Asset Management: Why Bellatrix looks like a buy
The company is one of few thriving during a period of depressed natural gas prices
Jody Chudley is the author of The Punchcard Portfolio, a value-oriented newsletter with a focus on Canadian oil and gas stocks
by Jody Chudley
For the past several years we have been living in a world of depressed natural gas prices. You have to look pretty hard to find a natural gas producer that has thrived during that time. Bellatrix Exploration is one of them.
While the market for most of 2012 avoided Bellatrix because of its exposure to natural gas, the company was still on a tear operationally. Check out the following statistics covering the last few years for Bellatrix. Production between 2009 and 2012? Up 254 per cent. Liquids production over the same period? Up 335 per cent. Reserve growth per share between 2009 and 2011? Up 294 per cent. And cash flow growth per share between 2009 and 2012? Up 431 per cent. How has a natural gas producer managed such impressive per-share growth during a period of depressed natural gas prices? Because Bellatrix is blessed with a great set of assets.
We’ll get to those assets in a moment, but first, a little history. The company was formed out of a plan of arrangement involving its predecessor, True Energy Trust. Ray Smith and his team took operational control of the company in early 2009, and put in place a strategy of reducing debt, disposing non-core assets and focusing its efforts on its core properties (most of which are in the Cardium) in west-central Alberta.
That history is important, because it explains in part why Bellatrix’s assets are so good. First, Bellatrix (through True Energy Trust) owned the rights to its Cardium acreage before anyone knew that horizontal drilling was going to unlock the oil and gas on the land. It didn’t have to buy this acreage to play the unconventional game, and with no land cost the full cycle economics are greatly improved.
Second, the wells Bellatrix drills pay out very quickly. The Cardium and Notikewin plays in which Bellatrix is heavily involved pay out their full capital investment promptly – often in under a year. That means the cash comes back quickly so another well can be drilled and production increased. That is a must for a small company to succeed in the horizontal game. Better still, the zones are stacked on the same acreage. That greatly reduces infrastructure costs (roads, pipelines and processing) and also allows Bellatrix to have extremely low operating costs.
The Cardium and Notikewin plays are the core of Bellatrix’s business right now, but it also has an option on the Duvernay that could prove to be very valuable to investors. The verdict is still out on how good the Duvernay is going to be, but the industry is clearly excited about it. One thing we know for sure is that Bellatrix is very much “in the game” when it comes to the Duvernay. Bellatrix has 52 net sections of Duvernay mineral rights in the liquids rich Ferrier region.There have been 100 wells licensed along that trend, 17 drilled and 5 currently on production. Bellatrix itself has drilled one well which has the highest initial production of any well drilled to date.
That’s the upside. The downside is that drilling a well in the Duvernay takes a lot of cash. Well costs can be in excess of $10 million, which is almost three times the cost of a Bellatrix Cardium well. That is a lot of cash for a non-major to cough up per well. But the nice thing for Bellatrix is that it has plenty of Cardium and Notikewin wells to drill in the near future, so it can sit back and let the industry de-risk the Duvernay around them. If the Duvernay works as expected, Bellatrix estimates it has over 300 drilling locations.
There’s more. Bellatrix this year announced a $300 million joint venture with an unnamed Korean company. The deal covers 52 of the 130 net sections of the Cardium land that Bellatrix controls, and is for an 83 well program in the Ferrier portion of the play. Under the terms of the deal, the Korean partner will pay for 50 per cent of the drilling costs in order to receive a 33 per cent working interest in the wells. Without this deal Bellatrix would have added production from roughly 45 wells in 2013. With it, Bellatrix effectively pays to drill 45 wells but gets production from 58.5 wells. That is going to provide a significant boost to production growth for Bellatrix in 2013. The company exited 2012 at 19,500 boe/day, and with the JV it’s expecting to exit 2013 more than 50 per cent higher at 30,000 boe/day. And best of all, the company’s growing at this rapid pace while still keeping its balance sheet clean.
So, now the important question: what’s the company worth to shareholders? I believe that with current commodity prices Bellatrix could be generating $2.25 per share in cash flow by December of this year. If I assign a multiple of five times to that cash flow I arrive at a stock price of $11.25, which is almost double the current share price. And that multiple might be conservative, given that the company’s growing its production at 50 per cent. It seems especially conservative when you consider Bellatrix should have many years of growth beyond 2013 in front of it.