SPYGLASS RESOURCES CORP (SGL): The Bargain Hunters Should Check Out This Oil and Gas Producer

Published on June 6, 2013 at 1:19 pm by The Motley Fool in News

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 17,340 boepd (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 and $9.74/boe 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 (MMBoe)	Per boepd	Per boe
PVA	~1,4 billion	19,000	125.5	~$73,700	~$11.16
SM	~5,7 billion	115,000	293	~$49,600	~$19.45
RTK	~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.

3)SPYGLASS RESOURCES (TSX:SGL) has secured a $400 million senior credit facility and has approximately 30% undrawn upon closing. This gives the company sufficient breathing room for 2013 to execute its drilling program.

Additional kickers

Here is more convincing information that can make you gravitate to the bullish side:

1) SPYGLASS RESOURCES (TSX:SGL) is led by Tom Buchanan who has a track record of creating value. Apart from his recent short-lived career in Charger Energy, he founded Founders Energy in 1993 from an initial investment of $700,000. Founders Energy evolved into Provident Energy Trust and hit a peak rate of 35,000 boepd a couple of years ago. Provident’s upstream business was divested, and the remaining mid-stream business was acquired by Pembina Pipeline Corp. for $3.8 billion in 2012.

2) The new entity offers a balanced commodity profile to help mitigate the risk associated with any one commodity. The company estimates to exit 2013 at 18,000 boepd (52% oil and liquids) up from 17,340 boepd (49% oil and liquids) in Q1 2013.

3) Spyglass has Net Debt and Working Capital at $293 million and plans to dispose of certain non-core properties within the combined asset base to further enhance its financial flexibility and sustainability of the dividend model. Spyglass targets a decent ratio Net Debt to Exit Cash Flow (annualized) of 2.1x by year end.

4) The company has an active hedging program to protect against fluctuations in the prices of oil and gas. It has 32% of its estimated crude oil production hedged at an average floor price of $94.84/bbl and 41% of estimated gas production at an average floor price of $3.02/GJ.

5) SPYGLASS RESOURCES (TSX:SGL) owns 645,000 net acres undeveloped land which can sustain more than 20 years of exploration and drilling development. The capital program will be primarily focused on low risk, light oil development opportunities intended to offset the company’s natural production declines and sustain the monthly cash dividend to shareholders. Most of the CapEx will be allocated to development drilling. By the end of 2013, the company plans to drill 18 to 20 net wells focused primarily on Southern Alberta and the Viking light oil play at Halkirk-Provost.

Foolish Bottom Line

There are some inherent risks of investing in the oil and gas industry. This is a commodity-related sector which is sensitive to any significant deterioration in the natural gas and oil prices or macro outlook. However, I believe that the worst are behind us, and I don’t expect AECO (Alberta natural gas price) to drop below $3/Mcf and Edmonton Light to plunge and remain below $85 for a long period of time. I believe the bottom is in, and a first position in Spyglass at the current levels is a good entry point with a favorable risk reward profile.

Nathan Kirykos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article The Bargain Hunters Should Check Out This Oil and Gas Producer originally appeared on Fool.com.

NYSE:SM NYSE:PVA Sm Energy Co (SM)Penn Virginia Corp (PVA)

SPYGLASS RESOURCES CORP (SGL): The Bargain Hunters Should Check Out This Oil and Gas Producer

Published on June 6, 2013 at 1:19 pm by The Motley Fool in News

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