January 19, 2011 - 10:46am EST by
2011 2012
Price: 2.10 EPS NAA NA
Shares Out. (in M): 72 P/E NA NA
Market Cap (in $M): 15 P/FCF NA NA
Net Debt (in $M): 11 EBIT 0 0

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Asset Play:  
SSN sold 17k acres to CHK for $73 million cash. The acreage sold is in SE Wy, and the acreage retained by SSN is just north of that. This has a decent back-stop of value, and the bet you are making is that they realize value in their holdings, or that someone else does that for them.  Still very early.
Market appears to be valuing SSN on acreage value in Niobrara, and not yet willing to value based on potential well metrics.  Company has 16k net acres (may be inching up).  At $3k/acre, this would be worth $48 mm. But if Niobrara looks like a Bakken, acreage worth much more.  Estimates are all over the place, but some well-known E&Ps have put forth pretty interesting early estimates.  Continental Resources says Niobrara will hold 286k-573k bbl per unit (not sure what spacing they assumed.  Noble Energy sees 290k bbl/well on 160 acre spacing.  CHK has also been talking numbers in the Continental range.

This would imply SSN has 80 locations (acreage risked at 80%) on 160 acre spacing.  At 300k bbl/well and an in-ground PV of $12.50, this equates to resource potential of 24 mm bbl and value of $300 mm.

Current conventional reserves are 328k bbl and 12.8 bcf of natural gas.  Using $25/bbl for PDP and $12.50 for PUD oil, and $2/mcf for NG PDP and $0/mcf for PUDs (Conventional gas PUDs getting little to no value today), we get $68 mm value for proved reserves.

Throw in $76 mm in cash and just $11mm in debt and the shares could be worth $3.86 per share at the conservative EUR/well estimate near Noble’s.  SSN says they see north of 400kbbl/well, which would price the fair value at $4.87 per share.

Keep in mind that a JV/farmout is possible, so SSN could end up with 50-75% of their current net acreage.  However, they would likely see some nice cash come in door as a result, and be able to drill out the play if productive at a much quicker pace.  They did sell out some acreage to CHK for $73 mm that was similar in size to their current Niobrara holdings.  The big question is did SSN keep their acreage, which is just north of the package CHK bought, because CHK did not want it, or because CHK could not get it? SSN says the acreage retained by them (SSN) has better logs than what they sold to CHK.

If you just assume $3k/acre in Niobrara, then the shares are worth $1.34. So this does provide some level of support.  We have heard some deals have been going in the $4-5k/acre range lately in the Niobrara.


 Success at their own hand or by somebody else. 
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