By Roger Choudhury and the Investment Underground editors We searched for exploration and production (E&P) companies with undervalued natural gas reserves. We think Exxon Mobil's (XOM) purchase of XTO, in addition to the flurry of deals completed by Chesapeake (CHK) has put a floor on valuations, going forward. The best deals around include the lowest cost producer in Marcellus, Range Resources (RRC), and Wyoming, Ultra Petroleum (UPL).
We think mixed oil and gas players in the deepwater, such as ATP Oil and Gas (ATPG), are also likely to fare well, given that there remains plenty of commodity price upside from here. GMX Resources (GMXR) and SandRidge (SD) tipped their hats toward oil in the near-term by introducing themselves to significant oil plays. The names we found are below.
GMX Resources (GMXR) announced on January 28 that it would buy 67,724 net acres of horizontal oil resources within the core development areas of the Bakken / Sanish-Three Forks Formation in the Williston Basin (Bakken) and the Niobrara Formation in the Denver Julesburg (DJ) Basin. The 67,724 net acres is includes 26,087 net acres in the Williston Basin, North Dakota and Montana targeting the Bakken/Sanish – Three Forks Formation and approximately 41,637 acres in the DJ Basin in Wyoming targeting the Niobrara Formation. In addition, this provides 342 additional horizontal drilling locations. The purchase is to be made in $1.8 million in cash and up to 2.7 million shares of stock.
The Company is a smaller operator with around 42,000 net acres in the Haynesville shale in the eastern Texas counties of Harrison, Marion and Panola. At December 31, 2010, the Company‘s total proved reserves are 319.3 BCFE, which a decrease of ~10% from 355.3 BCFE, a year back. However, the Company also announced that year-end 2010 Haynesville/Bossier reserves were 234.1 BCFE, an increase of 208.2 BCFE compared to year-end 2009. This is an increase of 804%. For Cotton Valley Sand, Travis Peak, and other non Haynesville/Bossier reserves, on December 31, 2010, they stood at 85.2 BCFE, which is a decrease of 244.1 BCFE compared to reserves of 329.4 BCFE at December 31, 2009.
Last year, GMXR shifted from vertical drilling in the Cotton Valley Sands to horizontal drilling in the Haynesville Shale. As a result, the company had to remove substantial proved undeveloped reserves from its books on the Cotton Valley due to its switch to the Haynesville Shale below it, cratering the share price. We think a buyout would come in around $700 million on the low end or $12 per share given GMX acreage and infrastructure at current gas prices. Devon (DVN), legacy XTO (XOM), Apache (APA) and EOG Resources (EOG) all have acreage in East Texas and are looking for acquisitions opportunistically. GMXR acreage, with no impending lease expirations and the ability to place well heads near pipelines due to its Cotton Valley experience, is a potential target. You can read more of our explanation of why it’s a buyout target here.
SandRidge (SD) announced on April 4 last year that it will acquire Arena Resources for $40 per share or $6.2 billion. This represented a 17% premium for Arena shareholders. (more)
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