How Under-Valued is VII Vs. Peers Part 2 of 2In part 1 I presented price multiples for Vii's Montney and Permian Peers. VII's land holdings and reserves are the fundamental underpinning of its intrinsic value. I worked the Montney in Alberta and BC for over 15 years from the Dawson Creek area to Hinton and as far east as Valleyview. I also worked for a US independent on their unconventional evaluation team where we looked at all of the shale plays in North America. They were sucessful in the Montney, the Eagleford and more recently have gained an interest in the Duvernay. I recommended the Permian to them in 2009... VII's Nest 1. 2 and 3 areas are the premier Montney production areas by far based actual results. The remainder of their lands are as good as Shell's, Nuvista's, Sinopec's and Encana.
THe "Nests" are so prolifac becuase of their rock type (|dolomitic silt stone), permiability, fracibility and pressure. The later is due to the depth of the reservior. The pressure and permiability provide productivity and enhanced recoveries. They sit on a cold spot on the basement that results in a preponderence of Condensate. No one in the Montney has this good of rock. The drilling cost issue has been wrestled to the ground.
Based on rock quality VII should be trading at a high end multiple rather the lowest of the low.
The large landbase is both a blessing and a curse. The blessing in that their is so much running room, the curse in that you can only book so much. To book contingent reserves you have to have a development plan, timelime and show that the play is economic. So if you have no wells drilled tough cookies. To book 2P reserves you have to production obvoiusly but you can only book what you can map between say two producing pads.
That's why the reserve report only includes the Nests but not Wapiti, Rich Gas and the Lower Montney. The 2017 report including 1.7 Billion BOE of 2P and 1.3 Billion BOE of Contingent for a total value of $12 Billion. Assuming 350 Million shares after buyback the value is 8.57 BOE per share and $34.28 per share. What about upside? They say they have 900 Wapiti wells. What if we had 1,100 Lower Montney wells on 150 sections (very conservative). If we risk by 50% (1,000 wells), and each well has an NPV 10 $5 Miilion and produces 1 Miilion BOE we add 5 Billion dollars to the and 1 Billion BOE to reserves. Now the company has 4.0 Billion BOE and is worth 17 Billion or $11.48 per BOE and $48 per share. Obviously these lands while still be liquids rich but will be more gas prone and some of it will be sour. This gas will not be needed until LNG Canada or other Pet Chem plants are constructed. At that time natural gas prices should be notably higher. As fas as the cost of sour gas is concerned, the cost could be in $750 million range to add a sweetening unit to one of the Gold Creek Trains.
Based on the current price and the upside in the land base VII is a juicy take-over target IMHO.
Moving onto production, VII has done a very good job of designing their plants and super pads to handle at the time an unknown fluid characteristic, to whit increasing Condy rates. The pads have by and large been able to eat what has been thrown at them. In four years they have they have grown production from 20,000 to 220,000 BOEPD. What the market has killed them for was five bad quarters in 2017 and Q-1 2018 where they consistently missed targets and continued to spend more than they were cash flowing. It got so bad that duriing the course of late 2017, they had to admit that production growth would slip by a year ( ie 2018 guidance was supose to 210-215,000). The sad thing about it was that they kept making the lower end of guidance. The market just didn't believe them after August 2017 when they revised the guidance down just after a release in JUly that they were on track to meet guidance.
I attribute the 2017 miss partly due to bad luck ( Pembina plant outages and Alliance 10 day shut-in) but also due to inexperienced leadership. THe CFO at the time admitted that the 2017 budget was based ona 97% on time. 97% works for pipelines but anyone knows 95% is laudable for an E&P Company becuase you have to service equipment and overhual compressors every 4 years. Also this was the last CEO's budget not MHP's.
IMHO the Q-1 miss and it wasn't really all that important given where we are today was a result of the slower second half drilling in 2017 and the Nest 1 wells which produced great Condy but lower gas rates than Nest 2. OK to drill Nest 1 along with the rest of drilling program but not the whole enchalada. I'm guessing but this probably knocked of 5,000 BOEPD of the Q-1 rate.
What gives me great comfort and hope here is that the Company now has the proper leadership in place. Guys with experience who go over to Pembina and Alliance and ask them what there plans are and budget accordingly so that we never have this occur again barring a force majuere.
I think these guys will make sure that they budget and operate professionally.
I can't imagine the stress MHP is under. I hope that him and us can get back to the right value for our shares/options. Marty is way under water. The market seems to be rooting for him however
Before I leave I'll throw one more thought out as to why VII has been hit so hard. I might be totally off base. At one time VII sold themselves as absolute leaders in well everything. I've read on this blog that certain members of management team were quite arrogant,. Fortunetly they aren't here anymore. What are your thoughts that there is an element of schadenfraud going on here as well resentment for the as promised goods at $30 per share.ie once bitten twice shy.