Breitburn/Lynden Energy transaction analysis

Here is one way to analyze the recent Breitburn transaction.

The Breitburn transaction includes 4.7 net wells and 403 net acres for $19.3 million.  The price per acre equals $48k/acre which can be assigned to proven/developed acreage.  The transaction equates to approximately 86 acres per well.

To approximate the amount Lynden’s developed and undeveloped acreage, one can multiply their net wells by 86 devloped acres/well.  Lynden has a total of 33.0 net wells equaling 2,830 developed acres.  With a total of 6,466 net acres, Lynden’s remaining undeveloped acreage equals 3,636 acres (6,466 – 2,830).  After the sale to Breitburn, Lynden will have 2,427 remaining developed acres (2,830 – 403). 

Assigning a value of $48,000/acre to Lynden’s remaining developed acreage and using a conservative number of $10,000/acre for their remaining undeveloped acreage results in a Wolfberry value of $153 million (2,427 acres x $48k/acre + 3,636 acres x $10k/acre).  These conservative numbers result in a fully diluted share price of $1.07/share ($153 million / 143.5 million shares).  Using $20k/undeveloped acre results in an additional $0.25/share.

Mitchell Ranch is still a very exciting upside opportunity.  With other companies delineating resource potential around Mitchell Ranch and Lynden interpreting their own seismic data, Lynden’s 34,150 net acres could become very valuable.  At $2k/acre, the Mitchell Ranch property could add $0.48/share and at $4k/acre the upside could be $0.95/share. 

What does all of this add up to?  LVL’s Wolfberry valuation conservatively ranges from $1.07/share to $1.32/share and Mitchell Ranch adds from $0.48/share to $0.95/share totaling a range of $1.07/share (no value assigned to MR) to $2.27/share!  Obviously, an upside to today’s share price.

One last thing to keep in mind… With Chesapeake focusing on acreage outside of the Permian Basin, it would not be surprising if they let their Mitchell Ranch term assignment expire.  Should this occur, our view is that this would be a positive by increasing LVL’s Mitchell Ranch exposure by 17,000 net acres. 

Lynden to sell 403 acres to Breitburn for $19.3 million!

Lynden has entered into a deal to sell 403 net acres to Breitburn for $19.3 million (click here).  This equals $48k/acre!!!

Comparing the QEP transaction metrics to Lynden

Comparing the QEP transaction metrics to Lynden:

QEP, $950 million

6.7 mboe/d = $142,000/mboe/d
47 mmboe net proved = $20.21/barrel
26.5k net acres = $36,000/acre

LVL’s Wolfberry has:

1,200 boe/d (after royalties) x $142,000 = $170 million = $1.19/share based upon 143.5 million shares (fully diluted)
7.8 mmboe net proved = $158 million = $1.10/share
6,466 net acres = $232 million = $1.62/share

LVL's Wolfberry project alone equates to $1.10 to $1.62/share based upon QEP metrics for similar acreage!  These metrics do not include Mitchell Ranch which gives Lynden an additional upside!

QEP to acquire Permian Basin acreage for $950 million!

QEP announced it will acquire Permian Basin oil properties in Martin and Andrews counties for $950 million (click here).  The acquisition includes 6.7 mboe/d, 47 mmboe of net proved reserves and 26.5k acres.  Valuation metrics equate to $142k flowing barrel and $36,000/acre!

Lynden Energy reports results for quarter ending 9/30, 1,664 boe/d!

Lynden Energy Inc. reported their quarterly results today.  Highlights include total production of 153,088 boe and 1,664 boe/d!  This represents a 56% increase over their June 30 results! 

Cormark initiates coverage on Lynden! $2.00 target price!

Cormark Securities, Inc. initiated coverage on Lynden Energy Corp. today.  They have a "Buy" rating and a $2.00 price target.  Some quotes from the coverage:

"The hottest shale play in the U.S."

"Significant discount to larger peers in the Permian" - Currently trading at $72k/boed and $18.50/boe on reserves versus peers at $125k/boed and $31.00/boe.

Cormark says "Trading at a deep discount to US-listed peers in the basin, Lynden Energy represents one of the most attractive investments in our small cap "international" universe.  We expect a material rerating of Lynden in the market near term."

"A relatively small company like Lynden represents an accretive, attractive tuck-in acquisition for many larger players in the area."

"We expect a material rerating of Lynden in the market near term as ... new entrants look for acquisitions with the type of asset base currently held by the company."

Cormark's coverage along with other recent analysis is very bullish on Lynden and concludes that Lynden is currently trading at a deep discount.

Thom Calandra report on Lynden Energy

Thom Calandra wrote an article on Lynden Energy.  It states, "I don't think Lynden even makes the cheap end of the graph," mentioning that he's in "no rush to sell."  Here's the link (click here).

Now that almost 14 million warrants were either exercised or expired on 10/27, it's possible some of the warrant selling will decline leading to an improving share price.  Nothe that there are 5.9 million warrants that expire on 11/12 and 295k that expire on 11/19.  Once those two periods are over, the next set of warrants won't expire until May 2015.

New article by Torrey Hills Capital touting Lynden Energy

Torrey Hills Capital (babybulls.com) wrote an interesting piece on Lynden Energy today suggesting that Lynden has a lot of room to run.  Here is the link: http://www.babybulls.com/index.cfm/cdid/12353

Lynden reports 1,244 boed during last 14 days!

Lynden Energy Corp.'s latest news release reported production after royalties of 1,244 boed over the last 14 days.  Their production is in line with their earlier forecasts.  The production compares favorably to Diamondback Energy's recent purchase of 15,000 net acres and supports the application of the valuation metrics from that deal to Lynden's Wolfberry lands.

Diamondback purchases 12,500 net acres in Midland County

Diamondback Energy purchased 12,500 net acres in Midland County for $440 million (click here).  This equals $35,200/acre.

Applying these metrics to Lynden Energy Corp.'s Wolfberry project translate to $228 million (6,482 net acres x $35,200/acre).

Conservatively, Lynden's Mitchell Ranch could be valued at $68 million (34,150 net acres x $2,000/acre).

With 145 million shares, LVL could be valued over $2.00/acre using the above metrics!

BHP Competing "Vigorously" for Texas Oil

Here is a link to an article today about BHP "Vigorously competing for Texas oil." (click here)

Antares Energy signs Letter of Intent

Antares Energy signed a Letter of Intent to sell 32,297 net acres of Permian Basin acreage for $300 million.  The acreage includes 15,500 from their Big Star project in southern Martin County, 12,100 from their Northern Star project also in southern Martin County and 4,697 from their Southern Star project in Howard and Martin Counties.  Included in the sale is approximately 2,500 boed.

Metrics for the sale are $9,300/acre and $120,000 per flowing barrel.

This is a good comp for Lynden Energy as there aren't many other small cap junior oil producers.  Lynden Energy has approximately 6,482 net Wolfberry acres in Martin, Howard, Midland and Glasscock counties and 34,150 net acres at their Mitchell Ranch project in Sterling and Mitchell counties.  Keep in mind that Lynden also sold 630 net acres in Martin County for $25 million ($40,000/acre) to Breitburn in December so at least some of their producing acreage is worth upwards of $40,000/acre.

Also, Keith Schaefer from the Oil and Gas Investments Bulletin had a nice article about Lynden in his recent bulletin.  He claims the area around Mitchell Ranch is getting drilled up "with some success" and Mitchell Ranch is "pretty darned near smack dab in the middle of the new Cline Shale play."  His potential valuation numbers are pretty much in line with what has been previously mentioned on this blog which means Lynden has the potential for a much higher stock price.

Five large block trades have occured since 6/19 equalling 5.25 million shares.  These trades have not been listed as insider trades by JVL Advisors so it's likely that another investor has been making these purchases.  It's good to see that another investor is enthused by Lynden's story.

Link to Torrey Hills Capital/Babybulls.com article

Here is the link to the Torrey Hills Capital/babybulls.com article on Lynden Energy (click here). 

Highlights from the article:
- Pioneer Energy plans to "rapidly escalate their horizontal drilling program" in the Permian Basin.  Lynden Energy has "excellent exposure to this Permian region" with 6,500 net acres in the core Wolfberry Play area.

- Lynden sold 630 net acres to Breitburn Energy for $25 million ($40k/acre).

- Lynden is targeting 1,000 to 1,200 boed by June 30, 2013 and 1,500 boed by year end.  Note that this is only from vertical wells as Lynden has yet to drill a horizontal well.

- Using Breitburn sale, Lynden's remaining acreage is "around $193 million , $1.34/share."  Using $125k per flowing barrel equals $1.29/share.  With these "two back of the envelope calculations would yield share price appreciations of 91.5% and 84.3% yielding nearly a double from current share prices."

- Devon and Oxy have "set up camp on the perimeter (of Mitchell Ranch) and are showing success with a number of 800+ boed horizontal wells in close proximity."

- JVL Advisors owns 21.29% (prior to today's 2.5 million share purchase) of the outstanding shares.  "Based in Houston, John is a very experienced energy professional and institutional investor with an excellent track record.  If he sees this much upside in Lynden at this time, we think you should be taking a hard look at the Company here as well."

Pioneer's success could bode well for Lynden Energy

Pioneer has experienced a recent runup in their stock price likely due to their horizontal success in the Permian.  Pioneer's Mabee K #1H and DL Hutt C #1H wells are both very close to Lynden's West Martin acreage.  This should help attract interest in Lynden's land.

Babybulls has issued a post about Lynden.  The article is very bullish.  We will post a link to this soon.

A 2.5 million share block traded today.  It is possibly another purchase by JVL.  JVL is a well known  energy investor and obviously through his due diligence, he sees a lot of value in Lynden.  If this is indeed another purchase by JVL, then they are approaching a 25% ownership stake.

JVL acquires 1.6 millions shares of Lynden Energy!

JVL Advisors acquired an additional 1.6 million shares of Lynden Energy today (click here).  They now hold 20,716,000 shares.  Together with their 3,571,500 warrants, their ownership would represent 21.29%.  They have now taken their ownership above the 20% level with the purchase pursuant to the private issuer exemption. 

Lynden Energy Financials are out

Lynden Energy released their financials for the nine month period ending 3/31/13 today (click here for link).  No real surprises, last three months' production was 1,037 boed.  Targeting 1,000 to 1,200 boed by June 30 although completed wells may not be tied in by then.  Previous guidance of 1,200 boed after royalties may not be met until July or August. 

Another relevant comment, "It is the Company's objective to sell portions of its proven acreage in order to manage its working capital and to redeploy funds to its unproven acreage."

Company is still progressing with their Wolfberry project.  Recent nearby wells, particularly by Pioneer, are derisking LVL acreage.  Acreage in the Wolfberry and Cline shale areas are still in high demand, particularly large blocks.  We wouldn't be surprised to see takeover interest in this company by year end.

Devon exploring Cline Shale

Devon has nine exploratory rigs in the Wolfcamp and Cline Shale areas according to an article released today (click here).

Devon states, "There is good potential for the Cline to develop into a long term play."  Also, "Our geologists and engineers recognize the potential here or we're not going to be here."

Devon spokesman Chip Minty says early results in the Cline "have been encouraging".

Analyst says "So far Cline results have been good"

An article was posted today (click here) on the San Antonio Express News website talking about the Texas oil boom.  Noteworthy was this:

Benjamin Shattuck, an analyst with Wood Mackenzie in Houston, told the San Antonio Express-News that just 80 to 100 wells have been drilled in the Cline, and data is sketchy so far. He expects the industry in six months will have twice as much information on Cline Shale as it does now.  "Operators are doing their best to keep the result confidential," he said. "The big thing in the Cline is that results so far have been good."

Article in Forbes about Texas Shale Oil

There is an interesting article posted by Forbes today on Texas Shale Oil and Gas (click here).

In the article it states, "We are now seeing speculation that the Cline Shale formation in West Texas may well contain more oil than the Eagle Ford."

Clayton Williams Energy Inc.

Clayton Williams Energy Inc. is generating attention today.  It is up 10%.  Clayton Williams owns Wolfberry and Cline Shale property in Sterling, Glasscock and Mitchell Counties just to the west of Lynden Energy Corp.'s Mitchell Ranch.

Article says Devon is excited with Cline wells

Just saw this from the Dallas Business Journal, "Cline Shale Could be the Next Oil Play" (click here for link).

The article says, “Today, I spoke with a Devon official who says the Oklahoma City-based company is excited about what they’ve found with the first six wells.”  This is the first comment that we’ve seen that says Devon is excited about their Cline results.  This is exciting for Lynden Energy Corp. as Devon has several Cline wells along the northern border of Lynden's Mitchell Ranch project.  In fact, their Schlarlarch M#1H well is only 480 feet from their northern border! 

Laredo derisks Wolfberry

Laredo's release today states that they "have reduced the risk and uncertainty associated with this entire acreage block for vertical development of the Wolfberry interval."  They are referring to their Wolfberry Garden City block which runs from the southern edge of Howard County and through Glasscock and Sterling Counties.  As Lynden's Wind Farms property is on the eastern edge of Laredo's Permian Garden City acreage, Laredo is implying that LVL's Wind Farms property is also derisked.  One can begin to value LVL's Wind Farms property at $40,000/acre similar to their recent sale to Breitburn.  Also, Wind Farms has Cline potential as well.

Here is the statement from Laredo's release:

"The Company increased its Permian-Garden City acreage holdings to approximately 145,800 net acres at year-end 2012. Drilling results from more than 800 vertical wells, of which approximately 250 are deep vertical wells, have reduced the risk and uncertainty ("de-risked") associated with this entire acreage block for vertical development of the Wolfberry interval. In addition, based on actual production history from the Company's horizontal wells that have been correlated with core analysis, single-zone tests and supporting industry activity, the Company now believes that it has de-risked the effective equivalent of approximately 360,000 net acres in the Permian-Garden City area for horizontal development from the four stacked zones. By zone, the de-risked acreage consists of approximately 80,000 net acres in the Upper Wolfcamp, approximately 80,000 net acres in the Middle Wolfcamp, approximately 73,000 net acres in the Lower Wolfcamp and approximately 127,000 net acres in the Cline shale. There is significant overlap of the de-risked acreage by zone that provides development opportunities for multiple stacked laterals to utilize common drilling pads and surface facilities. A pilot program to test the vertical and horizontal spacing criteria of the development laterals, within the four stacked zones, is expected to begin in the second quarter of 2013. In addition, the delineation program will continue in 2013 to de-risk additional acreage, by zone, for horizontal development."

Given that Wind Farms is surrounded by Pioneer on the west, Laredo on the east, Range to the north and Apache to the north and south, Wind Farms is very well positioned.  It seems easy to calculate LVL's Wolfberry value and see that Lynden’s Wolfberry pieces alone support a much higher price.

Lynden is covered in an interview in The Energy Report

The Energy Report published an interview (click here for link) with Mat Wilson, an analyst with Pinetree Capital.  He is very bullish on Lynden.  Here is a portion of the interview:

TER: What's an example of a less risky asset?

MW: Two companies that are starting to see a solid de-risking to their asset base are the two that I'm most bullish on in 2013: Lynden Energy Corp. (LVL:TSX.V), which is operating in the Cline and Wolfcamp shales of West Texas, and Americas Petrogas Inc. (BOE:TSX.V) in Argentina.

Lynden is listed on the Toronto Venture Exchange, based in Vancouver, and exploring in Texas, which has kept the story relatively unknown to many investors despite its strong performance in 2012.

Lynden has exposure to more than 100,000 gross acres in the Wolfcamp and Cline shale formation in the Midland Basin of West Texas. We expect the company to report a 2012 exit production rate of about 1,000 barrels of oil equivalent per day (1,000 boe/d) from 7,000 net acres in the middle of the Wolfcamp basin. This land package and production underpins its current valuation of $100 million ($100M) as it recently sold 660 net acres for $25M.

What's more exciting here is that the company holds 50% of 68,000 gross acres in Mitchell County. This property is in the middle of Devon Energy Corp.'s (DVN:NYSE) 560,000-acre Cline shale package, which is only beginning to be explored.

Following the money, Sumitomo Metal Mining Co. Ltd. (STMNF:OTCPK) recently paid Devon $340M in cash and is committed to spend more than $1 billion ($1B) for just 30% of the ground in the basin. The majority of that is going to this Cline package, which Lynden's ground is right in the middle of.

Just south of this area, Sinochem International Corp. just paid Pioneer Natural Resources Co. (PXD:NYSE) $500M in cash and is spending $1.2B to drill 86 horizontal wells in the Wolfcamp. This is adding fuel to the fire in what is turning out to be one of the more exciting American domestic oil plays.

Lynden's plan for the year is to continue to push its Wolfcamp production and probably drill a well on its Mitchell property to prove the Cline shale extends through its ground.

TER: What was Lynden's production last year and what's its production guidance for this year?

MW: Lynden came into 2012 producing 300–400 boe/d and its guidance throughout the year was to exit 2012 with 1,000 boe/d. Lynden will be reporting soon and we expect its exit production to be in line with its guidance.

TER: What's the plan to expand that production in 2013?

MW: These are not very expensive wells, so Lynden will continue to rely on its $30M borrowing base to expand production as it has been doing for the last year.

TER: It sold roughly $25M worth of acreage. What are the plans for that cash?

MW: That cash brought down the borrowing base to essentially zero to allow the company to continue pushing forward on its production expansion.

Links to Cline Shale articles

An article in the Times Record News (click here for link) says, "The latest hot spot in oil exploration is the Cline Shale play in West Texas." 

Fuelfix.com posted a new article (click here) and here a few quotes from that article:

Benjamin Shattuck, an analyst with Wood Mackenzie in Houston, said just 80 to 100 wells have been drilled in the Cline, and data is sketchy so far. He expects the industry in six months will have twice as much information on Cline Shale as it does now.

“Operators are doing their best to keep the result confidential,” he said. “The big thing in the Cline is that results so far have been good.”


Apparently, it seems like Cline shale results from Devon and others are being held confidential.  Hopefully, results will filter to the market soon.  A good sign, though, is that several companies are continuing to drill wells and buy Cline land.

Devon Energy Conference Call mentions Cline Shale

Devon Energy's conference call this morning made mention of the Cline Shale.  Here is a quote from the transcript on Seeking Alpha from Devon's CEO:

"If you look at total resource potential, then certainly the Cline Shale and the Wolfcamp Shale would rank at the top of the list.  And as we really drive the economic value as we move forward in the Cline Shale, it could be very, very significant."

Keep in mind that Devon is drilling in the Cline Shale in Mitchell County very near the north border of Lynden Energy's Mitchell Ranch.  In fact, three of Devon's wells are within a mile of the border.

Lynden Energy named to TSX Venture 50

Lynden Energy Corp. was named to the TSX Venture 50.  This is a ranking "reserved for the strongest performing compnies on the TSX Venture Exchange." 

Colin Watt, LVL CEO states, "This is an honor for Lynden to be included among the industry top performers as part of the TSX Venture 50.  This achievement is further confirmation of the impressive growth we have realized not only in our share value but also in the market's recognition of our company."

Cline shale article posted on Lubbock Online

There was an informative article posted on Lubbock Online, click here for link.  Lynden Energy is mentioned toward the end of the article.

Also, Lynden Energy was mentioned as one of the top Canadian companies with foreign direct investment in a release by the state of Texas (click here to view).

Good mention about Lynden Energy

There is an interview in the Energy Report with Keith Schaefer from the Oil and Gas Investments Bulletin that mentions Lynden Energy Corp. (click here for link from the Before It's News website).  Towards the end of the interview (you may have to view it on the 2nd page), Schaefer mentions that LVL is "a really interesting story."  He states the following:

1. Mitchell Ranch is a big land package that is very rare because it is one contiguous block.

2. If Mitchell Ranch were to be spun out and IPO'd, it could "probably get $250 million for it, worth $2.50/share).

3. Lynden raised its own money and therefore, doesn't get a lot of research from the Street, "It's a bit of an undiscovered gem."

4. Lynden's Wolfberry production "justifies the price of the stock on its own, so you're basically getting Mitchell Ranch for free."  (Note, see our 10/31/11 analysis where we discuss buying an oil field for free, much of that analysis still applies.)

Interesting article on Cline Shale

The Oil and Gas Journal has an interesting article on the Cline Shale (click here to view).  Mitchell County and Sterling County are right in the center of the Cline Shale area as shown on the map in the article meaning Lynden Energy's Mitchell Ranch is also in the heart of the Cline Shale area.

Sinochem buys stake in Pioneer's Wolfcamp shale play

Pioneer announced that it will sell a stake in their Wolfcamp shale play.  The sale is valued at $1.7 billion and includes a 40% interest in 207,000 net acres.  The sale equates to $20,531/acre for what we believe to be largely undeveloped acreage.  Pioneer has drilled 39 horizontal wells on the acreage to date.

New wells permitted adjacent to Mitchell Ranch (updated)

Purvis Operating Co. permitted a new oil well, Whiteface 36 #1, adjacent to Lynden Energy's Mitchell Ranch.  The well is located near the northwest corner of the ranch. 

Update - Purvis also permitted another well, Brahman 24 #1, less than a half mile to the southwest of Whiteface 36#1 on 1/28/13.

Click on map for larger version.

 

New Firewheel Well

Firewheel Operating, LLC submitted an application for a new well, Davis Heirs #1111H, located approximately half way between their Horwood well and Mitchell Ranch.  Firewheel's first two wells, Horwood #2151H and H&H Ranch #41 have initial tests of 561 boed and 1,497 boed, respectively.  Firewheel's Cline shale testing is moving north towards Lynden Energy's Mitchell Ranch which is also bordered on the north by Devon's wells. 

A few noteworthy items...

Most noteworthy is the filing by Firewheel Energy that their H&H Ranch #41H well had an initial production rate of 1,250 barrels of oil and 1,484 mcf of gas in a 24 hour test period.  This equals almost 1,500 boed! The location of this well in relation to Lynden Energy's Mitchell Ranch can be seen on the map from the December 6 posting.  This news is very relevant to the potential of Lynden's Mitchell Ranch.


Also, there was a good mention about the Cline Shale on the newswest9.com website (click here for a link to the article).  The article mentions "The energy industry's buzz over the Cline shale is getting louder. The formation has the potential to make a huge impact on the Permian Basin."

Midland Energy Expert Morris Burns says, "This is a huge shale formation."

Geologist Gary Dawson who has studied the Cline for years says, "It's kind of the perfect shale...Right now we're just barely tapping the potential of the Cline Shale."


One other item to note, when searching under JVL and Lynden, it was noticed that JVL Advisors acquired shares in Epsilon Energy Ltd. (click here for the article).  Epsilon is referred to as "Lynden" in the news release.  Not sure if there's any relevance or whether it's just a typo.