|Shares Out. (in M):||45||P/E||0.0x||0.0x|
|Market Cap (in $M):||55||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-14||EBIT||0||0|
American Eagle Energy (EERGD) is an interesting special situation as a result of the recent merger of Eternal Energy (EERG) and American Eagle (AMZG). As background, AMZG and EERG were sister companies in that they held 50% interests in the same projects. EERG generally had stronger capabilities in sourcing, leasing, and monetizing acreage positions while AMZG was stronger at evaluating and choosing prospects from a geological perspective. The combined company (EERGD, soon to be EERG again I think) is a $55mn debt-free company primarily focused on Northern Rocky Mountains oil plays such as the well-known Bakken and Alberta Bakken. Management has extensive experience in this area and has been able to create value over the years through early leasing/acquisition in and around well-established oil companies. We view EERG as an inexpensive way to create exposure to a number of lower-risk plays (via its 55,000+ acreage position) around the more established areas of the Williston basin.
The opportunity exists largely (we think) because of the complexity of the merger, potentially confusion about the true acreage exposure, and general inefficiency surrounding the issuance of shares, subsequent merger, and reverse split (for example, Ameritrade has yet to actually reflect the reverse split and new share issuance)… as we enter the new year, the company will likely shed more light on the actual state of its assets and capital structure, however using the Prospectus, recent filings, and press releases we have tried to get out ahead of this to uncover what the true value of the company might be.
The conclusion of our analysis suggests that using $80 oil forever and liquidation-type valuations (many of which have been already been realized/illustrated by the company as a result of partial acreage sales), the stock should trade to around $1.35 share, modest upside to current prices. However, using any sort of conservative upside scenario whether it be pricing or valuations, we see this as a highly asymettric investment with a clear runway to potentially double or triple your money from current prices. Below we've gone into granular detail on each of the company's assets to try to conservatively model upside and downside asset valuation cases. Importantly, unlike many micro-cap companies, American Eagle faces no financing risks, and likely could self-fund almost all of its growth plans given its $14mn+ cash position and debt-free balance sheet. In short-creating the acreage for <1000/acre in a debt free structure, seems highly asymettric to us.
Note American Eagle's website(s) are fairly good and will help illustrate some of the following discussion:
American Eagle's key assets are:
1) Hardy - 100% interest - 4600 net acres (note all net acreage referenced is net to American Eagle) - located in Southwestern SK, Canada - this targets the Bakken formation in between the prolific fields in North Dakota and Viewfield (Saskatchewan) - formation target is structural in nature, wells are smaller but much less expensive than the ND Bakken play
- 1st well - Hardy 7-9 well currently producing 40 barrels/day - this well was previously drilled (mis-drilled) when American Eagle acquired the property around year ago - American Eagle recompleted the well at minimal cost ($475k Gross cost)
- 2nd well - Hardy 4-16 well - cost $1.5mn Gross to drill - Passport Energy paid 38.5% of this cost for a 25% interest in the well production - well is producing 130 barrels/day, management thinks they'll get it back to 160 barrels/day as they optimize pumping rates due to new production equipment
- note the website production references only the 7-9 well, not the newer 4-16 well
- Passport has elected to drill one more well under the "carry" arrangement provided above (pay 38.5% for 25%) - this is an small example (of many) have American Eagle management has been able to de-risk its drilling to fit the company size
- In addition, the company will drill at least one additional well in 1H12, as it moves towards a self-funding full-field development
- the Hardy area has ~14 drilling locations we estimate (management claims 28 potential but we use 14 for conservatism)
- We estimate the pre-drill NPV of each location based on 150 barrels/day initial production, 100-150k barrel Ultimate Recovery (ie: $10-15/barrel development costs), and $30/barrel lease operating expenses
- NPV ranges from $1.5mn at (15% discount, $100 oil, high case well) to $.5mn at (20% discount, $80 oil, low case well) - note these wells payout (cumulative cashflow > capex) in around a year
- Net-net we value the current production (~150bbls/day net to American Eagle = 40/day from well 7-9, 110/day from 75% of well 4-16) at 3x annual cash flow ($3mn/year) or $9mn… this equates to around 60,000 per flowing barrel of production, in-line with recent oil asset deals, and also checks out with our well-level, post-drill NPV model
- Adding 14 locations at .5mn to 1.5mn each equates to another 7-20mn of potential value for the undeveloped land - this equates to anywhere from 1500-4500/acre, again in-line with acreage transactions we've seen recently
2) Spyglass - 50% interest - 4500 net acres - located in Divide County, ND - offsets SM Energy (SM), Continental Resources (CLR), Crescent Point (CPG) and privates (North Plains, Samson, etc) - clearly appears to be in the right zip code as numerous wells drilled by the large E&Ps (some of which American Eagle has small interests in) have produced at >500 barrels/day of initial 30-day production
- there is good information on both the management discussion and property overview tab of these properties
- note that there are 2 plays: the Bakken and Three Forks, which have roughly equal productivity but make the acreage substantially more valuable if you can drain twice as many wellbores per acre as a single play
- This project is an example of how management has savvily created value, by avoiding the perceived "hot" acreage areas and focusing around the cusps of the play to pick up cheap, overlooked land, that still has low geologic risk and good economics. SM Energy has been paying 2000+/acre in this area for operated areas, while American Eagle sold non-operated acreage for $1750/acre earlier this year (to the E&P subsidiary of Nexterra)
- the acreage sale earlier this year comp'd this acreage to a value of $8mn ($1750/acre)… this would represent a liquidation scenario in our mind and even then may be low due to the premium for operatorship SM Energy, among others, would be willing to pay
- American Eagle will drill its 1st operated well (60% net interest) in this area in 1Q12, with the potential to dramatically increase (double or triple) company-wide production with this well. We see operational risk as relatively low given that the company has studied dozens of non-operated wells they've participated in and given their long history of drilling .throughout the Williston Basin
- Estimate the pre-drill NPV-10 of each location based on a $6mn well cost, 500 barrels/day initial production, 400-500k barrel Ultimate Recovery ($12-15/barrel development costs), and $25/barrel lease operating expenses… these well rates could be conservative based on recent 30-day results of 700 barrels/day+
- Note that these Initial Production Rates are 30-day rates based on state well-level data, not 24-hour rates quoted (and commonly hyped) by operators… we've analyzed dozens of wells to calibrate this initial production level and type curve/ultimate recovery range
- well-level NPV ranges from $6.5mn at (15% discount, $100 oil, high case well) to $2mn at (20% discount, $80 oil, low case well)
- note that while American Eagle will have small interests in dozens of wells its effective "net" exposure will be to ~3.75 wells based on 1280-acre spacing (3.75 = 4800 acres/1280) which we value at between $7.5-22.5mn, or 1600-4800/acre. The low-end of this checks out with where American Eagle was able to monetize acreage earlier this year while the upper end would be more representative of a derisked, control-premium for the asset.
- in addition American Eagle has exposure to ~100bbls/d (= 1/5 of one well) via ~12 different producing well bores which it has various small interests in… we value this similarly to the Hardy production at $6mn
3) West Spyglass - 100% interest - 2600 net acres - this acreage was recently acquired adjacent to Spyglass, and subsequently flipped to (we think) Nexterra's E&P subsidiary, potentially illustrating that American Eagle and Nexterra have an informal arrangement whereby Nexterra trusts American Eagle management to source quality acreage and pays a premium for access
- sold 75% of this project (7600 acres) for $12mn (1600/acre) recently, again an example of management creating significant value in "off the run" acreage positions within the Williston Basin
- this sale comp's the current acreage position at ~$4mn, however again, this would represent liquidation value and likely has some asymettric upside if drilling results are anywhere close to what Spyglass has realized
- We use essentially identical economic assumptions for this play as Spyglass (above), corroborated somewhat by the similar sale price the company was able to achieve with Nexterra
- Low case = $4.2mn, high case = $12.7mn
4) Pebble Beach - 10% interest - ~1000 acres (post recent sales) - this acreage is scattered to the SE of Spyglass in Divide County and leads to very small (~1%) interests in 20+ wells drilled by other operators in the area - namely SM Energy, Baytex, Continental, Crescent Point, Samson, and North Plains - 8 wells are producing while 10+ are in some stage of drilling or completion - these wells all have drilling economics substantially similar to the Spyglass economics above
- sold 1400 acres for $2mn recently, comping this acreage to roughly $1.5mn (~1500/acre)
5) Glacier - 33% interest - 25000 net acres - this is the play which could make the company worth many multiples of where it trades currently - this play is in a different basin (in NW Montana), but is targeting a similarly aged formation as the Bakken in North Dakota - recently the play has been somewhat controversial as industry participants have been reluctant to given too many details and have drilled what appear to be a few marginal wells. Note that there is very little risk of not having oil in the ground. The challenge is to design wells which cost effectively drain the oil-saturated section of rock… we think ultimately completion designs and well results could fall somewhere in between the productivity of Hardy (small wells, small production) and Spyglass ($6mn wells, but much larger production)
- American Eagle's position is scattered throughout the basin, interspersed with Newfield (NFX), Rosetta (ROSE), and Quicksilver Resources (KWK) positions - American Eagle is focused on the shallower section of the reservoir where wells are less expensive (<$4mn) and historical production (Sunburst Dome and Cutbank Sand Unit) have de-risked the acreage to some extent.
- in partnership with FX Energy (1/3) and Big Sky Petroleum (1/3), the partnership has drilled 3 wells: 14-29 (Horizontally drilled and awaiting stimulation), 15-13 (cased vertically, awaiting a horizontal leg), 81-3 (drilled vertically, confirmed oil in the reservoir)
- note that wells 14-29 and 81-3 have both confirmed good oil and gas shows throughout the reservoir which is why I say the oil in place is not the risk, its moreso the economic lifting of oil, something industry has been relatively adept at figuring out over the last 2-3 years (at $100 oil)
- see the following press release for details on this project:
- needless to say, there are numerous catalysts for this particular project as these important well results start coming out over the 1Q12
- note that Big Sky trades in Canada and has a market cap of ~$25mn (60mn shares @.40/share) for an equivalent land position as American Eagle (25000 acres each). Big Sky recently raised $10mn at the current share price in order to fund acreage acquisition and the drilling of these initial wells
- Big Sky's current valuation ($1000/acre) is in-line with where sophisticated majors (Shell, Murphy, Hess) and E&Ps (Crescent Point, Bowood) have leased acreage at recent land auctions, based on the perceived optionality of buying land with such large oil-in-place content (Rosetta claims 12mn bbls per 640 acres)
- As far as valuation is concerned, I would use $500-$2000 per acre as bookends (12.5mn-50mn). We've heard and seen instances where buyers have been willing to pay for chunks of acreage at these levels based on the perceived optionality of the play. To the extent the play actually works out the ultimate value realized could be much greater than these initial estimates.
6) Hardy Expansion - management has farmed-in (along with Passport Energy 50/50) on 22000 net acres near the current Hardy project (likely farming in on Crescent Point). This is another excellent example of management savvily creating opportunity for shareholders. Management structured this farm-in such that American Eagle has rolling OPTIONS to drill anywhere from 1 to 7 wells. Each well would secure 3200 of the 22000 net acres. Most importantly, all of the initial, "carry" wells that American Eagle drills will accrue 100% of cashflow to AMZG until Payout (cumulative cash flow > drilling cost), at which point American Eagle would continue to receive 65% of the gross cash flow (leaving some upside for the partner who is being farmed-in on). The partnership (Passport + American Eagle) has ~2 years to drill the 7 wells, which are estimated to cost $3.2mn each, creating a self-funding situation for the venture with asymettric risk-reward (because if the wells end up being uneconomical, there is relatively little sunk cost for the partnership). I find this to be a very savvy deal that management negotiated and another (of many) small example of how management is creating tremendous shareholder value.
- Low-high valuation cases (albeit somewhat theoretical) would be 0 - 20mn
7) Various other assets including 2 small projects in the Williston Basin (Galaxy and Benrude) and Marketable securities worth ~$1-2mn. We expect management to continue to source NPV-accretive projects throughout the basin and view this as all upside going forward.
Adding up all the parts to get the following (in $mn):
Hardy Production 9mn
Hardy Acreage 7-20mn
Spyglass Production 6mn
Spyglass Acreage 7-22mn
West Spyglass 4-13mn
Pebble Beach 1-2mn
Marketable Sec 1-2mn
Cash 14mn (from West Spyglass sale), assuming 2mn burn in 4Q12
Core Value 49-88mn
+ Glacier 12-50mn
+ Hardy Exp. 0-20mn
+ Other ???
Total Value 61-150mn
Per Share 1.33-3.43
As you can see this situation is highly asymettric with multiple assets providing optionality to the upside. Core assets with clear comps can easily get you to 2.50 of share value with Alberta Bakken being the key to creating more than a double out of this. Ultimately part of the story revolves around management as well and having spent a good bit of time getting to know management and observing ways they are treating shareholders and creating value, we believe this is the right team to continue growing this business. Furthermore management is well experienced in running public companies having sold Ryland Oil 2 years ago. We think ultimately they try to grow this business into the next Kodiak, American Oil and Gas (sold to HES), NOG, etc… it would appear that at current prices, shareholders are paying very little for any of this potential upside and hence why we find this situation to be so attractive.
Happy to answer any questions as this is a somewhat complex set of assets.