Today we learn that Statoil has offered 4.4 billion for Brigham Exploration, a company with holdings in the US Bakken. Using a number of interesting methods of comparing the Brigham Exploration with Petrobakken, Devon Shire concludes that Petrobakken could be worth as much as 300% of its current market price (at close on Oct 17, $8). This kind of comparison is very interesting, because, as I reminded readers in a previous post about Petrobakken, the true value of an junior or intermediate oil company isn’t so much its market capital, but by how much an industry insider such as Sinopec or Statoil is willing to pay. Devon Shire writes:
I don’t know exactly what Petrobakken is worth. But common sense tells me that an acquirer would be willing to pay a lot more than the current share price.
Petrobakken is just like Brigham. They are both companies that have years and years of drilling locations ahead of them and both companies sit on vast amounts of oil. That is why the multiples of flowing barrel of production and EBITA being paid for Brigham are so high.
You can’t value these companies using the same approach as you do for a conventional oil and gas producer. Much of the value is in the huge land positions that these companies have in unconventional resource plays. And much of that doesn’t show up in proved reserves because most of the undeveloped acreage isn’t booked as proved reserves.
It isn’t just Petrobakken that is massively undervalued right now. The entire sector in Canada is. Pick an unconventional producer and I almost guarantee it is trading at 50% or less than what an acquirer would pay.
All it takes is some common sense to see it. And some patience to wait for Mr. Market to figure it out.