Description

Thesis

Iron Bridge is an orphan Canadian micro cap e&p company trading at a substantial discount to peers with a clean balance sheet and on the cusp a significant inflection in production growth.  Iron Bridge is currently trading below its 1P PV10, 20% below the price at which management and the board recently purchased shares in the company, and 30% below the price at which the company has been repurchasing its own shares. The company has an entirely new management team and board with their turnaround plan about to start to show results. IBR’s share price has fallen 33% year to date despite crude oil’s recovery to over $70/barrel as the company is off almost all investors’ radar screens. Later this month, IBR will reveal well results from its new completion design which should be a significant catalyst for its shares. IBR shares could easily double by the end of the year as the company uses its net cash balance sheet to accelerate production growth. We believe the shares are likely worth more than C$1.40/share today. With such a large disconnect between intrinsic value and its public market valuation, we expect IBR will end up being acquired at over C$1/share within the next 24 months.

Capital Structure

In mid November 2017, Iron Bridge initiated a normal course issuer bid to purchase up to 12 million of its common shares. As of March 20th, 2018 the company had repurchased 1,769,874 shares for $1.2 million (roughly $0.68/share.)

Overview

Iron Bridge Resources is the remaining assets of RMP Energy after RMP sold its West Central Alberta assets to Tangle Creek Energy Ltd. in October 2017. Iron Bridge’s assets are in the Elmsworth field in the Montney.

In January 2017, RMP started to reshape its board of directors with the appointment of Josh Young to the board. Within three weeks of Mr. Young’s appointment, RMP’s then CEO John Ferguson announced plans to retire and Mr. Young was named chairman of RMP’s board. By the end of May 2017, RMP’s entire board of directors had turned over.

On July 26, 2017 Iron Bridge named its new management including CEO Rob Colcleugh, COO Tim Krysak, VP of Engineering Jeremy Smith, VP of completions Gregg Nixon, and VP of exploration Zoran Jankovic. Iron Bridge decided to retain CFO Dean Bernhard. Mr. Krysak, Mr. Smith, and Mr. Nixon all joined from Tourmaline Oil Corp (TOU CN) -- Tourmaline is well known for being one of the best operators in Canada and has experienced over the years very few senior executive departures.

In September 2017, Mr. Young (through his investment management firm Bison Interests LLC and Bison Energy Opportunity Fund LP) as well as the new management team and other board members collectively purchased 5.35 million units of the company (comprised of one share and one 4 year $0.75 strike price warrant) for $0.60 per unit. The warrants vest in equal tranches of one third each upon the 20 day weighted average trading price of the common shares equalling or exceeding $0.75, $0.90, and $1.05.

On October 17, 2017 RMP closed the disposition to Tangle Creek Energy Ltd. of its interests in the Waskahigan, Grizzy, Kaybob, Gilby, and Pine Creek areas of West Central Alberta for $68 million in cash and 13.85 million shares of Tangle Creek common stock.

RMP renamed itself Iron Bridge Resources in November 2017.

At the end of 2017, Iron Bridge had proved and probable reserves of 26.11 million barrels of oil equivalent. Proved reserves were 11.47 million boe. The PV10 of Iron Bridge’s proved reserves is C$40.5 million. The PV10 of IBR’s proved and probable reserves is C$121.5 million.

In q4 2017, IBR had production of 1,946 barrels of oil equivalent per day. Iron Bridge’s production was 72% nat gas and 28% liquids. Ascribing no value to Iron Bridge’s undeveloped acreage, IBR shares are currently trading at under C$19,000 per flowing boe.

Iron Bridge’s Assets

IBR’s acreage sits in the volatile oil window of the Montney. Iron Bridge controls 53,440 net acres, 49,600 of these net acres are in the Montney. Iron Bridge has only booked reserves on 10% of this acreage. Undeveloped land in IBR’s area of operations has been trading for C$3,000 to C$12,000 an acre in private market transactions.

Iron Bridge’s acreage is surrounded by private producers Velvet Energy and Hammerhead Resources.

Iron Bridge’s acreage is surrounded by strong wells drilled by its competitors. In the last 6 months in offsetting acreage to IBR’s holdings 13 horizontal Montney wells have been drilled, and 6 wells have already been brought onto production.

Velvet Energy is a Warburg Pincus portfolio company with roughly 20,000 boepd of production. Velvet has reportedly been buying land in the Elmsworth/Gold Creek area for over C$10,000 an acre.

Source: Velvet Energy

Velvet cracked the code on how to produce out of the Elmsworth/Gold Creek area. Iron Bridge has started to copy Velvet with a new 75 stage frac design well. Iron Bridge expects to see production similar to what has been experienced by Velvet on its recent wells.

Historically, Iron Bridge had relatively pedestrian results from its wells in the Elmsworth/Gold Creek area. All of Iron Bridge’s historical drilling in the area used less than 35 frac stages and had relatively wide frac spacing. Velvet has been using 75 stage frac completions in achieving its much better well results.

Competitor well results indicate there is a very strong correlation between reducing well spacing and increasing frac stages and higher initial production rates. Velvet and Hammerhead both announced strong well results in 2017 achieved by reducing well spacing and increasing frac intensity. In the two wells Iron Bridge drilled at the end of 2017 and is currently bringing onto production, Iron Bridge copied Velvet’s completion techniques.

Iron Bridge will report the results of its first two 75 frac stage wells when it reports Q1 2018 earnings later this month. We would expect Iron Bridge to announce improved results compared to its prior drilling and likely results similar to what has been achieved by Velvet.

Assuming Iron Bridge is able to achieve well results similar to Velvet, the company should be able to double production to over 4,000 boepd over the next 12 to 18 months by ramping up drilling plans. At current oil and gas prices, most if not all of this drilling can be financed through the net cash on the balance sheet and the cash flow from the company’s production.

Infrastructure to produce in this region is already in place. Iron Bridge owns roughly $20 million of infrastructure assets it could likely sell to Meritage if it needed to raise additional capital. The Meritage Patterson Creek facility has 180 mcf/d of gas processing capacity and meritage has over 6,000 bopd of liquids pipeline capacity in the region.

Tangle Creek

As a result of the asset disposition, Iron Bridge has a significant “hidden” asset in its ownership of 13.85 million shares of private Canadian oil and gas producer Tangle Creek Energy Ltd. In an investor presentation released last month, Tangle Creek valued itself at C$0.89/share.

Source: Tangle Creek Investor Presentation

Tangle Creek has had steady production growth both through the drill bit an bolt on acquisitions.

Given Tangle Creek is disclosing significant financial information through presentations to the public, we expect the company to either go public or sell itself within the next 18-24 months. A monetization of IBR’s stake in Tangle Creek should be a relatively cheap form of financing for IBR’s drilling plans.

Iron Chain Technology

In January 2018, IBR announced plans to set up a wholly owned crypto currency mining and hosting subsidiary called Iron Chain Technology. Iron Chain plans to own and operate cryptocurrency mining datacenters at Canadian oil and gas field sites in an effort to take advantage of very low Canadian natural gas prices. ICT believes that the very low cost of this residual gas could make ICT a low cost miner for cryptocurrencies. IBR expects to invest less than half a million dollars into this venture.

I ascribe no value to these operations.

Valuation

At C$3,000 an acre for Iron Bridge’s undeveloped Gold Creek acreage as well as valuing IBR’s production at C$25,000 per flowing BOE and including the company’s net cash and the value of its stake in Tangle Creek shares would be worth roughly C$1.40/share.

Montney Canadian E&P companies are trading at an average value of C$40,000 per flowing boe. Companies with similar liquids mix to Iron Bridge are trading around C$30,000 per flowing boe.

Source: RBC Capital Markets

Junior Canadian E&P companies based in the Montney with similar liquids mix as Iron Bridge are trading at C$2.5 to C$5 million per section (C$3,600 to C$7,200 per acre.)

Catalyst

The company reports the well results from its initial 75 frac stage wells.

The company continues to repurchase its stock at significant discounts to intrinsic value.

Competitors continue to report strong well results at offsetting locations

The company doubles production in the next 2 years through the drill bit 

The company is sold to Hammerhead, Velvet or another Canadian E&P looking to grow production in the Montney