Long Run Explor Ltd Ord WFREF

motley fool blogger

[OneStar]

The end of the world

Turns out the world didn't end on Dec 21. Phew. Here, then, is my "Apocalypse Kit."

The first element of my kit is SM Energy (NYSE: SM),which holds 149,000 net acres at the Maverick, Dimmit and Webb counties of Texas, which border Mexico. This land is rich in natural gas as it sits on the wet gas window of the Eagle Ford Shale. It also holds 68,000 net acres at the northwest part of Texas and most importantly has 87,000 net acres at the Divide and Williams counties of North Dakota, which are adjacent to the McKenzie county where Continental Resources (NYSE: CLR) made a significant oil discovery recently. Continental's Charlotte-3 well flowed 953 boepd and this is a game changer discovery, according to the company.

SM's production is 103,000 boepd (45% oil and liquids) currently and its Enterprise Value (EV) is $4.7 billion with $1.2 billion of long-term debt. The company's debt consists primarily of senior notes with maturities from 2019 to 2023. There is only a small bank debt of $228 million. The Funds from Operations (FFO) annualized for 2012 are about $900 million, so it trades for $45,600/boepd and 5x the FFO annualized. Both metrics are really attractive and the D/CF ratio is as low as 1.3x. The CEO is Mr. Tony Best and I wish him all the best in his efforts!

Texas Is Hot

My "Apocalypse Kit" also contains Penn Virginia (NYSE: PVA),which holds 31,800 net acres in Gonzales and Lavaca counties, which are the hottest counties of Texas. These are the counties where Magnum Hunter Resources (NYSE: MHR) has seen some of the best drilling results in the Eagle Ford Shale thus far. Magnum Hunter Resources has hit an average IP-30 of 815 boepd in that area while Penn's average IP-30 stands at 657 boepd.

Penn Virginia also holds an inventory of 550 undrilled locations in Oklahoma, Mississippi and Pennsylvania. Its production is 17,000 boepd (51% oil and liquids) currently and its Enterprise Value (EV) is $900 million out of which $670 million is long-term debt, mainly held through notes due after 2015. With an approximate FFO annualized for 2012 at $270 million, it trades for $52,000/boepd and 3.3x the FFO annualized. Both ratios are low and the D/CF ratio is 2.5x.

When Two Are Not Enough

My third pick for your kit is the Canadian Long Run Exploration (TSX: LRE), which holds almost 1,900,000 net acres in Canada. It is a dominant player in the oily Peace River Arch region holding 600,000 net acres and the fifth largest land holder in the liquids-rich Montney.

Its current production is approximately 23,000 boepd (48% oil and liquids) and its EV is $900 million currently. According to the company, the net debt by year end will be approximately $290 million.

The FFO annualized for 2012 is almost $200 million so it trades for $39,000/boepd and 4.5x the FFO annualized. Both ratios are low and the D/CF ratio is just 1.5x.

Foolish Conclusion

These three companies have a clear strategy: They transition to an oil weighted production during the next months. Their oil acreage has been greatly de-risked so they could have some high impact wells that could help them move quicker to their oily goals.

If the natural gas price also keep recovering gradually, further fuel will be added into these energy houses. Once the stock prices rise significantly, they can dilute moderately to pay off part or all of their debt. If the scenario above does not work, both companies own significant land to sell. All this being said, a buyer at the current levels has strong odds of winning.