The turbulence that has affected the North American oil and gas industry has created some great opportunities.
The bargains aren’t always of the bombed-out, financially strained variety. There is still a chance to buy into quality, low-risk development opportunities at rock bottom prices.
Listed on the Toronto Stock Exchange last September, it is an amalgam of the assets of Lone Pine Resources and Arsenal Energy.
Last month, it bolstered the business with the acquisition of assets producing an estimated 1,000 barrels of oil equivalent a day (boepd) immediately adjacent to its existing Evi area in northern Alberta for C$41mln.
It looks to have taken advantage of the depressed market for good oil projects as analysts estimate the acquired package is actually worth closer to US$60mln.
PPR itself is still working hard to achieve what one would describe as an ‘in-valuation’, which today should be somewhere in the region of five to six-times' debt-adjusted cash flow. It currently trades around three times'.
Why? Well, in the eyes of some investors it is subscale at a current run rate of around 6,500 barrels a day. Get above 10,000 barrels and the market appears to take you more seriously.
New to the market, PPR also needs to establish credibility by providing investors big and small with greater evidence it is a consistent performer.
“We have some really good growth potential and we definitely are not being recognized in the market,” said CEO Granger.
“But once we have provided the investors with a track record, one of success and delivery, people will follow us in numbers and we are confident our valuation will better reflect that performance.”
PPR’s assets in its Evi, Princess and Wheatland operations have some compelling development potential.
The plan is to push production up to 7,500-8,000 boepd by the end of the year.
Growth will be financed from cash flow, which is forecast to be around the US$35mln mark this year, rising to US$40mln in 2018, based on future strip commodity prices.
There could also be merger opportunities that tip the business over the 10,000 barrel a day threshold, but those would only be considered if they were “accretive to per share metrics”.
Looking under the hood, PPR’s proven plus probable reserve base is 16.4mln barrels of oil equivalent, according to independent petroleum engineer Sproule Associates.
It owns 100% of the Wheatland Area in Southern Alberta, a 72,000-acre Mannville play that’s host to 145 future potential drill locations.
In the second half of last year alone the company drilled 11 wells at a cost of $1.65mln each, a favourable reduction from the average per well cost of $2.7mln paid in 2015.
The 33,400-acre Princess area, also in southern Alberta, is described by Mackie Research as being low risk with a potential 15 drill locations – though more eye-catching are per well returns of up to 75%.
Evi, where it holds an 89% working interest in just under 16,000 acres, is producing a net 1,400 boepd currently, increasing to approximately 2,500 once the acquisition closes.
It is located in the Peace River Arch area in Northern Alberta, which offers significant upside from its water flood operation.
Following the completion of PPR’s February deal, it will have a 12-well water flood program in the immediate vicinity, with the opportunity to expand this number significantly.
The upside of using this technique is two-fold: the production decline on wells improves (meaning fewer barrels need to be replaced each year to keep production flat), while the company’s reserves base is also boosted.
A full-field water flood could increase the recovery of the original oil in place by around 9%, or an additional 13.6mln barrels, according to reserve evaluation consultants RPS.
“We run our own internal economics assuming a 6mln [barrels] increase in the recoverable reserves,” said Granger.
“But it doesn’t matter which way you look at it, the rate of return is significant.”
Okay, so back to the valuation. That benchmark five-to-six-times debt-adjusted cash flow equates to $1.70 to $2.00 a share.
An alternative yardstick is the company’s PV10, a frequently used method of estimating the present value of the company’s proven oil and gas reserves.
PPR’s PV10 is booked at C$224mln, or around C$2.17 per share, even though in their analysis of the Company, Mackie Research’s price target is a more conservative C$2.00 (or 3.3-times the current share price).
“With us you know what your risk is; it is low-risk development without high-risk exploration,” said Granger.
“This is a nice way to grow. We are not taking big chances by swinging for a far-away fence; or hunting mythical elephants; we don’t expect to find the next big pool, but then we are also not going to blow up.”
In other words, PPR is a low-risk growth stock that trades at a significant discount to its bigger peers. While it hasn’t yet, the market will eventually catch on to this mismatch between risk and potential return.