Junior Oil Buyout Validates all Cardium Players
Source: Keith Schaefer, Oil & Gas Investments Bulletin (1/4/10)
Junior oil producers with land packages in the Cardium formation are jumping up today after Berens Energy (BEN-TSX) was bought out today by PetroBakken for $2.70 a share. . .
This transaction is significant for a couple reasons. It's a huge validation of the emerging Cardium play. The Cardium has quickly become the next "hot" play in Canada, after the high profile Bakken play in Saskatchewan. And PetroBakken is one of the top intermediate producers in Canada. The market has great respect for this management team's (CEO John Wright and CFO Corey Ruttan) technical and business expertise.
I would suggest that Berens was sold at a significantly higher valuation than people expected—$90,000 per flowing barrel of oil equivalent (boe) based on average December production of 3700 boe/d.
Part of the reason was Berens land base—PetroBakken indicated it saw 100 Cardium drilling locations there. One analyst report on the deal this morning noted that even backing out the land price at $2 million per section, the deal was worth $70,000 per flowing boe.
The market is taking this news and immediately re-rating all of the juniors in this play (which is great for our subscriber portfolio!). Many of the juniors are natural gas weighted, with high debt issues—just like Berens was/is—and were/are trading at roughly $35,000 per flowing barrel. That leaves a lot of upside for investors.
Another significant issue this transaction highlights—and I'll have a more detailed story on this issue later this week—is that the price takes into account the low risk nature of the Cardium wells.
What I mean by this is that Berens' Cardium land package has a very high "repeatability" factor. Each drilling location should produce like all the ones before it.
This is great news for investors. It means that valuations are moving higher, as the seller is getting a larger portion of the future cash flow in their purchase price. (This is why all the juniors in this play are up 10%–15% this morning.) Between the consistent geology and production rates, and technologies like 3D seismic, the exploration risk on these plays has been greatly reduced over the last 5-10 years.
And for the Cardium in particular, the risk is almost zero, as this large formation is well known and has been drilled through for 50 years. Everybody knows exactly where it is. The excitement is around a well known zone in the formation that has only recently been accessible due to improvements in horizontal drilling and particular multi-stage fracing.
For PetroBakken, this is their first major step outside the Bakken play and could be the start of a new round of buyouts by the company. Their major competitor in the Bakken, Crescent Point Energy, has a better cost structure and if PetroBakken was to move outside of its core area to differentiate itself, it would make sense to buy up these cheap Cardium plays. The Cardium is generally regarded by Canadian analysts as having the second best economics of any play in Canada, after the Bakken.
As a caveat, Berens may have got a premium valuation because it was one of the lowest cost gas producers in the country—a significant feat because of its small size. It also reported a boomer of a well in late November—1250 bopd over a 3 day test—and an average of 220 bopd over the first month. That initial production can greatly help payback.