getting the low down at Rockwells Velvets “low ball” unsolicited offer to take Iron Bridge (IBR) private seems to be progressing. There has been no overt counter move from its principal shareholder, Bison, or rival bid from a third party. It could be only a matter of time before Joshua Young, Chairman of Bison, (second largest shareholder in Chinook Energy (CKE) sits down with Velvet to discuss terms of settlement. It is said that, at its heart, this is a battle for control of their adjoining Montney holdings in Gold Creek / Kopnik - most of this acquired by each from CKE. As one can see this is, in a way, very much a family affair.
Next expect to probably see a similar “low ball” unsolicited bid for CKE - and sadly a similar result.
There are several candidates in the neighbourhood - Storm Resources, Black Swan, Suguaro, CNRL and Progress (Petronas). But my bet is on Bison making a joint bid with AIM (HMQ in Alberta) to take CKE private. Between them they already control almost 50% of the company. CKE currently trades at around 20c. With a bid around 31c, they would be getting a bargain too good to miss.
Of course it is predictable that, as with IBR, management will immediately protest the bid is too low. But to my mind (and in Shakespeare’s words) they “protest too much.” Management have simply not made enough information available to the market in a proper fashion to attract alternative bidders. Add to that, management themselves seem to believe that delisting CKE may be the way to go (see CanadianFemme post June 02, 2018)
If there is to be any hope of a counter bid that properly values CKE, then in all fairness, management should start being more open about CKE and its potential now. As ultimate owners of the company, shareholders are entitled by right to this and nothing less.
At the core of any valuation of any energy company are three keys issues - assets, production and finances. On keeping shareholders informed on each of these, CKE gets three failing grades from me. Lets start with some of the “hidden” values in CKE
Firstly, we are ill informed about CKE land holdings post the Craft divestiture. Besides the principal holding of 48,328 acres at Birley / Umbach there are almost another 100 thousand acres of which we know very little. 75,756 net acres, are “legacy lands” in the Martin Creek/Black-Conroy area which are still producing. 11,950 net acres of these have prospective Montney rights. Chinook recently drilled two exploratory wells here but the results are being kept confidential. Then there are another 23,482 net acres in Boundary Lake area of which 3,395 net acres include Montney rights. Then as mentioned in my June 21 post, CKE may still own 3,840 acres in the Gold Creek / Nig / Kopnik area which could be quite valuable. There is a rumour (it probably started at Rockwells Pub in Dawson Creek. BC) that Velvet has recently been paying up to $10,000 an acre for land in that area !
CKE “valued internally” (whatever that means) 86,643 acres of their undeveloped land at $392 per acre. Taking the remaining 15,345 acres with Montney rights into consideration, CKE “other” land holdings could potentially be worth - at an average of $1,000 per acre - over $100 million or 44c a share.
Next there is the value of their near dormant 55 K 12” pipeline which runs through the heart of North Montney - from Martins Creek to the Aitkens Creek storage facility. Besides providing connections for the surrounding producers to the storage facility and the Alliance pipeline, it could also offer potential connections to Enbridge’s T-North pipeline and the TCPL’s North Montney expansion. CKE is already getting some revenue for its use by a third party. Tourmaline reports growing revenues from this employment of their infrastructure. Alternatively it could perhaps be sold as an entity to a pipeline operator (Brookfield Infrastructure ?) The price could be significant. Replacement cost of the pipeline and ancillary processing / storage facilities could be well over $90 million - or 40c a share.
Then there is production. Determining a valuation based on this should be pretty simple for an operation of CKE size. The problem is that for most of 2017, CKE output was reduced by third party restrictions. Giving year end exit production guidance is pretty standard for most companies - but CKE remains silent on this. The difference between what CKE produced in 2017 and what could be produced from the same wells in 2018 and beyond is significant. It is a major factor needed in any analysis of current value.
This much we know. In the Q2 (2017) M&A Report CKE gave Q4 exit production guidance at 6,300 - 6,500 boe/d. Since then a couple of “old” well have been reactivated and “new” wells brought on line. McDaniels, in their reserve report, gave an estimate for all of 2018 of 5,474 boe/d. In the Q1 (2018) CKE reported that, with third party restriction eased, total production was up to 5,400 boe/d for the month of April from 3,779 boe/d in Q4 2017. So what would be a reasonable estimate for exit production end 2018 with restrictions lifted and all systems go?
CKE has approximately 70 producing “old” vertical NG wells in Martin Creek, Black Conroy and Boundary Lake North. Their production potential seems to be about 2,000 boe/d but could be as high as 2,500. Then there are the 13 (11.23 net) “new” horizontal wells in Birley/Umbach. If one applies a 601 boe/d per well production rate (as projected for IP 360 in 2017) to each of these wells, then Birley/Umbach could contribute 6,749 boe/d bringing potential 2018 exit production to as high as 8,749 boe/d - but lets assume for this exercise 8,000 boe/d.
It is even trickier working out what that extra production could mean to the valuation of CKE. Taking an average between prices paid lately in Montney - $64,151 for Paramount and $45,455 for Trilogy - at a guess - $50,000 per flowing boe/d would be a reasonable number to use here.
That would value CKE production on its April number of 5,400 boe/d at $270 million. Absent of third party restrictions this valuation could rise to $400 million at 8,000 boe/d. That would make for a significant increase in valuation of $130 million - or 49c a share.
Finally, CKE is carrying on its books $ 327 million of “deferred tax assets” - potential tax benefits to an acquirer derived from prior losses incurred by CKE. This is a complex issue and only certain companies could derive a benefit from it. However appraising these at just 15c in the $1 could add $48 million to the value of CKE - or 21c per share.
CKE debt of course must be set off against these amounts. At $3.4 million, however, that would only amount to about 1.5c a share.
The “hidden values’ In CKE are really just the cherries on the top. For the cake itself one must look at the valuation of CKE principal holding - the 48,328 acres at Birley / Umbach of which 31,350 acres have Montney rights. And here too there may be a hidden value.
CKE holdings are in the prime liquid rich fairway. The potential of the area has been pretty well established and de risked, not only by the wells drilled by CKE, but also by its neighbours Black Swan, Storm and Suguaro. The $4,400 per acre ConocoPhillips recently paid for some 35,000 net acres of undeveloped land south of Aitken Creek would probably be a good number to start with. This would value CKE land at $213 million as a whole or $140 million for just the Montney rights (95c / 59c per share). But there may be a hidden value here too that could bring the value closer to the $5,508 paid by Paramount to Trilogy for 118,000 acres. This would kick the value up to 266 million / 173 million or 119c / 77c per share.
Some how I suspect this “hidden value” to show up in the price paid for the two sections recently purchased by CKE but of which we have been told little. Price and location are usually of public record - so why all the secrecy ? Same factor could apply to the results of the recent exploratory wells which are being kept under wraps. It could make it seem rather silly to hush them up. Besides that, management should know that not too much stays confidential for too long in that neck of the woods. Pop into Rockwells Pub in Dawsons Creek for a Friday night pint and one can probably pick up all the information needed on anything happening in the neighbourhood.
As written before, in my opinion, the information made available to shareholders of CKE is like a poor dogs breakfast - lots of mush and little meat. So much seems missing or buried in a clutter of information. It is presented in such a ponderous way that good analyst would have to spend days paging through back and forth through quarterlies, MD&A statements and SEDAR reports to even form a half decent opinion. This I think shows up in the present lagging share price and apathetic volume.
Bottom line. Shareholders and the market are not being kept properly informed about CKE by CKE. Sadly there are only a few of us who are afforded the pleasurable alternative of making the trip up to Mile 0 and stopping by Rockwells to find out whats going down at CKE besides the share price.