Two for One: High North’s Montney acreage is an interesting play
Montney acreage is interesting at its current prices. Its Duvernay assets could make it the steal of a lifetime
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
I’m a big fan of investing in companies that hold large acreage positions in proven, profitable North American horizontal oil plays. I’m not making investments in these companies for the short term. I’m making these investments for the very long term. I believe these horizontal oil plays are only going to get better over time as the industry figures out how to get more and more oil out of the ground. It is important to be aware that there is a limited number of these plays (especially the oil ones), so the companies that have already established big land positions have an advantage.
What I’d like to note is that I referred to “proven” horizontal oil plays. I have very little interest in junior energy companies that are promoting large land positions in the “next” big horizontal shale oil play. I’ve found that there is a good chance that these “next” plays these companies are promoting may never work for a variety of reasons. Even more concerning to me is that even if the play in question ends up working, these junior resource companies don’t have the financial staying power to be around to benefit from it, given the immense capital costs associated with de-risking them.
And yet, despite all of that, this month I’m going to focus on a tiny company that I do like even though it has very little capital and no current cash flow. I like this company because it sits on a very big acreage position that appears to be right in the middle of an established oil play. Now, it’s nowhere near close to being one of the largest landholders in the area. But here’s the catch: High North Resources has an enterprise value (share price times number of shares less net cash) of somewhere around $14 million.
I’m not the sharpest knife in the drawer, so I don’t like my investment ideas to be too complicated. I like to be able to use good old-fashioned common sense to determine whether a stock is a good value. The question relating to High North, then, is whether $14 million looks like an obvious bargain price to pay for the assets that the company controls. I’m inclined to say yes, and I’ll try and explain why.
High North has 125,000 acres which the company claims are highly prospective for a Montney light oil play. Like most investors, I’m not inclined to simply take someone’s word on the value of something. I like to be able to prove it with some evidence. The nice thing in this case is that we don’t have to just take High North’s word for how prospective this land is – we can see it by what another company is doing literally within eyesight of High North’s land.
That company is Long Run Exploration, which is going full bore into the Montney. Since 2010 Long Run has taken its Montney oil production from nothing to almost 8,000 barrels per day. Long Run is showing that this portion of the Montney is a highly economic play, with well costs of roughly $2 million and full payout of that amount in roughly a year. Long Run has drilled wells in the section of land directly to the east of High North and has the company surrounded with more acreage to the west of High North as well. As such, Long Run’s results provide very solid evidence that High North’s land has a great deal of potential.
In terms of its valuation, High North has an enterprise value of $14 million and controls 125,000 acres. That equates to $112 per acre.
Recent land sales in the region have taken place at prices as high as $273 per acre, which is obviously encouraging. What is more encouraging is that the Montney isn’t the only hydrocarbon zone that is present on this acreage. There is also the Duvernay.
Yes, the Duvernay, Canada’s answer to the booming Texas horizontal oil play called the Eagle Ford. In recent history there have been two very noteworthy transactions involving the Duvernay acreage. First, Chevron bought a private Duvernay-focused company which owned 67,900 acres for $1 billion. That is $14,728 per acre. Second, Encana signed a joint venture on 225,000 acres of the Duvernay with Petrochina for $2.2 billion, which equates to $9,778 per acre.
I’m not suggesting for a minute that we should value High North using these prices. In fact, I refuse to even multiply High North’s 125,000 acres by either of those per-acre transaction figures because I don’t want to see how big the number is. It would be too tempting. However, what I am willing to say is that if there is decent upside in High North’s share price just for the Montney acreage that Long Run’s production has “de-risked,” then also having this Duvernay potential available on top of that is an attractive proposition.
The value of the Montney should make High North a good investment at current prices, which is one of the reasons I own the shares. If the Duvernay hits as well, then we are really onto something. High North is currently in the process of drilling its first two Montney wells. If these wells demonstrate production rates similar to what Long Run has experienced, then this company could be off to the races.