RE:Long Term Price Target | 60 to 70 Wells | $1,100 per MCFBased on your analysis and assuming a successful execution of the 2021 plan it seems possible to hit an EOY price target of $20 per share. Given that a lot of derisking will have taken place (six wells drilled, reserves calculated, facilities built, buyers revealed) it doesn't seem that wild. Thoughts?
FilProTrading wrote: Hello All, this is an update to the analysis I posted in December 2020. I am posting this update based on recent interviews from DME’s Management and as before, appreciate any feedback / corrections to the DD.
For this updated long term Price Target, I’m looking at where DME may be after the completion of 60 to 70 wells (with the 2021 private land acquisition) understanding the company is still pesenting this as taking 6 years and $45MM CAPEX. I would add $4MM to $8MM CAPEX to the $45MM still showing on the Investor Presentation on DME’s website since it also still shows 50 to 55 wells although a recent DME press release has updated this to 60 to 70 wells and based on an estimate of $400K CAPEX per well.
The updated math I’ve done from the company’s presentation and recent PRs is as follows:
CAPEX for five (5) wells: $26,000,000
CAPEX Payback from production of five (5) wells: 18 months
(PREVIOUS DD – Still on DME’s Investor Presentation)
Annual Gross Revenue per well $275/mcf: $8,942,000 (average annual production of 32,516mcf per well)
Annual Gross Revenue from five (5) wells @ $275mcf: $44,710,000
18-months Gross Revenue from five (5) wells: $62,594,000
Continuing to use the analysis that all Net Income after tax, G&A and royalties was being applied as Payback to $26,000,000 CAPEX on five (5) wells, it now looks like the Annual Net Income per well at $275mcf is estimated at $3,714,507 (i.e. *$26,000,000/$62,594,000 = 41.54% |$8,942,000*0.4154 = $3,861,155). A little lower than before, but this is still based on $275mcf.
(NEW DD – Based on DME’s PR numbers)
Annual Gross Revenue per well $1,100/mcf: $35,767,600 (average annual of 32,516mcf per well)
Now this is where it gets interesting…I assume the G&A as a relatively fixed-cost does not increase with the potential $825mcf revenue increase (i.e. $275mcf to $1,100mcf). Then I'll assume that the G&A for DME as a vertically integrated company is 20% and as with G&A, Operating Expenses do not increase with the additional revenue of $875mcf. With these assumptions, this will increase the Net Income after tax and royalties to 61.54%. If this is accurate, then the Net Income per well at $1,100mcf is estimated at $22,011,381 (i.e. $35,767,600*0.6154)
If 60 to 70 wells is reached then the projected long-term Annual Net Income of the company after OpEx, tax, G&A and royalties could be between ~$1,320,682,860 to $1,540,796,670 (at a helium price of $1,100mcf).
Assuming the outstanding shares do not exceed 79,410,315, this gives an EPS range of $16.63 to $19.40. Using a P/E ratio of 15 (still best I could discern from looking at various O&G PE ratio averages, but understand that value of a Helium producer may not correlate well to those commodities), that gives a long-term Price Target of $250 to $290.
Quite frankly, it’s a bit mind-blowing if we get a share price anywhere in the triple digits and even more so, if we get close to this Price Target.
NOTE: One of the biggest Price Target variables in this estimate is the PE ratio of 15. I feel another method for valuation should be using a Discounted Cash Flow (DCF) model with maybe a 7-8% discount (although with a weakening USD perhaps this discount would be offset by increasing helium prices). That said, I am not sure how to establish the Terminal Value using a DCF model, so if anyone has experience with DCF models it would be great to get your insights.
GLTA and appreciate any and all feedback!