VALUATIONVALUATION
Valuation Benchmarks – Reflecting only a small fraction of the
upside potential from the Alberta Bakken play
Bowood currently has a market capitalization of $107 million. The stock has rallied over
290% since hitting a low of
.10 earlier in the year and 56% just in the last couples of
weeks, on the back of the excitement surrounding the Crown land sales and
announcements that Murphy Oil and Crescent Point are now involved in the Alberta
Bakken play. We continue to see further upside in the story.
Our valuation parameters are based on the September 24th closing price of
.39.
Bowood is trading at a big premium to the small cap producers average on every
measure, but we still see significant upside potential in the story as the stock in nowhere
close to reflecting the large reserve and production growth that we believe could
materialize in this story over the next few years if this play develops even close to the way
we think that it will.
Based on Friday’s closing price of
.39, Bowood is trading at 16.5x (15.1x on a debt
adjusted basis) to our 2011 CFPS (f.d.d.) estimate of
.02, versus the oil-weighted Small
Cap group average of 4.0x (4.8x debt adjusted). Our target implies a 48.4x debt adjusted
target multiple compared to the peer group average of 7.1x. Our valuation is not based
off of the existing cash flow estimates, but instead off of the risked resource exposure that
we see Bowood is now exposed to with its large land position that is strategically
positioned in the heart of the emerging Alberta Bakken fairway.
Given the significant upside reserve and production growth potential that Bowood is
exposed to we expect the stock to bypass more conventional valuation measures, as near
term price to cash flow ratios will likely not reflect the true value of what they are sitting on.
We have instead decided to approach our valuation based on calculating the risked
recoverable resource that Bowood is exposed to. With approximately 115,000 net acres
on the play or 180 net sections and using the lower end of the estimated OOIP of 10
mmbbls per section and a primary recovery factor of 15%, we calculate that Bowood is
exposed to 270 million recoverable barrels (unrisked). If we assume that these light oil
assets are worth $25.00/barrel this works out to almost $23.21 per share. Assuming 4
wells per section generates over 718 locations on the Bowood lands, if we assume only
25% of its lands are prospective this cut the inventory to roughly 180 locations and at $4.5
million per well this results in a future drilling program of $809 million. This is significant
for a company with only a market cap of just over $100 million. As a result we believe that
Bowood will need to farm-out the play to industry partner with deeper pockets to help fund
the exploration and development efforts. Given this is a relatively exploratory play we
have decided to risk this at 10% and have only given Bowood an average working interest
of 45% on its lands (assuming farm-out). This all generates a value of $1.04 per share
and when we add on the value of its current production of
.10 we generate a target
price of $1.15. We believe Bowood is definitely the most leverage company in terms of
land position and upside exposure if this play takes off like we expect it will over the next
year.
The other way that we looked at the value is in reference to the recently announced
US$456 million deal in which Enerplus acquired Bakken acreage in North Dakota last
week. Enerplus picked up 46,500 net acres (72 net sections) in the Fort Berthold area of
Dunn and McKenzie counties in North Dakota. If we net off roughly $56 million in value
for the existing production base (800 boe/d @ $70,000/boe/d) we calculate that Enerplus
paid just over $5.7 million per section for the Bakken rights in this area. Enerplus
estimates the total OOIP per section at roughly 9 mmboe (between the Bakken and Three
Forks formations), which is comparable to the 10 mmboe per section that we used to
value the Alberta Bakken above. Translating this back value back to Bowood (assuming
a 45% working interest) generates a value of $1.60 per share for just the Alberta Bakken
and the existing production value of
.10/share get us to an upper value of $1.70/share
using this latest Bakken transaction as a proxy.