Monday, October 31, 2011

Energen and Linn Energy acquire $317 million in Wolfberry acreage, could this mean buying Lynden is like buying an oil field for free?

Energen Resources Corp. and Linn Energy plan to acquire Wolfberry packages totaling $317 million in the Permian Basin.

Energen announced that they will purchase two Wolfberry packages for a total of $211.9 million. The properties are located in Martin, Howard and Glasscock counties and include production of 1.5 mboe/d, proved reserves of 17.08 mmboe, and proved plus probable reserves of 24.24 mmboe. The metrics for this deal are $4/boe for probable reserves, $10.46/boe for proved reserves and $119,073 per boe/d according to Derrick Petroleum Services.

Linn Energy announced that they signed purchase agreements for two bolt-on acquisitions in the Wolfberry for $105 million including net production of 800 boe/d and proved reserves of 8.3 mmboe. Metrics for this deal are $12.65/boe for proved reserves and $131,250 per boe/d per Derrick Petroleum Services.

Here is what is interesting, comparing these deals/metrics with Lynden Energy Corp.'s latest news releases confirms Lynden's Wolfberry value and reveals its tremendous upside at their Tubb and Mitchell Ranch projects!

From Lynden’s news release on October 28:
- Proved plus Probable reserves are 6.77 million barrels of oil and 18.15 bcf of gas (9.8 mmboe) as of 6/30/11. These reserves are attributed to the West Martin and Wind Farms lands in Martin and Glasscock Counties.
- Proved reserves are 3.29 million barrels of oil and 8.63 bcf of gas (4.73 mmboe).

From Lynden’s news release on October 13:
- Daily production is 423 boe/day.

Using Energen deal metrics for Lynden’s reserves equates to $69.8 million (5.07 mmboe x $4/boe + 4.73 mmboe x $10.46/boe = $69.8 million). Using Energen’s production metrics for Lynden equates to $50.4 million (423 boe/d x $119,073 = $50.4 million).

Using Linn deal metrics results in Lynden proved reserves equal to $59.8 million (4.73 mmboe x $12.65/boe = $59.8 million) and based upon daily production equal to $55.5 million (423 boe/d x $131,250 = $55.5 million).

These two deals demonstrate valuation of Lynden’s West Martin and Wind Farms Wolfberry lands alone to be between $50.4 million and $69.8 million. These values are based upon reserves as of 6/30/11 and 423 boe/d production. Of course, as Lynden’s production grows towards 500 boe/d, these values increase even more.

Several points should be noted:
- These valuations are higher than Lynden’s current market cap but provide a reasonable value of their West Martin and Wind Farms Wolfberry Projects.
- West Martin and Wind Farms are located in the same counties as the Energen deal lands.
- Tubb property in Howard County and Mitchell Ranch do not have any reserves or production attributed to them in the above analysis

Adding in Lynden's other lands results in tremendous upside potential!

Lynden’s West Martin and Wind Farms net acreage equals 3,841 acres (43.75% x 5,488 + 30.625% x 1,127 + 43.75% x 2,503 = 3,841 acres).

Lynden’s Tubb net acreage equals 2,469 acres (35.5% x 6,956 = 2,469 acres).

Mitchell Ranch net acreage equals 34,150 acres (50% x 67,400 + 1.25% x 36,000 = 34,150 acres).

Using a valuation of $60 million for the West Martin and Wind Farms acreage, knowing that Tubb is likely to have Wolfberry success (conservatively estimating $10,000/acre valuation for Tubb lands), and assigning a valuation of $2,000/acre for Mitchell Ranch results in a potential value of over $150 million or three times the current market cap. Upside includes additional value to be realized at West Martin and Wind Farms, potential success at Tubb resulting in valuation up to $25,000/acre or more, and potential success by both Lynden in the Wolfcamp at Mitchell Ranch and Chesapeake in the Mississippian resulting in potential valuation of up to $10,000/acre. It’s clear to me that Lynden has huge potential! Approaching anything close to those valuations could mean that Lynden could eventually have a market cap worth several hundred million dollars.

What does this all mean? The opportunity is out there to buy an oil field in the exploding Permian Basin for FREE! How? Given the above mentioned valuations, it’s easy to see that the company is valued for its West Martin and Wind Farms Wolfberry assets alone. The valuations DO NOT take into account the Tubb or Mitchell Ranch areas. Buying this stock is like buying the company's developed assets which are worth the value of the stock alone - together with the Tubb and Mitchell Ranch project for FREE! There is tremendous upside potential in the Tubb Prospect Area which is a relatively low risk play in the Wolfberry and the Mitchell Ranch land which CHK paid a good amount for and is spending a large sum to determine the viability of development of the Mississippian zone.

Buying Lynden at its current valuation could be looked upon as buying their Tubb Prospect Area and Mitchell Ranch Project for free and Lynden could be a stock worth several dollars per share!

Just our opinion and please do your own due diligence.

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