Editor’s Note: This article has been amended to better reflect Spyglass Resources’ dividend payment.
According to the latest news from the energy patch, Pace Oil & Gas, AvenEx Energy, and Charger Energy merged
in March 2013, forming SPYGLASS RESOURCES (TSX:SGL)
. Spyglass is an intermediate oil and gas producer with a balanced production mix. Its assets are distributed fairly evenly across various oil producing areas of Alberta, providing diverse development opportunities. With so many targets, Spyglass can select the top quality prospects in the most promising regions in order to achieve a decent return on capital.
Let’s take a closer look under the hood to check out whether this new stock has the potential to offer sizable capital gains from the current levels to investors.
The investment glasses and Spyglass
Actually, it doesn’t require special investment glasses to confirm the gross undervaluation of SPYGLASS RESOURCES (TSX:SGL) at current levels. Here is why:
1) In Q1 2013, Spyglass produced
(49% oil and liquids) and held proved reserves of 57.5 MMboe (51% oil and liquids). With Enterprise Value of ~$560 million, Spyglass trades at $32,300/boepd
of proved reserves.
Most oil and gas producers with a balanced production mix (approximately 50%-55% oil and liquids) and producing areas in North America, carry much higher valuations than SPYGLASS RESOURCES (TSX:SGL). Here are some of them:
|Company ||EV ||Production (boepd) ||Proved Reserves |
|Per boepd ||Per boe |
|~1,4 billion ||19,000 ||125.5 ||~$73,700 ||~$11.16 |
|~5,7 billion ||115,000 ||293 ||~$49,600 ||~$19.45 |
|~220 million ||3,603 ||17.05 ||~$61,100 ||~$12.9 |
After the recent deal
with Magnum Hunter, Penn Virginia Corporation (NYSE:PVA)
has expanded significantly its acreage in the Eagle Ford shale in Texas which is its primary operating area. Penn Virginia acquired oil-weighted producing assets of 3,200 boepd
and 12 MMboe of proved
reserves. Penn Virginia also owns properties in the Mid-Continent, Mississippi, and the Marcellus Shale.
Artek Exploration Ltd (TSX:RTK)
has its core operating areas (128,000 net acres) in the Peace River Arch and Deep Basin areas of Alberta and British Columbia, targeting primarily the liquids-rich Montney and Doig formations. It is also worth noting that Artek has one of the highest rates of insider ownership in the energy patch. The insiders own
29% of the company.
SM Energy Co. (NYSE:SM) has a diversified portfolio of assets extending from the Williston Basin of North Dakota to the Basins of Texas, targeting primarily the Bakken/Three Forks, the Eagle Ford, and the Mississippian lime formations.
It is worth noting that Moody’s upgraded recently SM Energy’s Corporate Family Rating (CFR) to Ba2 from Ba3. Moody’s also upgraded the company’s existing senior notes to Ba3 from B1. Several analysts have also upgraded shares of SM Energy lately, raising their price targets and their ratings on the stock.
2) SPYGLASS RESOURCES (TSX:SGL) is a dividend paying entity with a monthly dividend of $0.0225 per share, resulting in a hefty annual yield of 12%. Based on the outlook for the oil and gas prices, I am not concerned about Spyglass’ dividend sustainability. Spyglass targets a basic dividend payout ratio of 25% to 30% and an all-in payout ratio (including capital expenditures) of 90% to 100% of the projected annual cash flow which is estimated at ~$105 million for 2013. After all, the targeted payout ratio is reasonable and achievable.