Tuesday, April 26, 2011

Comparing Net Present Values to Market Values of Alberta Conventional and Oil Shale Plays

Several Canadian Royalty trusts have converted to corporate status over the past two to three years, including Equal Energy (EQU), Penn West (PWE) and Pengrowth (PGH). Many newly converted Canadian Royalty Trust have significant unexplored and undeveloped land holdings, which they did not develop due to capital restraints -- in so far that the royalty trust legal structure required that most net income earned to be paid as dividends.

How can these firms be analyzed for potential value? Canadian firms are required to publish after tax, forecasted discounted net revenue from proven and probable oil and natural gas reserves with SEDAR (the Canadian equivalent of the SEC).

The oil and gas companies selling below future net discounted oil revenues will be undervalued, all other factors equal. The forecasted value is listed as the "PV-10" value below (Present Value of oil and gas reserves, discounted at 10% per year, minus income taxes, development and transport cots, not taking out corporate costs and interest expense).

Table 1: Disclosed Future Value of Proven and Probable Oil and Natural Gas Reserves, year end 2010 Reserves Data, Selected Canadian Oil Firms (and Exco, US based Oil Shale Development Company):
PV-10 Value (proved)($C1000's) PV-10 (Proved + Probable)($C1,000's) Enterprise Value EV/PV-10 (proved) EV/PV-10 (prov+prob)
Equal Energy (EQU.TO) 318.7 374.7 375 1.18 1.00
Pace Oil & Gas (PCE.TO) 515.9 681.9 574 1.11 0.84
Penn West (PWE) 7401 9205 14580 1.97 1.58
Pengrowth (PGH) 3218 4028 5670 1.76 1.41
Enerplus (ERF) 2914 3683 6340 2.18 1.72
Baytex (BTE.TO) 2478 3327 7410 2.99 2.23
Bonavista (BNP.TO) 3012 3780 5316 1.76 1.41
Can Natural Res (CNQ) 38892 54302 59140 1.52 1.09
Encana (ECA) 18083 23566 30940 1.71 1.31
Exco Resources (XCO) 1223 na 5940 4.86 na
Legacy Oil&Gas (LEG.TO) 815.2 1192 2230 2.74 1.87
Imperial Oil (IMO) 21295 na 44950 2.11 na

Note in Table 1, the ratio of the PV-10 values for both proven and probable reserves are placed in bold font, and the lower, the more potentially undervalued, all other factors equal.

From table 1, it appears that most of the Albertan oil and gas corporations are trading a bit above their PV-10 values. PV-10 to market capitalization plus debt is between 1 to 2x for most of the firms listed. Pace Oil and Gas is the sole exception, while Equal Energy and Canadian Natural Resources are trading very close to their PV-10 values, on a combined proven and probable basis.

Most US based Oil and Gas Firms trade well above their PV-10 values, as the market assumes (probably correctly) that these firms will discover significant new reserves going forward -- and also possibly on the assumption that energy prices will rise going forward. An example of this is Exco Resources, which is US-based (included in Table 1), which is typical of US firms in so far that it sells at 4.86x its PV-10 value.

Summing up, overall the Albertan energy industry appears to be selling at a discount compared to its US based counterpart for PV-10 values, and may have good expansion potential. This means that the newly converted Albertan Royalty trusts may be undervalued. Future questions include the relative land holdings of the firms compared to the current market valuation, and the ability of these firms to execute on expansion plans, now that they are organized as corporate entities.

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