West Energy WTL.TO
November 13, 2008 - 3:30am EST by
2008 2009
Price: 2.18 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 180 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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I submitted West Energy back in the good ole’ days of 2006 before oil really took off. It was a very different animal at that time. The alleged value back then was based on the pure exposure to their hot, highly prospective core landbase. I showed that other junior explorers and even large independents, were paying up for access that West had established long before it became known. The stock did good for a year or so despite other E&Ps and oil prices remaining flat. However, management over promised and under delivered during the great uptrend in commodity prices of 2007 through mid 2008. The stock was shunned. Now it is nearly 50% lower (not adjusting for currency). There were numerous legitimate operational excuses. They are still being plagued by a variety of minor things that helped fuel the sell off. That leads us to the present: It is officially a bottom-of-the-barrel, discount value play. You are not paying for growth or speculating on high oil prices yet it still has all those great prospects. When you buy the stock at today’s price, all you pay for is their cash and a sliver (~1/3) of their reserves.

So, like I said, there is no shortage of resource companies on sale now but this one is special because of the capital structure. Few imagined a commodity selloff as steep and fast as the one that is occurring. Scared investors are focusing on balance sheets as survival now becomes a question. In this environment, West is an especially rare find because they have no funding or liquidity issues. They are sitting on $76 million (nearly 1/2 their market cap) with no debt. They can use it any way they see fit. There is no “burn rate” of the cash because they are bringing in record amounts of cash from operations. They are nearly bringing in enough operating cashflow to support their aggressive capex. This cash isn’t earmarked for a plant expansion. In today’s environment, they are actually a source of funding.

The $2.18 share price buys you:
$.92 worth of cash
$3.22 worth of reserves
= $4.14 per share

12/31/2007 price deck used in the $3.22 per share reserve NPV calculation

WTI cushing
Aeco Natural Gas
2008 92 91.1 6.75
2009 88 87.1 7.55
2010 84 83.1 7.6
2011 82 81.1 7.6
2012 82 81.1 7.6
2013 82 81.1 7.6
2014 82 81.1 7.8
2015 82 81.1 7.97
2016 82 81.12 8.14
2017 83.66 82.76 8.31
thereafter +2%/year +2%/year +2%/year


Nymex crude futures $US/barrel, December month
% of 12/31/2007 price deck

2008 --



The current spot price for oil (cad $65.57 for Edmonton) is off significantly from the 12/31/2007 price deck projection for 2008 ($92). However, YTD Edmonton has averaged $111/barrel.

For years beyond 2008, the price deck they used isn’t much different than current oil price projections derived from NYMEX futures. Depending on how you project the Canadian dollar, it could even make the NPV of reserves even higher.
There’s no easy way to adjust the NPV of reserves for the different price assumptions. I'm attempting to show that the price deck isn't that much different from the futures, so effectively the reserves are worth the same now as they were at the end of the 2007.  However, you can slice the 12/31/2007 reserve value in half and it’s still a good deal at the current share price.

Sometimes people look at the juniors on a enterprise value per flowing barrel basis since that eliminates the commodity price. At the current share price, you’re paying $20k per flowing barrel of oil for West. That is very much on the low side for a Canadian junior. The average EV per flowing barrel at the end of Q2 was $56k.

Acquisitions. Could they blow the cash unwisely? They mention acquisitions as a possibility, and even say they are looking, but I judge it to be remote possibility. In West’s history as a company they have never actually made an acquisition, despite having had the ability by sporting a premium multiple. They are not a roll-up, growth by acquisition type of company. They are one of an elite few Canadian junior explorers that pride themselves on their growth by the drill bit, and have stayed true to that idea not just talked it. If they do actually go forward and make an acquisition, it would be their first ever and I would expect this acquisition to be carefully chosen. Furthermore, I can pretty safely say that this is not the peak of investor exuberance in the energy sector (as maybe 2005-2006 was?). Any hypothetical acquisition they do make, even if they did it with their eyes closed, would likely turn out OK in this market given the carnage in Canada.

Asset Backed Commercial Paper (ABCP) – In calculating the cash, $16 million of the $76 million is asset backed commercial paper that has been frozen. This $16 million is basically the proposed bank settlement value after a $14 million haircut ($30 million face value).


Acquiring West is a slick way to raise capital for another E&P with a weak balance sheet. For example, Crew Energy is a larger E&P that makes acquisitions. It is involved in a very exciting resource play along with West, called the Montney Shale (Shell Canada recently purchased Duvernay for an outrageous premium to get access to this Montney resource play, but this idea is not about “future potential prospects” since we’re certainly not paying for them). Currently, Crew trades at $5/share and produces about 11,500 barrels/day. It has $231 million in debt. That debt load is arguably on the high side for Crew. An acquisition of West at double their current share price, paid for with Crew shares, would result in a NewCrew with a much safer debt level (under 1x annual cashflow vs. 2x annual cashflow currently). No one used to care about stuff like this… it used to be all about production and cashflow.

Even better, I believe West is answering the phone and talking mergers. In July, as oil was spiking, they ended a “strategic review” period. They had a significant exploration discovery, and given the outlook for commodities, felt that they couldn’t get a fair price. They chose to go on with business as usual. That was before the recent market disruption and oil price drop. The world has changed drastically since then. In the past, acquisitions were measured based on accretitive cashflow or sometimes land prospects. Liquidity, financing and debt was a non-issue. The turbulence in the market has caused a shift in preference from income statement to balance sheet. Survival matters now. This makes West a hot item.

Insider Buys. Insiders have been buying in July and October.
Here is their corporate website: http://www.westenergy.ca/


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