TOU Vs. VIITOU Vs. VII
In Q3-20, TOU had q of 298,000 boe/d whilst VII had q of 170,000 boe/d. The difference was TOU had a breakdown of 80 percent gas, 10 % oil and Condy and 10% NGL’s. Vii’s breakdown was 44,36,20. Both had similar prices for each product. TOU had cash expenses of $8.00 per boe versus $14 for VII, the difference being lower field opex and transportation for TOU. TOU had a cash netback of $10.76 per boe providing Cflow of $290.8 million. They spent 354 million resulting in free cash flow of minus $64 million. VII on the other hand had a cash netback of $13.64 resulting in cashflow of $166 million. They had free cash flow $10.70 million in q3. YTD TOU has negative free cash flow of $10 mm. VII’s YTD free cash flow is +97.6 mm.
TOU shows that their Cflow will be $1.22 B in 2020. I estimate that VII’s Cflow will be about $825 Million. This works out to $4.47 per share and $2.48 per share respectively. At Friday’s SP’s this works out to 4.0- and 2.32-times cash flow respectively. Using this metric VII is undervalued in relation to TOU by a wide margin.
Another metric would be comparing the NPV10 before tax of 2P reserve value and the number of shares. TOU and VII have 273 and 333 million shares outstanding respectively. VII’s 2P NPV10 is $16.1 Billion versus TOU’s of 15.1 Billion. Based on these two values VII should be worth 87% of TOU per share.
For sheee its and giggles I ran cases with similar prices of $3.00 per mcf, $50 WTI and $15-dollar NGL. I assumed TOU produces 300,000 Boe per day and VII produces 200,000 boe per day. TOU metrics are $1.58 billion funds flow, capital of 1.2 Billion and Free cash flow of $0.38 billion. VII makes $1.5 Billion Funds flow with $1.1 Billion of capex results in Free cash flow of 0.40 Billion. Basically, if both companies were treated equally by the market the only difference would be the difference in the number of shares.
What are the intangibles that make the market reward TOU More? First off Mike Rose, the CEO of TOU is on his second major growth company. He is a world class geologist and is one of the richest oilmen in Calgary. He is widely respected in the investment community. Secondly, TOU averages $3.5 million per well whereas VII averages $6.5 Million. But TOU wells have lower reserves per well. TOU has about three times the acreage of VII. TOU has three plays the BC Montney, Ab deep basin and the Spirit River Triassic. VII’s wells are deeper and have higher liquids recovery. VII’s only weakness weakness is a finite number of locations based on land ownership. Twenty Years worth or more though. As I have said, proving up the Lower Montney could add over a thousand locations. One final intangible, TOU took out Modern and Jupiter for price of $7,700 per flowing boe. This price is lower than acquisitions in the 1980s.
TOU is over whelmingly a gas play and they are the largest gas producer in Canada at 1.4 bcf per day. Due to the preponderance of gas reserves in North American shale, gas prices I believe will be capped at 4.00 per mcf. At this price US producers will drill up a storm. The value of VII rests on the price of oil. VII has greater upside above 50 WTI than TOU.
Based on the above VII has more upside as long as oil prices hold up and should move closer to TOU. I’d say it should be about $9.00 now.