Description
Teton Energy (TEC) represents an opportunity to buy high quality, resource basin assets for less than half of break-up value. We will demonstrate to you that if you tried to create this company today, you would pay a minimum of $10 per share on a conservative basis. Teton Energy is a Rocky Mountain-based exploration and production company with significant holdings in the Piceance Basin, Eastern DJ Basin, Northern DJ Basin, Williston Basin & Big Horn Basin. For those of you who are unfamiliar with those regions, they are true resource basins, with low drilling risk, excellent rates of return and high repeatability. In fact, virtually all of the majors have a presence in these regions. Teton’s partners in these projects include Noble Energy, Marathon, Delta Petroleum, Berry Petroleum, Whiting Petroleum, a Riverstone/Carlyle company, and Targe Energy.
History:
Teton started as a Denver based company drilling for oil in Siberia. The projects were so successful that the company was given the “Russian bear hug” – take this money as settlement and leave our country alive. In 2005, the company decided to focus on exploration and production in the Rockies. They invested around $15 million since that time in building a significant presence in the U.S.
Total acreage is now in excess of 1,000,000 acres. All projects with the exception of the Big Horn Basin are producing. The first Big Horn hole is due to spud sometime in the current quarter. The company is seeking an industry partner for this project and Red Technology Alliance (Halliburton) Barrett and St. Mary Exploration are some of the names that the Street has mentioned.
Valuation:
In conducting our due diligence on Teton, we have spoken to land owners, analysts, independent petroleum engineers and peer companies. Based on this feedback, we conservatively estimate replacement cost or break-up at $200MM, well in excess of $10 a share. If you are interested in learning more or being more technical, please follow up in the thread.
Recent Events:
Teton recently held its first ever analyst day. The company announced that 2007 preliminary proved reserves of 14.1 BCF doubled from 2006. Keep in mind that 2006 included a 25% interest in the Piceance basin of which half has since been sold off. Also, many of the wells drilled in 2007 will make it in the 2008 proven numbers do to reserve reporting guidelines. The company also gave 3P guidance of roughly 400BCF, without counting significant acreage tracts.
TEC has been amazingly successful is entering projects at a very low cost and adding value as the projects develop.
The first project was to acquire a 25% interest in a Grand Valley Piceance project at approximately $4 per acre. The company recently sold half to Delta Petroleum for approximately $47K an acre. The sale also included receiving 504,000 of producing (oil & gas) in the Northern DJ Basin. So effectively the company sold just 17% of its current production for $33 million. On that basis, the implied valuation for the Piceance Project is over $175MM. The current market cap for the entire company is approximately $80 million. The sale entailed giving up approximately 100 BCF of Piceance natural gas reserves but the company bettered its position considerably by swapping for 504,000 acres of oil and gas assets and cutting capex by 50%.
The sale generated enough cash to meet Cap EX through 2008. The company indicates that it does not plan share issuance beyond 2008 even with aggressive development plans. The company has a $50MM credit line with JP Morgan with only $8MM outstanding.
Teton has a substantial working partnership with Noble Energy. The two are partners on a 3,000 plus well project in the Eastern DJ Basin that Noble has called a “growth project” for it. Teton is named in recent Noble presentations. This project, assuming only 1/3rd is drilled, should yield Teton at least 175BCF of gas. Drilling results have been over 90% without the aid of seismic. Teton paid nothing for its share of this project. A very conservative value would be $3 a share. This project was recently expanded to over 300,000 acres.
Teton, American Oil & Gas, Marathon Oil & Whiting are part of a large AMI in the Williston Basin in North Dakota. This acreage is probably worth $800 an acre, so approximately $18 million in value for Teton. The company acquired the acreage for less than half that amount. The Williston Basin has some technical issues but a catalyst will be Whiting’s drilling in the Red River formation. The first well had a 99% rate of return drilling the Red River. Teton announced 10 more solid Red River locations. This project is perhaps a $10 a share option.
The company is banked by JP Morgan and utilizes ML Petrie as an advisor. Research by Dahlman Rose , Canacorrd & Ferris Baker with NAV ranges of $7.30 to $12.
With the overhead of share issuance gone, and roughly $2 in cash per share, the company’s high quality, low risk acreage is substantially undervalued.
Catalysts:
Insider Buying – insiders have bought almost 1% of outstanding shares in the last couple of months.
Acquisition – several of the majors like Noble Energy could acquire TEC
New land acquisitions by big name players – recently, Chesapeake Energy (CHK) has been acquiring land in the Rockies at multiples of what TEC paid
Rockies Gas Price – the price of Rockies gas has increased by more than 300% in the last year and TEC stock price has not yet appreciated.
Partnership announcements – South Frenchman Creek and Big Horn partners should be announced this quarter
Changes in SEC Reserve Accounting- Proposals are out that could dramatically enhance the reporting for companies in “resource basins”, like TEC.
Risks:
Commodity Price Decline – the price of natural gas and oil could decline and TEC would still be worth $11 based on acreage values. However, perception of a declining commodity prices could affect the stock price on a short term basis.
Stock issuance – the company could try to raise capital via a stock sale. However, they have $2 per share in cash at this time and strong support from JPM.
Disclaimer: We currently have a position in TEC and we may buy or sell stock without notifying VIC members.
Catalyst
Insider Buying – insiders have bought almost 1% of outstanding shares in the last couple of months.
Acquisition – several of the majors like Noble Energy could acquire TEC
New land acquisitions by big name players – recently, Chesapeake Energy (CHK) has been acquiring land in the Rockies at multiples of what TEC paid
Rockies Gas Price – the price of Rockies gas has increased by more than 300% in the last year and TEC stock price has not yet appreciated.
Partnership announcements – South Frenchman Creek and Big Horn partners should be announced this quarter
Changes in SEC Reserve Accounting- Proposals are out that could dramatically enhance the reporting for companies in “resource basins”, like TEC.