CANADIAN SUPERIOR ENERGY INC SNG
May 03, 2010 - 3:58pm EST by
manny
2010 2011
Price: 0.60 EPS $0.00 $0.00
Shares Out. (in M): 350 P/E 0.0x 0.0x
Market Cap (in $M): 210 P/FCF 0.0x 0.0x
Net Debt (in $M): -60 EBIT 0 0
TEV ($): 150 TEV/EBIT 0.0x 0.0x

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Description

Canadian Superior is an under-followed, small-cap energy company with a somewhat random, but interesting, collection of assets. Through a checkered past, the company was inefficiently run, eventually pressured into bankruptcy last year, sold a partial stake in a large Trinidad gas field, and emerged retaining the majority of the enterprise value for the equity. The bankruptcy forced a number of traditional equity investors out of the stock, however the current holders list is sort of a whos-who of distressed/special situations/value energy investors. One of these investors is Clay Riddell, a long-time, well-regarded energy investor out of Calgary who indicated interest for the Canadian assets while SNG was in bankruptcy and has since led a $60mn private placement to recapitalize the company for future development of its rich asset base. Historically the company had been opaque about the assets it has collected over the years and the new management team is committed to increasing transparency (as witnessed by its recent conference call) and renaming/rebranding the company to turn things in a new direction. While not a traditional catalyst, I view management's rebranding of the company over the next 2-3 months as an opportunity to invest before the company is on the radar of more mainstream investors. This is the catalyst which I think could turn what is otherwise just another deep-value stock into a very lucrative opportunity over the next 6 months.

I say SNG is a deep value stock because I think once investors peel back the layers and start adding up the value across SNGs asset base, they will appreciate the quality of the various assets substantially more than the current stock price is discounting. Further, I think there are a number of historical events/transactions which we can point to, to validate the downside-case for an asset-by-asset NAV valuation. The bankruptcy, where effectively every asset was up for sale at one point or another, served to generate a couple of data points, all of which I consider to be worst-case valuations given that they were in a distressed-seller/early-2009 credit environment. In short, I think you can purchase Canadian Superior's assets at a discount to the sum of these distressed bids. This gives me comfort in the downside case for the company.

A couple of places to go for further information are the Annual Information Form on SEDAR and the company's website which will give you a flavor for its diverse asset base.

The collection of assets includes:
1) Western Canada - somewhat opaque but large land base w/ a worst-case valuation data point
2) Offshore Trinidad - world-class offshore gas reservoir/exploration potential with BG as partner - w/ a worst-case valuation data point
3) Offshore North Africa - highly prospective oil reservoir with an relatively low-risk appraisal well which should be a catalyst for the stock as the company quantifies reserve potential
4) Offshore Nova Scotia - very speculative/don't count on any value

Western Canada
SNG owns 260,000 acres scattered across Alberta (mostly). All of this acreage is likely prospective for one thing or another from shallow, coalbed methane all the way to higher impact, oily resource plays. While its hard to quantify actual potential due to the lack of data out there, the best downside case data point we have is Clay Riddell's indication of interest (while the company was in bankruptcy) when he tried to buy the Canadian assets for ~$120-130mn last spring (I don't think this is officially in writing but the company has confirmed it and trolling the bankruptcy docket might have some indication of this).

Current production is estimated to be 14,000 mcf/d of natural gas and ~1000 bbl/d of oil.
Current proved developed reserves (PDPs) are 744,000 bbls of oil, 99,000 bbls of NGLs and 17.6 Bcf of natural gas. A conservative valuaton of $30/barrel, $25/barrel and $2.00/mcf for these respective reserves yields $60mn of value (these valuation metrics are a conservative framework which you will arrive at using normal decline rates, $70 oil, $5 gas-type pricing, and normal discounting assumptions). Note that this value is only for wells that have already been drilled - ie: this is a run-off type value. Pg. 26 of the annual information form shows the details of a full DCF of these assets and roughly corroborates the assumptions laid out above.

In addition to the PDPs, I would pose that it wouldn't be unreasonable to assign $500/acre of value for the 260,000 undeveloped acres which they own. Some acreage will end up being worth $5,000+/acre and some will be much less than that. I would certainly say that if we wanted to re-lease their entire acreage base today, $500/acre would probably be a good estimate of the cost to reconstruct this portfolio. Clay Riddell's bankruptcy/early-2009 bid implies an acreage value of ~250/acre.

Adding $500/acre x 260,000 acres to $60mn of PDPs/run-off value yields a realistic, upside valuation of $190mn. Whatever the right number is, there is no doubt that there's substantial optionality in this large acreage package.

My low and base cases are $125mn and $190mn for Western Canada.

Offshore Trinidad

Block 5(c) is an offshore oil and gas block which SNG currently has a 25% interest in (BG 75%). SNG has drilled 3 wells thus far and delineated a major natural gas discovery (in a gas-rich basin) - extensive details of each well are in the Annual Information Form. After these wells, BG purchased 45% of block for $142mn in a distressed sale by SNG last year. This sets the low-case valuation floor in my mind (implies $80mn for SNGs stake). In reality, for a market-based transaction in the current environment, I would have to imagine this stake would be worth considerably more and may be a sale candidate by the company in order to fund other opportunities.
I don't think assigning $100mn+ to the block would be aggressive for a more normalized case. BG has indicated this block will be very economical to develop as it backfills the nearby Dolphin platform as that field declines.

At this point, I think we've established a low-case valuation of $200mn for the Canadian and Trinidad assets (both corroborated by "low-ball" bankruptcy bids). Post-private placement, the company has 350mn diluted shares outstanding (including preferred share dilution) @ .60 = market-cap of 210mn, no debt, and cash of ~60mn (note: I count 22mn of restricted cash at the Trinidad subsidiary as this cash is simply escrowed for future development drilling in the block). Putting this together, I think you're paying $150mn through the equity, $50mn less than the bear case for Trinidad and Canada (again, bear-case established through market-based bankruptcy indications of interest). Add to this Tunisia for free and I think you have a deep value stock (importantly, with a catalyst coming up over the next 2-3 months).

Looking at Tunisia, SNG is drilling an appraisal well (considered lower risk than an exploration well) on their block which is delineating a large discovery ("Zarat") from the 1990s in an adjacent block - on the call management disclosed a preliminary resource estimate (which I have forgotten but it was substantial) and the block appears to be in an oily basin, which likely could have further discoveries to be had (SNG plans 2-3 more exploration wells over the next 3-4 years to fulfill requirements of their PSC). SNGs appraisal well will be drilled in 4Q10 and should be important to the extent it further increases our valuation argument.

In summary, SNG appears to be an under-followed stock with substantial fundamental asset support and a bright outlook as the company begins to highlight development opportunities in Canada and completes appraisal well drilling in Tunisia). With strong institutional support from current shareholders and ample firepower via cash on hand, I think Canadian Superior has years of accretive investments ahead of it and should be a very interesting story to be involved in. My upside case would be ~$1.25/share based on $190mn for Canada, $100mn for Trinidad, (ballpark) $50mn for Tunisia, and the $60mn of net cash.

Catalyst

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    Description

    Canadian Superior is an under-followed, small-cap energy company with a somewhat random, but interesting, collection of assets. Through a checkered past, the company was inefficiently run, eventually pressured into bankruptcy last year, sold a partial stake in a large Trinidad gas field, and emerged retaining the majority of the enterprise value for the equity. The bankruptcy forced a number of traditional equity investors out of the stock, however the current holders list is sort of a whos-who of distressed/special situations/value energy investors. One of these investors is Clay Riddell, a long-time, well-regarded energy investor out of Calgary who indicated interest for the Canadian assets while SNG was in bankruptcy and has since led a $60mn private placement to recapitalize the company for future development of its rich asset base. Historically the company had been opaque about the assets it has collected over the years and the new management team is committed to increasing transparency (as witnessed by its recent conference call) and renaming/rebranding the company to turn things in a new direction. While not a traditional catalyst, I view management's rebranding of the company over the next 2-3 months as an opportunity to invest before the company is on the radar of more mainstream investors. This is the catalyst which I think could turn what is otherwise just another deep-value stock into a very lucrative opportunity over the next 6 months.

    I say SNG is a deep value stock because I think once investors peel back the layers and start adding up the value across SNGs asset base, they will appreciate the quality of the various assets substantially more than the current stock price is discounting. Further, I think there are a number of historical events/transactions which we can point to, to validate the downside-case for an asset-by-asset NAV valuation. The bankruptcy, where effectively every asset was up for sale at one point or another, served to generate a couple of data points, all of which I consider to be worst-case valuations given that they were in a distressed-seller/early-2009 credit environment. In short, I think you can purchase Canadian Superior's assets at a discount to the sum of these distressed bids. This gives me comfort in the downside case for the company.

    A couple of places to go for further information are the Annual Information Form on SEDAR and the company's website which will give you a flavor for its diverse asset base.

    The collection of assets includes:
    1) Western Canada - somewhat opaque but large land base w/ a worst-case valuation data point
    2) Offshore Trinidad - world-class offshore gas reservoir/exploration potential with BG as partner - w/ a worst-case valuation data point
    3) Offshore North Africa - highly prospective oil reservoir with an relatively low-risk appraisal well which should be a catalyst for the stock as the company quantifies reserve potential
    4) Offshore Nova Scotia - very speculative/don't count on any value

    Western Canada
    SNG owns 260,000 acres scattered across Alberta (mostly). All of this acreage is likely prospective for one thing or another from shallow, coalbed methane all the way to higher impact, oily resource plays. While its hard to quantify actual potential due to the lack of data out there, the best downside case data point we have is Clay Riddell's indication of interest (while the company was in bankruptcy) when he tried to buy the Canadian assets for ~$120-130mn last spring (I don't think this is officially in writing but the company has confirmed it and trolling the bankruptcy docket might have some indication of this).

    Current production is estimated to be 14,000 mcf/d of natural gas and ~1000 bbl/d of oil.
    Current proved developed reserves (PDPs) are 744,000 bbls of oil, 99,000 bbls of NGLs and 17.6 Bcf of natural gas. A conservative valuaton of $30/barrel, $25/barrel and $2.00/mcf for these respective reserves yields $60mn of value (these valuation metrics are a conservative framework which you will arrive at using normal decline rates, $70 oil, $5 gas-type pricing, and normal discounting assumptions). Note that this value is only for wells that have already been drilled - ie: this is a run-off type value. Pg. 26 of the annual information form shows the details of a full DCF of these assets and roughly corroborates the assumptions laid out above.

    In addition to the PDPs, I would pose that it wouldn't be unreasonable to assign $500/acre of value for the 260,000 undeveloped acres which they own. Some acreage will end up being worth $5,000+/acre and some will be much less than that. I would certainly say that if we wanted to re-lease their entire acreage base today, $500/acre would probably be a good estimate of the cost to reconstruct this portfolio. Clay Riddell's bankruptcy/early-2009 bid implies an acreage value of ~250/acre.

    Adding $500/acre x 260,000 acres to $60mn of PDPs/run-off value yields a realistic, upside valuation of $190mn. Whatever the right number is, there is no doubt that there's substantial optionality in this large acreage package.

    My low and base cases are $125mn and $190mn for Western Canada.

    Offshore Trinidad

    Block 5(c) is an offshore oil and gas block which SNG currently has a 25% interest in (BG 75%). SNG has drilled 3 wells thus far and delineated a major natural gas discovery (in a gas-rich basin) - extensive details of each well are in the Annual Information Form. After these wells, BG purchased 45% of block for $142mn in a distressed sale by SNG last year. This sets the low-case valuation floor in my mind (implies $80mn for SNGs stake). In reality, for a market-based transaction in the current environment, I would have to imagine this stake would be worth considerably more and may be a sale candidate by the company in order to fund other opportunities.
    I don't think assigning $100mn+ to the block would be aggressive for a more normalized case. BG has indicated this block will be very economical to develop as it backfills the nearby Dolphin platform as that field declines.

    At this point, I think we've established a low-case valuation of $200mn for the Canadian and Trinidad assets (both corroborated by "low-ball" bankruptcy bids). Post-private placement, the company has 350mn diluted shares outstanding (including preferred share dilution) @ .60 = market-cap of 210mn, no debt, and cash of ~60mn (note: I count 22mn of restricted cash at the Trinidad subsidiary as this cash is simply escrowed for future development drilling in the block). Putting this together, I think you're paying $150mn through the equity, $50mn less than the bear case for Trinidad and Canada (again, bear-case established through market-based bankruptcy indications of interest). Add to this Tunisia for free and I think you have a deep value stock (importantly, with a catalyst coming up over the next 2-3 months).

    Looking at Tunisia, SNG is drilling an appraisal well (considered lower risk than an exploration well) on their block which is delineating a large discovery ("Zarat") from the 1990s in an adjacent block - on the call management disclosed a preliminary resource estimate (which I have forgotten but it was substantial) and the block appears to be in an oily basin, which likely could have further discoveries to be had (SNG plans 2-3 more exploration wells over the next 3-4 years to fulfill requirements of their PSC). SNGs appraisal well will be drilled in 4Q10 and should be important to the extent it further increases our valuation argument.

    In summary, SNG appears to be an under-followed stock with substantial fundamental asset support and a bright outlook as the company begins to highlight development opportunities in Canada and completes appraisal well drilling in Tunisia). With strong institutional support from current shareholders and ample firepower via cash on hand, I think Canadian Superior has years of accretive investments ahead of it and should be a very interesting story to be involved in. My upside case would be ~$1.25/share based on $190mn for Canada, $100mn for Trinidad, (ballpark) $50mn for Tunisia, and the $60mn of net cash.

    Catalyst

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