|Shares Out. (in M):||411||P/E||0.0x||0.0x|
|Market Cap (in $M):||1,400||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
Aurora Oil and Gas (AUT.AX) is a well-managed oil company with a highly economic acreage position in the core of the Eagle Ford Shale oil play. The Eagle Ford Shale was recently highlighted in a Wall Street Journal article, and has received a lot of press, even more attention from the Sell Side, and has been the focus of a number of some of the largest and most successful oil and gas companies, attracting capex dollars and scarce oil services and drawing increasingly high transaction valuations.
As a pure play company in such a play, Aurora naturally draws investor attention, and achieves a premium valuation. And as a well-run, well-managed small-cap oil company, it deserves a premium valuation. However, Aurora is not trading at a premium valuation, it is trading at an absurd, stratospheric valuation and is likely to descend most of the 70% or so it would need to trade back in line with the most recent highest private market transaction comps. Also, importantly, there are shares available to borrow, and the stock is primarily owned by momentum driven retail investors.
Aurora currently has a market cap of $1.4 Billion AUD, with roughly $75 million in cash and no debt. It owns 15,760 net acres primarily in the condensate window of the Eagle Ford Shale in Karnes County. It has current net production of 1,660 BOEPD (barrels of oil equivalent per day).
There are a couple time frames in which to value Aurora - ranging from the present to 4 years from now, when their field has been nearly fully developed. And there are several valuation metrics that can be used to construct a range of potentially appropriate values.
To be conservative, let's start with the highest valuation Aurora could achieve with its current asset base, assuming the company management's assumptions about well production, reserves, and costs are correct. Management is projecting production will level out around 22,000 barrels of oil equivalent per day by 2014. At $70,000/BOEPD (the appropriate metric considering the high decline rate of the production and that some of the production is natural gas), this gets you to a valuation of $1.54 billion. Management has hired a 3rd party reserve engineering firm (not so different from credit rating agencies - garbage in, garbage out). The pre-tax 3P valuation awarded by this firm is $1.4 billion.
These numbers represent maximum values for the company's current assets. Virtually every other oil company trades at a large discount to their 3P value, which is often viewed as a ceiling value for a stock. Also, there are almost no oil companies that trade on flowing barrel metrics based on production 3 years out. And, these assume management estimates are accurate, which is unlikely for several reasons. The most obvious is the estimated well cost - management assumes a $6.5 million cost to drill and complete wells. Currently, it costs ~$8.5 million to drill and complete a typical Eagle Ford well, and that number is continuing to rise with the tightness in oil service capacity.
More realistic valuation estimates would include a production metric for year end 2011 production, a 2P valuation, and recent transaction comps. Management projects 2011 year end production will be 5,000 BOE/D. At the same $70,000/BOE/D metric, Aurora would be worth $350 million. The 2P value provided by the 3rd party reserve engineering firm, using management's rosy production assumptions and low-ball well capital costs, is $442 million. And the recent Marathon/Hilcorp transaction metric of ~$20,000/acre and $70k/BOE/D of current production implies a value of $431 million.
And a bear case valuation would simply give credit for current production, or $70,000/BOE/D, or $116 million, plus some small amount of credit for acreage value, perhaps $5,000/acre, getting you close to a $200 million valuation. This would be conceivable in an economic downturn where the price of oil came down substantially and oil companies reverted to trading for their 1P reserve value without much upside development valuation credit.
The short thesis is simple - the Marathon deal illustrates the current private market value of the asset and gives you a good idea as an investor of what a low cost of capital, sophisticated private investor would pay for it. And if other public companies with similar acreage positions, like PetroHawk (HK), were to trade for metrics similar to Aurora, they would trade for 3 times their current share prices. And similar companies in other oil fields trade for far lower metrics. Northern Oil (NOG) of blog-bashing fame, has 150,000 acres in the Bakken and currently produces over 5,000 BOPD, but has a similar $1.4 billion market cap.
So on both a fundamental and relative value basis, Aurora is grossly overvalued. Its current market value likely derives from the 3P value management has reported to unsophisticated retail Australian investors and from unrealistic service cost estimates and production growth assumptions. For Aurora to be worth its current market valuation, it would need to grow production 13x in a short period of time, which is an unrealistic expectation. Or it would need to be valued based on aggressively booked 3P reserves, which virtually no other public oil companies are valued on. As momentum wanes in the stock and more attention is paid to its valuation, the stock is likely to fall back to earth, yielding a potentially substantial return to investors who short the stock here.
I skipped a number of steps here to get this out the door in a timely manner. On P/E, P/CF, EV/EBITDA, etc. metrics, Aurora is almost immeasurably expensive and is trading way in excess of its comps. In the absence of meaningful traditional valuation metrics, the key here is the Marathon transaction, which gives me a lot of comfort that the asset is not worth anything close to what it is trading for, and it gives the market an easy and simple target valuation. The sell side has started to catch on, with Scotia Capital, a well-respected Canadian bank, taking the unusual step of pounding the table recommending shorting this stock based on valuation. For a more articulate short thesis and additional reasons to short the stock, see their note from June 2nd.
The main risk to a short thesis is they issue equity and use it to buy additional assets. However, while that could reduce the return from a short position, management has historically overpaid for assets and there is likely a limited secondary market for shares of Aurora at the current nose-bleed valuation.
I am short Aurora Oil stock and may buy or sell the stock at any time without further notification. I do not currently own stock in other companies mentioned here and may buy or sell these stocks without further notification. I am not compensated by any of the companies mentioned here.
|Subject||now is the time|
|Entry||06/15/2011 04:14 PM|
I think now is a fantastic time to be short Aurora. Oil prices have dropped, small cap growthy oil company stocks are falling rapidly (some are down almost 50% from their recent highs), and there are readily available value priced growing oil companies to pair with Aurora if you prefer pairs to outright shorts.
Aurora hasn't traded off yet due to a different shareholder base, primarily retail Australian investors. But I expect them to start feeling some pain and be forced to cut back their position as they get margin called in other investments. Sanity eventually prevails in the market, and sometimes it is hard to see where it will come from, but in this case the path is becoming clear.
|Subject||RE: now is the time|
|Entry||06/16/2011 03:57 AM|
Where does the $70,000/boepd number come from? And is it related to the price of oil?
|Subject||RE: RE: now is the time|
|Entry||06/16/2011 01:09 PM|
It comes from conversations with acquirers of oil assets, from sell side analyst reports, and from recent transactions. To be fair, oil production sells for anywhere between $60,000 and $130,000 per flowing barrel depending on the decline rate and the production cost. Production from new, high decline wells typically sells for $60-70,000 per flowing barrel. I gave Aurora more credit than they are due, in my opinion, due to the exceptionally high decline rate of their wells.
And yes, it is driven by the price of oil. I'm using numbers relevant in a $90-110 per barrel price of oil world. If oil prices were to go a lot higher, a higher number could be justified. If they went lower, a lower number would be more appropriate.
|Entry||06/17/2011 12:21 PM|
Re-posted from the MPO thread due to the relevance here:
The per-acreage math from the MRO/Hilcorp deal may not directly apply to AUT given the relative heterogeneity of Hilcorp's land:
MRO bought ~140K acres but only about 40K of those appear to be in the condensate window. The (undiscounted) developed value of the acreage acquired could range from ~$10K/acre (in the dry gas window) to >$70K acre (in the condensate window) in the $90/bbl WTI / $4.50 HH world depending on the assumptions. The weighted average of the (undiscounted) developed value of Hillcorp's acreage is probably somewhere in the $30-$40K/acre range vs. ~$21K MRO paid. Most of this acreage requires a higher discount factor than AUT's since it should be developed later due to lower prospectively: 4 year deferral of development @ 15% cost of capital cuts the NPV in half. AUT is currently valued ~$75K/acre with leases in the condensate window or awfully near it -- in the ballpark of what I estimate MRO paid for Hilcorp's condensate acreage.
The deal does not necessarily imply the value of AUT's acreage that is dramatically different from the current valuation. Assuming an aggressive development program and say $100/bbl WTI one may be able to get close to the current price though with no room for error. Sure, the reality will most likely disappoint and if I had to take a position I would be short AUT but would prefer to see more margin of safety on valuation and a crappy business / high-cost producer rather than holder of some of the best acreage in one of the lowest-cost NA plays.
|Subject||RE: MRO/Hilcorp Deal|
|Entry||06/17/2011 02:13 PM|
I don't think there is much of a quality difference between the SugarKane acreage and other Hilcorp areas, and saw nothing from Hilcorp or Marathon that indicates otherwise.
For example, one of the other areas is in Gonzoles County, in a joint venture with Lucas Energy. The first two wells drilled on this Gonzoles acreage IP'd at over 500 barrels of oil per day. This might make you think the acreage is worse. However, these were Hilcorp's first two wells in the area. Immediately adjacent to this acreage block, Forest Oil has drilled and completed at least 7 wells with IP rates averaging over 1,000 barrels of oil per day. And on the other side of the block Magnum Hunter drilled and completed two wells also IP'ing over 1,000 barrels of oil per day.
These IP rates are nearly as good as those achieved at Sugarloaf, despite there having been fewer wells drilled in the area (and thus there being more of a learning curve to ramp up). Also, there is a lower percentage gas produced, which makes the production more valuable.
Obviously, this is only one of Hilcorp's several other areas. However, it is particularly relevant because Lucas Energy is publicly traded (LEI) and is trading for an implied $5,000/acre (4,400 acres + 300 bopd production valued at $70,000/bopd and a $44 million market cap). This highlights the valuation discrepancy between Aurora and other companies in the space.
I agree with your final thought, that Aurora does not have a bad business model and is in fact a low cost producer. However, they are highly promotional, and often shorting overvalued excessively promotional companies is as good a trade as shorting bad business models and high cost producers.
|Entry||06/28/2011 04:38 PM|
In reviewing the maps of the acreage that MRO acquired from Hilcorp and comparing it to AUT's acreage it appears that they are significantly overlapping, if not entirely. Do you know how much AUT acreage was not part of the MRO deal? It looks like almost all of it is.
Assuming I am not missing something, I think about this as follows:
Aurora's current market cap, in USD, is $1.4B. If one were to give them a $70,000/boe/d value for their existing production then that implies $1.26B for their undevelopled acreage. AUT's acreage consists of 15,760 net acres, giving a value of $80k/acre.
If you take AUT's parameter's for where the condensate window lies and overlay it with the MRO/Hilcorp land I think that at a minimum you have to conclude that 60k acres are in the condensate window (70% of the 46k net acres in Karnes County and 50% of the 47k net acres in Atascosa County, ignoring the Lavaca and DeWitt acres to support my claim of "minimum"). If you apply AUT's current per acre valuation to this acreage then you get $4.8B.
The total price tag for the MRO/Hilcorp deal was $3.5B.
Is it really possible that 7,000 boe/day in production and 80k net acres is worth -$1.3B? Is it possible that MRO's operator ownership in this acreage is worth less than AUT's non-operator stake?
I'm sorry but I just do not understand how one can maintain that: A) the MRO/Hilcorp deal is not a good comp (it's the SAME LAND) and B) the deal does not imply that AUT is wildly overvalued.
Again, I could be missing something here.
|Subject||RE: MRO Acquisition|
|Entry||06/28/2011 07:53 PM|
Yes, I agree. And its clear that the other acreage is definitely worth something - CHK penned a deal in the oil window for over $10,000 per acre a few months ago. Some of it includes acreage shared with Lucas Energy, where EURs are north of 350 mBOE, and virtually all of those reserves are oil, making it quite valuable.
|Subject||RE: MRO Acquisition|
|Entry||06/29/2011 01:43 PM|
If 60K of the Hilcorp acreage acquired by MRO are in the condensate window, I would agree that AUT is signifficantly overvalued based on the transaction. However, by doing similar "map comparison" work I got closer to 40K net acres in the condensate window (though this may prove to be conservative). This did not offer much "margin of safety" on the short given that the remaining acreage is in the oil and gas windows may only worth ~$10K/acre developed vs >$70K/acre for the condensate stuff (depending on your pricing assumptions).
|Subject||RE: RE: MRO Acquisition|
|Entry||06/29/2011 06:12 PM|
Ok, I'm going to push back more on this $70k/acre number you're throwing out.
Acreage values are linked to expected NPVs from prospective wells on the acreage. Core Eagleford wells have NPVs approximately 2x the NPV of non core Eagleford wells. The most you should get to for a 2x NPV is maybe 3x acreage value, and probably not even that.
NPV has more of an impact on acreage in lower commodity price environments and should impact acreage valuations more considerably due to lower NPV wells being uneconomic, but at $90+ oil this is ludicrous. It also matters from a capital efficiency perspective, but again, in an play with relatively large players and low costs of debt and equity, this just doesn't matter as much.
|Subject||RE: RE: RE: MRO Acquisition|
|Entry||06/30/2011 04:14 PM|
I agree with the parameters that affect acreage value, but disagree with the 3x max valuation range for Eagleford. In general, any play will have some sufficiently poor acreage that's uneconomic under reasonable commodity price assumptions and is worth 0 (in practice it will have negative value as it will be partially drilled during delineation). Haynesville has been an especially vivid example of this recently and I believe dry gas Eagleford may similarly require HH price > $4.50/Mcf to have positive value. Different parts of a play like Eagleford seem to have more in common with other plays than with each other.
Regarding wet stuff, at $90/bbl WTI, and $4.00/Mcf HH in parts of the oil and condensate windows (while acreage in the dry gas window is probably uneconomic) assumptions yielding my results are:
Oil: 30d IP = 500boe/d, EUR = 300K boe, Oil & Condensate % = 90%, NPV = $1.5
Condensate: 30d IP = 1000boe/d, EUR = 700K boe, Oil & Condensate % = 50%, NPV = $9.0
(Obviously there's a continuum of results, assumptions, and typecurves between and around these spot estimates that could yield very different NPVs but this give an idea of how one can get to $10-70K/acre range.
Also, these NPVs assume immediate development and ignore the complexity of an actual drilling schedule which should lead to a further discount to the acreage that is even marginally less economic: If an acquirer will have 5 years of drilling inventory of higher-IRR locations, then at 15% cost of capital lower IRR locations' value warrants a further discount of (1-.15)^5=.44.
|Subject||RE: RE: RE: RE: MRO Acquisition|
|Entry||06/30/2011 07:19 PM|
Sure, but I can run those same 30 day IPs and get very different results depending on % oil cut, decline rates, and EURs. And I think most of Hilcorp's acreage would generate wells with much higher NPVs than $1.5 million.
I don't think we fundamentally disagree on anything except that I think there is a maximum acquirers are willing to pay for prime acreage (which is constantly changing, but is nowhere near $70k/acre), and I think there are good reasons for that that are directly linked to my thesis that AUT is grossly overpriced.
To be perfectly honest I've actually been using your approach when thinking about comps, I've been comparing condensate EF wells to Bakken wells and acreage values, as I am intimately familiar with that play and have been involved with both public companies and private transactions in the Bakken, and only to a lesser extent in the EagleFord. It is ludicrous to me that you can buy Bakken acreage for 1/10 the price of Aurora via a number of publicly traded companies, and you can get it much cheaper on the ground. And there are way more wells there, way more industry activity, and more production history to get better EUR estimates on.
To compare similar sized companies, take NOG and AUT. Assuming NOG is not a fraud, NOG's asset base is worth many times AUT's, but the companies trade at the same market cap. NOG creates more value on a quarterly basis by buying non operated working interests and has very little infill potential priced into the stock. And they have twice as much Bakken acreage HBP already as AUT has total EF acreage. And we're talking about 500mBOE+ EUR wells that are 90%+ crude.
|Subject||RE: RE: RE: RE: RE: MRO Acquisition|
|Entry||08/24/2011 07:53 AM|
Considering how the shares of most small-mid cap non-producing and exploration oil companies have collapsed over the last few weeks, I am surprised that Aurora still hasn't moved much at all. Share price has been fairly steady the whole year despite not exciting 1H results with indications of cost overruns. Anyone have any further view on this? Sugar1, anything to add? Still monitoring it?
|Subject||RE: RE: RE: RE: RE: RE: MRO Acquisition|
|Entry||08/24/2011 01:58 PM|
Still short. I can't imagine what people are thinking buying shares of Aurora when so many other high growth, previously overvalued, E&P companies have traded down so much. Companies similar to Aurora but traded in the US are down 50% or more from their peaks. And some recent well results have come in with a higher gas cut and lower expected liquids recovery, making them less economic. AND well costs continue to increase in the Eagle Ford.
|Subject||RE: RE: RE: RE: RE: RE: RE: MRO Acquisition|
|Entry||08/24/2011 02:45 PM|
Which comparative names in Eagle Ford or elsewhere would you say are looking cheap right now? LEI US ? Have you seen RFE AU ? You mentioned NOG before. Any suggestions for a hedge to this short?
|Entry||08/24/2011 04:18 PM|
My earlier comments on why MRO acquisition may not be a good comp and why Aurora may have a hard time working in the near term notwithstanding, it is hard to ignore its huge recent relative outperformance, especially as it is getting harder to find great E&P shorts. I am still worried about getting in the way of execution momentum with this stock. Disappointing results would help. You mention that "some recent well results have come in with a higher gas cut and lower expected liquids recovery, making them less economic". Can you provide more details on which wells have been disappointing? Macquarie (my proxy for the consensus view on international juniors) has actually been touting increases in OGR in the recent wells:
"The company has brought four additional gross wells on-line since its last update which have reported an average 30-day rate of 761boe/d, below the prior average of 911boe/d. However, the oil/gas ratio of these new wells was significantly higher averaging 812bbl/MMcf compared with the prior average of just 321bbl/MMcf." (8/15/2011)
"Recent wells have had very high oil:gas ratios (OGR) of 754bbl/mmcf of gas (30-day average). Second month average OGR's for new well have been 416bbl/mmcf, though we note recent, very high oil weighted production from Excelsior wells have yet to report 60-day data." (7/18/2011).
Are they misinterpreting the results somehow?
|Subject||RE: RE: OGR|
|Entry||10/14/2011 09:57 AM|
Up 50% since 3rd Oct. Brutal. Back to $3. Takeover rumors ?
|Subject||RE: RE: RE: OGR|
|Entry||10/14/2011 12:42 PM|
Irrational Australian retail investors. I'm going to ride this out. No chance in my mind Aurora could get bought out for anything close to what its trading for. Every oil and gas CEO I show this stock to is either already familiar and thinks its absurdly overvalued/borderline scammy, or looks at it, can't believe it, and thinks its overvalued. The only people who aren't shocked by the value are the sell side analysts who have made a lot of money leading secondary offerings for Aurora.
I think like many companies worth only a fraction of what they are trading for, the stock has the potential to crash meaningfully in a very short period of time, and I am in it for that. Its not a fraud so its not going to 0, but they could be on the hook to participants in previous secondary offerings for material misrepresentations (one example, saying well costs were $7 million when they were really $9 million).
|Subject||Aurora production update|
|Entry||12/20/2011 06:53 PM|
Finally a meaningful production miss by Aurora - http://www.auroraoag.com.au/irm/Company/ShowPage.aspx/PDFs/1827-16342224/SugarkaneFieldOperationsandProductionMonthlyUpdate
Should be interesting to see how the stock reacts. They blame it on infrastructure issues, but somehow infrastructure was never an issue up till this point.
|Subject||RE: Aurora production update|
|Entry||12/21/2011 12:33 PM|
Thank you for drawing attention to the production miss. The reaction seems to support your thesis about the sophistication of the marginal investor in the stock. While I still contend the relevance of the MRO deal and the magnitude of the downside for this stock given the economics / fully developed NPV using assumptions that appear to be currently imbedded in the valuations of low-cost “oil resource play” peers (>>$100/bbl realized oil price for CLR and KOG, IMO), it is now very hard to resist being short. Another factor in favor of the position is the AU market commodity-producer short exposure that it provides and the opportunity to benefit from the ongoing China-related capital flow reversals. Though I am surprised the stock has seemed immune to these so far.
|Subject||RE: RE: Aurora production update|
|Entry||12/21/2011 12:44 PM|
Thanks. My thought is that Aurora will trade like many highly promoted stocks. It will have lower than normal volatility until, one day, for whatever reason, it breaks and the stock falls well below its fair value. This may never happen and Aurora may eventually grow into its current valuation, but given the global macro risks you pointed out, I think this is a real possibility in the near term. Aurora continues to be my largest short position.
|Subject||RE: RE: RE: Aurora production update|
|Entry||01/23/2012 03:13 PM|
I noticed today I left out one of the most important parts of this thesis, my apologies. Aurora only has a 72% NRI on their fields. That means that they pay 100% of the cost of their working interest, but only get 72% of the cash flow back (the rest goes to royalty owners). This is substantially worse than the 80-85% industry standard. It is hard to make a lot of money with that kind of royalty burden, and that should both substantially impair their economics and make the Hilcorp comp less relevant (I think the NRI delivered to MRO was 80%, not 72%, and I'm trying to verify that now).
Also, management missed their year end production target by ~5%. And the drilling program in 2012 going to be concentrating drilling on lower WI wells and less productive parts of their acreage this year.
|Subject||RE: Some questions|
|Entry||01/24/2012 01:28 AM|
This response will be a little off the cuff.
1) No, look at sell side reports and then discount heavily
2) Their production will decline more than they're projecting, which is why they missed their target and have had to revise down multiple times. Look at NOG. Amazing company (the shorts were right on valuation but dead wrong on quality of company, management, etc), but can't hit their numbers because oil shale wells decline a LOT. Meaning EBITDA will miss by a lot and be a lot lower than people are saying.
Second set of questions:
1) very confident - look at microseismic and historical success of infill wells down to 40 acres. there is easily 80+ acres of drainage, plus they're going to frack right next to already fractured areas, there will be communication, the new wells will damage old wells, resevoir pressure will be damaged, fracs less effective, etc.
2) reserve auditors are like credit ratings agencies. If you want to bank on Ryder Scott reserve reports, I have some CDO squared I'd like to sell you. Or better yet, I'll sell you the "proved undeveloped" and "probable" reserves from a couple of my portfolio companies. (obviously joking, this is not an offer to sell securities or assets)
3) the new report incorporated almost 100% of the acreage
HK - BHP grossly overpaid, but they were apparently looking to go long uneconomic gas drilling, which is why SWN is probably not a short here. (despite ridiculous management aggressively digging themselves into a deeper hole. Drilling cheaper gas wells in a $2.50 gas environment is just stupid, when you can wait a year or two, deploy capital elsewhere -or God forbid, return in to your shareholders). And which is why HK-BHP is not a good comp for AUT, because they were actually giving more credit for gas acreage than you're calculating, and less for the good stuff in Black Hawk. Marathon is a better comp, but I think the NRI was different and they overpaid.
I agree, I think AUT is an excellent fundamental short AND macro hedge. It is possible it trades up but they'd need to start hitting (or better yet, exceeding) some targets, and I bet my longs like Molopo way outperform AUT over the next couple years.
|Subject||production miss driven by well underperformance|
|Entry||01/24/2012 12:25 PM|
Aurora amended their announcement to report well results in a similar format to previous reports, highlighting something remarkable - both lease areas with new well results had almost all the new wells producing below the type curve. The stock was down ~3% in the Australian market, perhaps this start to kill the stock's momentum. I've been way off on the timing on this stock but ultimately this kind of thing happens with E&P stocks, especially after they've traded up 1000%+ and haven't sufficiently leveraged their overpriced stock to anchor value through equity issuance or acquisitions.
|Subject||RE: eagle ford acquisition|
|Entry||04/30/2012 04:52 PM|
So you like gale force petroleum? i could be reading this wrong but it looks like it trades about $17,000/day
|Subject||RE: RE: RE: eagle ford acquisition|
|Entry||04/30/2012 08:05 PM|
i was actually kidding - i think we all know you really like gale force!