Description
Delphi Energy ("Delphi" or the "Company") is a long underperforming and out of favor E&P with assets focused in the Deep Basin of Alberta. Over the past 3 years the Company's share price is down >30% and is off 75% from its peak in 2005 notwithstanding a doubling of production over that time period. The drivers of the Company's negative returns can be summarized as: (i) lack of discipline in issuance of equity which has significantly diluted shareholders along the way (ii) poor capital allocation and (iii) management entrenchment which has led to sub-optimal strategic decisions and avoiding value maximizing transactions in the past including accretive mergers / corporate sale.
With that said, the Company has against all odds reached somewhat of an inflection point due to the good fortune of possessing one of the most economic drilling projects available in Western Canada (based on type curves and limited results) on their existing asset base as well as prior acquisitions (2010/2011). Due to the economics of the play and the Company's seemingly revived interest in focusing on per share returns, I believe the risk / reward is highly positively skewed and outweighs some of the obvious concerns outlined above.
Financial Overview:
Recent Price: $1.55
Shares O/S: 153.2 mm
Market Cap: $237.5 mm
Net Debt (Sept '13):$120.7 mm
Enterprise Value: $358.2 mm
Current Production: ~8,400 boe/d (72% gas)
Reserves: 56 mmboe (74% gas)
Estimate Run Rate Asset Level Cash Flow: ~$50 mm
2014E Asset Level Cash Flow: ~$70 mm
2014E EBITDA: $63 mm
EV / EBITDA (2014E): 5.5x (inclusive of PF leverage required for 2014 capex)
EV / Production: $42,640 / flowing boe/d
Asset Overview:
Deep Basin focused with three core areas (production and land as at YE 2012):
1) Hythe (2,788 boe/d - 77% gas, ~72,000 net undeveloped acres)
2) Wapiti (2,274 boe/d - 67% gas, ~16,500 net undeveloped acres)
3) Bigstone (2,420 boe/d - 75% gas, ~57,000 total acres, more detail below)
Bigstone Summary:
The Company has focused its recent efforts on the Montney formation at Bigstone which has the potential to materially transform the Company and provides a new catalyst on the horizon in the form of a corporate sale, substantive JV or other value enhancing event.
-The Company controls 118 gross sections prospective for the Montney and is surrounded by Exxon Mobil (via its acquisition of Celtic Exploration), EnCana, Conoco, etc.
-EURs are estimated at ~1.1 mmboe with condensate representing 30 - 100 bbl/mmcf which is what drives the economics (C3+ estimated at additional 30-45 bbls/mmcf)
-175 total prospective locations (vs. ~23 locations in booked reserves) which represent total capital of $1.6 billion, total NPV of $2.6 billion, total reserves of 192 mmboe (or ~4x current corporate reserves)
-The Company has drilled a total of 10 horizontal wells at Bigstone with 6 wells have at least 3 months of production data, the average production rate being 1,000 boe/d over the 90 days, that is well above the Company's type curve
-Company type well economics adjusted by using a flat price deck ($90 WTI and $3.50 AECO gas) generates an NPV of ~$10 mm, payout of 12 months and cumulative cash flow over the first 5 years of a well's producing life of ~$21 mm.
| |
Realized Price ($/bbl) |
| |
|
$20.00 |
$25.00 |
$30.00 |
$35.00 |
$40.00 |
$45.00 |
$50.00 |
| |
($8.5) |
($0.1) |
$2.6 |
$5.3 |
$8.0 |
$10.7 |
$13.4 |
$16.1 |
| |
($9.0) |
($0.6) |
$2.1 |
$4.8 |
$7.5 |
$10.2 |
$12.9 |
$15.6 |
| Capital / |
($9.5) |
($1.0) |
$1.7 |
$4.4 |
$7.1 |
$9.8 |
$12.5 |
$15.2 |
| Well |
($10.0) |
($1.5) |
$1.2 |
$3.9 |
$6.6 |
$9.3 |
$12.0 |
$14.7 |
| |
($10.5) |
($1.9) |
$0.8 |
$3.5 |
$6.2 |
$8.9 |
$11.6 |
$14.3 |
| |
($11.0) |
($2.4) |
$0.3 |
$3.0 |
$5.7 |
$8.4 |
$11.1 |
$13.8
Apologies if the formatting is off. The realized price per bbl reflects the blended gas/liquids price based on estimated production mix. $40/bbl reflects the flat pricing scenario referenced above, you can see the significant value applicable in a flat pricing scenario of each independent well.
-As further support for this type curve, the Company updated its mid-year reserves which included reserve bookings for ~23 locations at Bigstone. The Company's two producing wells were given a value by DEE's third party engineering firm (GLJ, very credible) of $21 mm each on a total proved basis (before tax, discounted at 10%)
What is the opportunity:
The rub here is that the Company lacks real financial capacity to take this play to full development. Based on my estimates (and reflective of a pre-existing financing arrangement) the Company has the capacity to drill ~7-9 wells given forecasted cash flow of ~$55 mm next year, increasing to $70 mm in 2015E. To fully accelerate value, the Company requires an injection in capital, or needs to focus on delineation of the land base to effectuate a corporate sale to an entity with better financial capacity. To solve for that, the Company is currently contemplating alternatives including a substantive JV. For the purposes of the valuation math below, instead of using a theoretical development timeline that doesn't match the Company's financial capacity, I've assumed the Company is able to drive a $200 mm JV that reflects a standard 100/50 arrangement whereby the Company does not put up incremental capital (and doesn't realize an upfront promote). Its clear this option is highly value accretive and based on discussions with management, in their thought process. Again, this is prospective but highlights the embedded optionality which supports the investment in my opinion and is a better approach to triangulating value rather than applying a $ / bbl.
Sum of Parts:
NPV of proved producing value of existing reserves (excluding Bigstone): $100 mm (@ 10% B-Tax)
NPV of proved producing value of Bigstone reserves: $50 mm (@ 10% B-Tax)
Value of Bigstone proved undeveloped and probable reserves: $110 mm*
Value of Deep Basin proved undeveloped and probable reserves: $90mm**
NPV of $200 mm JV (50% interest) related to Bigstone unbooked reserves: $163 mm***
Less: Net Debt $121 mm
Equity Value / Share: $2.56/share (65% upside)
Incremental Value likely brought through reserve statement due to drilling above:
Remaining Locations at Bigstone net of the above: 131 locations
Risk Factor: 75%
Net Risked Locations: 33 locations
EUR / well: 1.1 mmboe
NPV / bbl: ~$9.00/boe
Risk to reflect time value / discount: 60%
$ / bbl: $3.65 / boe
Potential risked upside: $132 mm
Equity value / share: $0.86/share
Total prospective value / share: $2.97/share (92% upside)
Downside case:
Use reserve value above which reflects flat pricing, ignore JV scenario for valuing unbooked reserves: $1.50/share (-5% from current)
Ignore:
*50% of probables further discounted, apply $6.50/boe to each which equates to a 2x recycle ratio less future development capital
**Assume ~$12/boe netback and 4.0x recycle ratio by applying $3.00/boe to each
***Assumes 7 wells drilled / annum carried by JV partner (~$65 mm annually) from 2015 - 2017 and 50% interest in cash flow for 10 year period, discounted back to today
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.
Catalyst
-Continued drilling results
-Announcement of JV
-Potential activism to strengthen board and capital discipline and to effectuate JV or other transformative corporate action