RE: RE: Interesting approachThis was a chance for Sprott to extract value from their tightly held Orion holdings. Both companies are similarly undervalued and remember that neither company had to do this deal. This was a friendly merging of two asset where the sum of the parts is worth more than the whole.
OIP made great progress to increase production in the past year and their share price didn't reflect that fully but that team looks like it wants to move on to explore in other countries and perhaps their Alberta prospects going forward were not that strong. However, they will be generating nice cash flow and Sprott probably wants to grow that money at a nice rate of return. What better place to roll over their position into WFE?
WFE doubled their drilling locations to 1100 and reduced technical risk significantly, yet their share price discounts this future growth significantly. WFE had 15 years of drilling inventory which is very high. This deal is great since it gives them the cash flow to double their drilling rate . Production growth per share will be similar to previous but they get their inventory down to 7.5 years which is more reasonable. WFE can perhaps take advantage of their increased debt availability to aggressively drill next year, and reduce risk with hedging strategies. Oil prices may not stay high forever so they need to unlock the value while prices are relatively strong.
WFE was ripe for a hostile takeover so this move reduces that probability significantly. WFE is tightly held now but not as tightly held as was OIP. WFE has sufficient inventory to bring them to 50 to 70 kboepd, up from current 9 kboepd. It is hard to imagine the new WFE to be below $12/sh in Dec 2011 unless oil price drops below $80/bbl.
I meet with my broker on Monday to free up more cash to throw into WFE since it is a bargain at current prices given the growth prospects. Think about competitors in surface mine oil sands who will invest $10 billion for 100 kboepd. WFE can generate 40 kboepd on $1.65 billion with similar risks. Think about competitors in SAGD oil sands who will invest $I1.65 billion to get to 40 kboepd with far more technical risk and far more difficult access to capital since scale up will occur in 5 to 10 kboepd increments. WFE wells pay out in 18 to 24 months which means far less risk than these other ventures. I am not putting down oil sands at all but on a comparative basis WFE is a far better investment.
I do not know how long these WFE wells can produce at say 40 boepd per well but they can easily double the currently expected life by simple water flooding. They may not have a 30 year reserve life but the NPV seems pretty darn good on a relative basis and scale up and access to capital are much simpler.
WFE should start to promote their contingent and original oil in place numbers as do their SAGD peers, since analysts will assign value to these and I suspect will increase share price targets.
WFE bought OIP for $65k per boepd, $15.3/boe reserves (P+P), and overall the merger does not appear to be dilutive. In fact, it appears to be an excellent deal for WFE at face value. I do not understand why the market does not like this deal, so I will take advantage and buy more at these prices. Hopefully the market will bring the shares down even lower on Monday so I can get an even better deal.
I am amazed at the fluffy posts that folks seem to put on these boards. Most of you seem to be momentum traders that actually have little to no understanding of your investment fundamentals. WFE currently has a minor retail holding so when the analysts start to pump the stock it will not take too many momentum players around to drive up the share price. Look for WFE to be taken out at $12 to $14/sh in the short term, otherwise stick around for 3 to 4 years and see a share price in excess of $20/sh.
Cheers,
dmacd