ANALYSIS (Part 2)
Valuation Metrics
1) Enterprise Value: The market cap as of today is $41M. The net debt was $111M (as of Q3 2012) so the EV=$152M. However the bank debt is only $88M.
2) Production: Q3 2012 average Production was 2,074 boepd (75% oil and liquids) and the company forecasts a 2012 exit production around 2,300-2,400 boepd. So the company trades for $65,000/boepd currently.
3) Cash flow: The company had FFO= $5M in Q3 2012 and the FFO was $19.5M for the nine months of 2012. The bank debt is $88M so this gives an annualized DCF ratio of 3.3. The market cap is $41M currently so it trades as low as 1.5x the FFO annualized.
The annualized FFO is around $25M. As the company is not the operator any more, this reduces its drilling costs significantly and its stake per well (40% WI) is less than $2M. This means the company can fund the drilling of (at least) 10 new wells per year. These 10 new wells can obviously impact very positively its production as its land is unrisked.
If we add on this, the impact from the low cost waterflood project, the production can exceed expectations in 2013.
4) P+P Reserves: Second Wave had 11 MMBoe (85% oil) 2P Reserves in Dec 2011. So it trades for a very low $13.8/Mboe valuation.
Based on the drilling success in H1 2012, I believe 2P Reserves will easily surpass 15MMboe once the new report is released in early 2013. Assuming 15MMboe 2P Reserves and the same low 13.8$/Mboe valuation, Second Wave should have an EV=$207M. Excluding long term debt, the company should have a market cap ~$120M which gives $1.40/share.
Beaverhill Lake-related Recent Transactions
The average metric for the transactions at the Beaverhill Lake is ~$123,000/boepd as the recent M&A deals show:
1) Midway was acquired by WhiteCap Resources (SPGYF.PK) for $96,000/boepd in Feb 2012. Midway's production weighting was 67% oil and liquids and it had 23,000 net acres in Beaverhill Lake.
2) Sure Energy (SUGYF.PK) sold its Beaverhill Lake assets in June 2012 for $150,000/boepd. Sure Energy land was near the Virginia Hills reef (16 sections) along with one section in Swan Hills South.
3) Petrobakken is the latest big oil player who proves how highly desirable Beaverhill Lake formation is. According to today's news, Petrobakken acquired 7M shares of Arcan directly from the market for an average price of $0.89 and now Petrobakken owns 17% of Arcan. Petrobakken is an oil weighted producer so this strategic movement into the oil rich Beaverhill Hill reinforces Second Wave position there and confirms its upside potential. In addition, any investor can assume now that Petrobakken may expand its acreage in Beaverhill Lake in the future.
Similar juniors' valuation
There are only two juniors remaining still "single and ready to mingle" in the Beaverhill Lake formation, Arcan Resources and Second Wave Petroleum. Arcan has an EV= $420M (convertible notes including) currently and:
1) According to the Q3 2012 report from Arcan, Arcan had less than double production from Second Wave (3,900 vs 2,100 boepd).
2) Arcan has a much worse DCF ratio than Second Wave (6 versus 3 respectively).
3) Second Wave sits on the sweet spot of Beaverhill Lake as the IP of its wells prove while Arcan IP results are significantly lower.
That being said, Second Wave should have at least half the EV of Arcan currently which is approximately $210M. If we exclude the long term debt, Second Wave should have a market cap approximately $120M or $1.40/share currently.
Conclusion
Summing up all the aforementioned valuation metrics and Second Wave Q3 2012 production (~2100 boepd), I conclude about the share price that:
1) It should be around $1.40/share based on the neighboring Arcan current valuation.
2) It should be around $1.40$/share based on a typical decent $100,000/boepd oil valuation.
3) It should be around $1.45/share based on a decent increase at its 2P Reserves Report which will be released in early 2013.
4) It should be around $1.60/share based on the recent average $110,000/boepd valuation for an oil-weighted transaction.
5) It should be around $2/share based on the average $123,000/boepd valuation for a Beaverhill Lake-related transaction.
All that being said, I believe that Second Wave gross undervaluation is blindingly obvious. This is why I consider that there is a lot of upside which can be realized in the next few months.