 8.5% increase in debt per share in 2012 vs. 2011.
Production has declined by 3.77% vs 2012, however oil production has increased by 1.9%, and based on the current capex budget, both overall production and oil production are expected to rise by 5.8% and 11.7% respectively. Should the company achieve its guidance, 2014 would be the year with the highest annual average production highest oil production since the company came public. Follows is the trend for oil as % of production:
2012 66.90%
2013 70.83%
2014 74.94%*
*Estimated.
The overall production numbers are clearly masking the sizable increase in oil as a percentage of production, thus while production at 6350 Bpd next year may seem flat compared to the period 2011-2013, the production stream is much more valuable.
Since becoming public, the company has distributed over $74m in cash dividends or $1.59 per share, while it is true $36m of this amount was due to an increase in debt, this has been addressed in the latest budget which rightly shifted more funds toward production and reserve growth partially funded by a lower dividend. The latest budget has improved sustainability and in time will lead to higher production and reserves per share.
The market has certainly overly punished the company, between December 2011 and December 2013 Longview’s enterprise value has declined from $570m to $340m, this 41% decline in EV cannot be explained by the rise in debt from $90m to $115m during the same period.
We can perhaps attribute some of that decline to the decline in NAV due to the down revision in commodity prices to $11.4 as of the 2012 report from $15.12 in 2011, but if we were to maintain the same discount between the public stock price and NAV for the same period, LNV would need to trade at $7.65. If we study 2012 NAV closely, we will notice that a stock price in the $7.65 is more reflective of the company value. The 2012 PV10 value of the company reserves was composed of the following:
Proven: $360.8m
Probable: $248.6m
Total: 605.5m or $11.4 per share.
However, it would be proper to apply a 50% haircut to the probable number to account for the uncertainty in producing those reserves. This would give us the following value:
Proven: $360.8
Probable: $124mm
Total: $484.4 or $10.33 per share.
Debt: $115m or $2.45m per share.
LNV value per share: $10.33 – $2.45.
Value per LNV share is $7.88 based on the 2012 reserve report, which coincidently is very close to the discount to NAV experienced in 2011. There is no operational development that can justify Longview’s current 68% discount NAV. At $4.8 Longview (including debt) is trading at less than the value of its proven reserves, reserves which are predominantly oil weighted and conventional in nature thus subject to a premium valuation in normal conditions.
At a $7.5 stock price, and using 2014 projected production and cash flows, LNV would trade at the following metrics:
EV/DACF: 5.75
Per flowing: $75K
Per P+P barrel (net) – using 2012 numbers: $14.31
Per proven barrel (net) – using 2012 numbers: $25
At the above multiples LNV would still be cheap compared to its oil weighted peers, but it would at least trade in line with its initial public offering multiple when AAV still owned 63% of the shares.
LNV at the current share price is vastly underpriced. Now, that LNV has operationally split from AAV, I expect the company management to run on all cylinders in 2014 to deliver a strong performance. In my discussions with management, I was assured that they intend to focus very strongly on operations in 2014, should they be successful, we could witness a 50% rise in the share price + the 10% dividend.
The only remaining issue is the AAV overhang, the worst case scenario would be a secondary for those shares at a depressed level, while I believe this is a low probability scenario, it remains an ongoing risk and it continues to be one of the factors weighing on the share price.
Regards,
Nawar