BXE - Bellatrix Explorations

[Guest notorious546]

CEO this morning said the company intends on reducing debt load below 2x FCF.  Cap ex will be down significantly as the firm completes construction of gas plant which will give them a lot of future capacity.  Also found it interesting in the 10Q:

 

At March 31, 2015, Bellatrix had approximately $1.70 billion in tax pools available for deduction against future income.

 

debt to cash flow NOT debt to free cash flow. their debt to cash flow is about 5 times on consenus numbers currently. the tax pools are common for the industry. If you look at any of their peers it's roughly the same magnitude.

[kab60]

There was some insider buying at the end of April: https://canadianinsider.com/company?menu_tickersearch=Bellatrix%20Exploration%20Ltd.%20%7C%20BXE

 

Daniel Lewis is not an insider. He is part of Orange Capital, an activist investor pressing for change.

Yes, my bad, just noticed. Disclosure: no position.

[Guest notorious546]

Only a 100 million or so left on that bank line. Makes you wonder if they will raise equity or something along that. Wouldn't be completely unexpected given how many other oil and gas firms have raised capital this year.

[bbarberayr]

Debt raise today:

 

http://finance.yahoo.com/news/bellatrix-announces-proposed-us-250-115200148.html

[Guest notorious546]

some additional buying from orange capital yesterday.

 

https://canadianinsider.com/company?ticker=BXE

 

[Guest notorious546]

a bit late but on May 26th, the company's deep cut gas plant came online about 1 month ahead of schedule and ~3% within estimated costs.

 

Completion of the Bellatrix Alder Flats Plant is a significant milestone for Bellatrix because it is expected to provide improved operational control and enhanced reliability of processing.  Bellatrix intends to deliver natural gas volumes to the Plant sourced from both behind pipe volumes that are currently constrained from area processing within the greater Ferrier region, and from operated natural gas volumes currently processed through third party facilities.  Bellatrix expects the enhanced natural gas liquids recovery capabilities of the Plant will provide an approximately 14% uplift in revenue from the same gas stream currently processed through third party plants

 

http://stream1.newswire.ca/media/2015/05/26/20150526_C6431_PDF_EN_16994.pdf

[Guest notorious546]

For E&P's there are basically three key variables you need to focus on. 1) Production volumes (widgets produced) 2) cash netbacks per boe (earnings per widget) 3) ability to fund/grow # of units of production (balance sheet strength to grow widget capabilities)

 

For my most recent valuation I’ve used a range of cash flow netbacks from $5/barrel up to $12.50/barrel, then I multiply those by expected volumes in 2017 using various growth rates (2.5% to 5%) then I divide by fully diluted share count (assume that they won’t outspend cash flow, seems fair given debt levels vs cash flow for this year are about 4.5x vs industry Avg around 2.0x). that spit’s out an estimated cfps for 2017, then again I apply a range of multiples on the cash flow and discount for three years at 20%  to get a present value (highlighted in blue).

 

ultimately, i don't really see how utilizing conservative assumptions arrives at an attractive valuation. the high debt levels, and capital intensive nature of the business keeps me on the sidelines.

[jawn619]

For E&P's there are basically three key variables you need to focus on. 1) Production volumes (widgets produced) 2) cash netbacks per boe (earnings per widget) 3) ability to fund/grow # of units of production (balance sheet strength to grow widget capabilities)

 

For my most recent valuation I’ve used a range of cash flow netbacks from $5/barrel up to $12.50/barrel, then I multiply those by expected volumes in 2017 using various growth rates (2.5% to 5%) then I divide by fully diluted share count (assume that they won’t outspend cash flow, seems fair given debt levels vs cash flow for this year are about 4.5x vs industry Avg around 2.0x). that spit’s out an estimated cfps for 2017, then again I apply a range of multiples on the cash flow and discount for three years at 20%  to get a present value (highlighted in blue).

 

ultimately, i don't really see how utilizing conservative assumptions arrives at an attractive valuation. the high debt levels, and capital intensive nature of the business keeps me on the sidelines.

 

Hey Notorious thanks so much for the info. Humor me for a second and let's say natural gas prices go to back to above $4 or 5 dollars. I saw from last year that their BOE was around 40-50 and their netback was 25-35. What price would you get at operating netback of 30?

[Guest notorious546]

I think in excess of 6 dollars per share, with today's cost structure.

 

 

[Wilson-TPC]

@jawn619,

 

Under a 4-5 canadian nat gas pricing scenario, we get a pv-10 of around 12.

 

Using a normalized cash flow per share multiple of 6, we get 9+.

 

Email me if you would like to see the full report on this.

[Guest notorious546]

@jawn619,

 

Under a 4-5 Canadian nat gas pricing scenario, we get a pv-10 of around 12.

 

Using a normalized cash flow per share multiple of 6, we get 9+.

 

Email me if you would like to see the full report on this.

 

Personally, I think the question develops into, what makes Bellatrix's asset base, strategy or operations particularly unique vs other E&P's? It's almost quite certain that many individual E&P's would benefit from the higher pricing scenario you have outlined.

 

What makes you not like companies like advantage oil and gas or peyto exploration? both of these companies are known to have industry leading cost structures? Peyto has midstream capacity in excess of it's own production volumes allowing it to process other parties natural gas and earn midstream fees. Advantage's glacier assets are by far the lowest operating cost in the Western Canadian Sedimentary Basin. debt levels and volume look quite favorable in my view.

 

 

[jawn619]

@jawn619,

 

Under a 4-5 Canadian nat gas pricing scenario, we get a pv-10 of around 12.

 

Using a normalized cash flow per share multiple of 6, we get 9+.

 

Email me if you would like to see the full report on this.

 

Personally, I think the question develops into, what makes Bellatrix's asset base, strategy or operations particularly unique vs other E&P's? It's almost quite certain that many individual E&P's would benefit from the higher pricing scenario you have outlined.

 

What makes you not like companies like advantage oil and gas or peyto exploration? both of these companies are known to have industry leading cost structures? Peyto has midstream capacity in excess of it's own production volumes allowing it to process other parties natural gas and earn midstream fees. Advantage's glacier assets are by far the lowest operating cost in the Western Canadian Sedimentary Basin. debt levels and volume look quite favorable in my view.

 

Bellatrix has been able to increase its BOE/day by an insane amount in the last couple of years. They also don't seem like they've been drilling excessively, so it "seems" like the land/projects they are pursuing have a higher ROIC. Maybe management is doing the right things, or maybe they are just lucky and sitting on a higher grade land. Probably a mix of both.

[Wilson-TPC]

I've attached the excel model for viewing pleasures.

Bellatrix_Exploration_-_Valuation.xlsx

[bbarberayr]

Thanks for posting this, a lot of good info here.

 

Sorry if you've answered this before, but where do you get your data for your spreadsheet (production projections, commodity prices, etc)? 

 

 

[Wilson-TPC]

Lots of the assumptions we used use both historical numbers through annual reports and manager projections. Future commodity pricing is based off the STRIP.

 

 

[ABH]

Thanks for sharing. I've been long BXE since February so always interesting to see what other peoples' views are.

I think some of the assumptions might be a little bit on the rosy side (prices, well succession), but the good news is that even after beating up on them quite a bit, the upside still appears to outweigh the risk (arguably rather conservative assumptions still yield > 50% upside).

[Guest notorious546]

Q2/15 came with a few surprises for the bulls.

 

Company lowered spending plans (-20%) for the year and production guidance (-6%). Net debt up about 20 million sequentially to 715 million. net debt to cash flow ~6.0x. let's see how long they last before the covenants get revised further/tripped!

 

[Wilson-TPC]

Q2/15 came with a few surprises for the bulls.

 

Company lowered spending plans (-20%) for the year and production guidance (-6%). Net debt up about 20 million sequentially to 715 million. net debt to cash flow ~6.0x. let's see how long they last before the covenants get revised further/tripped!

 

Debt convenants got revised. Going forward, all capex spending will be within cash flow. We have had meaningful contact with the management, Orange Capital, and Baupost with regards to this subject going forward.

 

The blueprint for BXE going forward will follow something similar to that of Advantage. BXE will selloff noncore assets and possibly the Cardium to become a pure play. Once done so, it will primarily focus on drilling just in the Spirit River formation. This will allow them to cut costs from 7.99/BOE to roughly 5/BOE.

 

Spirit River wells are also much more weighted in Nat gas at 80% and 20% liquids. So the revenue mix going forward will shift more towards Nat gas as wells in Cardium decline while bringing on new Spirit River wells.

 

Finally, at current EBITDA projections of roughly 140-150 mil, EV/EBITDA will be roughly 4.6-5x. The management said in the conference call that no further growth will be initiated unless commodity prices recover, and if so, they will focus on paying down debt first. Bankers seem to be very lenient with BXE as current credit facility were pay down after debt issuance and remains very supportive of BXE during this downturn.

 

The negatives I think is that the market still looks at BXE as a Cardium driller which is more oil weighted in revenue. There's the debt issue which the first glance will be really bad. And I think a lot of people are watching the way this is trading and wondering if there's a potential restructuring in store.

 

I think the negatives are warranted but I believe that my team has more info on this than most uninformed sellers and feel that there's a distressed value attached to the assets they have roughly around 4 USD per share.

 

Peyto's CEO Darren Gee recently told me during a private conversation that there's a good possibility for BXE to move in the direction of Advantage. The tone of the release and the call indicates this is the transitional quarter towards that goal as the company will not be pursuing growth at any costs (expensive JVs).

 

 

[jawn619]

Q2/15 came with a few surprises for the bulls.

 

Company lowered spending plans (-20%) for the year and production guidance (-6%). Net debt up about 20 million sequentially to 715 million. net debt to cash flow ~6.0x. let's see how long they last before the covenants get revised further/tripped!

 

Debt convenants got revised. Going forward, all capex spending will be within cash flow. We have had meaningful contact with the management, Orange Capital, and Baupost with regards to this subject going forward.

 

The blueprint for BXE going forward will follow something similar to that of Advantage. BXE will selloff noncore assets and possibly the Cardium to become a pure play. Once done so, it will primarily focus on drilling just in the Spirit River formation. This will allow them to cut costs from 7.99/BOE to roughly 5/BOE.

 

Spirit River wells are also much more weighted in Nat gas at 80% and 20% liquids. So the revenue mix going forward will shift more towards Nat gas as wells in Cardium decline while bringing on new Spirit River wells.

 

Finally, at current EBITDA projections of roughly 140-150 mil, EV/EBITDA will be roughly 4.6-5x. The management said in the conference call that no further growth will be initiated unless commodity prices recover, and if so, they will focus on paying down debt first. Bankers seem to be very lenient with BXE as current credit facility were pay down after debt issuance and remains very supportive of BXE during this downturn.

 

The negatives I think is that the market still looks at BXE as a Cardium driller which is more oil weighted in revenue. There's the debt issue which the first glance will be really bad. And I think a lot of people are watching the way this is trading and wondering if there's a potential restructuring in store.

 

I think the negatives are warranted but I believe that my team has more info on this than most uninformed sellers and feel that there's a distressed value attached to the assets they have roughly around 4 USD per share.

 

Peyto's CEO Darren Gee recently told me during a private conversation that there's a good possibility for BXE to move in the direction of Advantage. The tone of the release and the call indicates this is the transitional quarter towards that goal as the company will not be pursuing growth at any costs (expensive JVs).

 

+1. Thanks or the value add Wilson!

[tede02]

I ask myself with respect to both BXE and CHK, who is selling at these prices?  What do shareholders expect with commodity prices being so weak?  Logically they must believe commodity prices are going lower or will stay depressed for an extended period i guess.

[Guest notorious546]

Q2/15 came with a few surprises for the bulls.

 

Company lowered spending plans (-20%) for the year and production guidance (-6%). Net debt up about 20 million sequentially to 715 million. net debt to cash flow ~6.0x. let's see how long they last before the covenants get revised further/tripped!

 

Debt convenants got revised. Going forward, all capex spending will be within cash flow. We have had meaningful contact with the management, Orange Capital, and Baupost with regards to this subject going forward.

 

The blueprint for BXE going forward will follow something similar to that of Advantage. BXE will selloff noncore assets and possibly the Cardium to become a pure play. Once done so, it will primarily focus on drilling just in the Spirit River formation. This will allow them to cut costs from 7.99/BOE to roughly 5/BOE.

 

Spirit River wells are also much more weighted in Nat gas at 80% and 20% liquids. So the revenue mix going forward will shift more towards Nat gas as wells in Cardium decline while bringing on new Spirit River wells.

 

Finally, at current EBITDA projections of roughly 140-150 mil, EV/EBITDA will be roughly 4.6-5x. The management said in the conference call that no further growth will be initiated unless commodity prices recover, and if so, they will focus on paying down debt first. Bankers seem to be very lenient with BXE as current credit facility were pay down after debt issuance and remains very supportive of BXE during this downturn.

 

The negatives I think is that the market still looks at BXE as a Cardium driller which is more oil weighted in revenue. There's the debt issue which the first glance will be really bad. And I think a lot of people are watching the way this is trading and wondering if there's a potential restructuring in store.

 

I think the negatives are warranted but I believe that my team has more info on this than most uninformed sellers and feel that there's a distressed value attached to the assets they have roughly around 4 USD per share.

 

Peyto's CEO Darren Gee recently told me during a private conversation that there's a good possibility for BXE to move in the direction of Advantage. The tone of the release and the call indicates this is the transitional quarter towards that goal as the company will not be pursuing growth at any costs (expensive JVs).

 

Just look at the insider purchases, clearly management doesn't believe that the shares are undervalued. Could you perhaps outline why? or what management is seeing?

 

https://canadianinsider.com/company?menu_tickersearch=BXE%20%7C%20Bellatrix%20Exploration

 

Advantage's asset base is not comparable. Those assets are known to have the lowest operating costs throughout the entire WCSB and have very strong F&D costs and attractive capital efficiencies.

 

My question to you would be, why do you prefer this over peyto or advantage? it appears you are familiar with both of those as well.

[Wilson-TPC]

Q2/15 came with a few surprises for the bulls.

 

Company lowered spending plans (-20%) for the year and production guidance (-6%). Net debt up about 20 million sequentially to 715 million. net debt to cash flow ~6.0x. let's see how long they last before the covenants get revised further/tripped!

 

Debt convenants got revised. Going forward, all capex spending will be within cash flow. We have had meaningful contact with the management, Orange Capital, and Baupost with regards to this subject going forward.

 

The blueprint for BXE going forward will follow something similar to that of Advantage. BXE will selloff noncore assets and possibly the Cardium to become a pure play. Once done so, it will primarily focus on drilling just in the Spirit River formation. This will allow them to cut costs from 7.99/BOE to roughly 5/BOE.

 

Spirit River wells are also much more weighted in Nat gas at 80% and 20% liquids. So the revenue mix going forward will shift more towards Nat gas as wells in Cardium decline while bringing on new Spirit River wells.

 

Finally, at current EBITDA projections of roughly 140-150 mil, EV/EBITDA will be roughly 4.6-5x. The management said in the conference call that no further growth will be initiated unless commodity prices recover, and if so, they will focus on paying down debt first. Bankers seem to be very lenient with BXE as current credit facility were pay down after debt issuance and remains very supportive of BXE during this downturn.

 

The negatives I think is that the market still looks at BXE as a Cardium driller which is more oil weighted in revenue. There's the debt issue which the first glance will be really bad. And I think a lot of people are watching the way this is trading and wondering if there's a potential restructuring in store.

 

I think the negatives are warranted but I believe that my team has more info on this than most uninformed sellers and feel that there's a distressed value attached to the assets they have roughly around 4 USD per share.

 

Peyto's CEO Darren Gee recently told me during a private conversation that there's a good possibility for BXE to move in the direction of Advantage. The tone of the release and the call indicates this is the transitional quarter towards that goal as the company will not be pursuing growth at any costs (expensive JVs).

 

Just look at the insider purchases, clearly management doesn't believe that the shares are undervalued. Could you perhaps outline why? or what management is seeing?

 

https://canadianinsider.com/company?menu_tickersearch=BXE%20%7C%20Bellatrix%20Exploration

 

Advantage's asset base is not comparable. Those assets are known to have the lowest operating costs throughout the entire WCSB and have very strong F&D costs and attractive capital efficiencies.

 

My question to you would be, why do you prefer this over peyto or advantage? it appears you are familiar with both of those as well.

 

I don't think the word "known" is associated with the Montney. Advantage became that lean because it cut A LOT of cost. Take a look at the company's history, there's no such thing as a lean asset base unless you make it lean.

 

Spirit River economics allows a similar BOE cost. Look at Peyto's Spirit River operations, it's still low, yet they operate in Spirit River. So I don't think you are referencing the right reason as to why Advantage has such a low cost basis. They own their plants which makes a big difference, they have no JV financing which substantially decreases cost, and they have a lean G&A.

 

Peyto is awesome. I wouldn't want to own Advantage. I think BXE could become the next Peyto. My discussions with Darren illustrates that Peyto's strategy isn't hard to replicate, but requires a long term vision. My discussion with Orange Capital indicates similar objectives, to grow Bellatrix into a Peyto. Selloff all nonecore assets and focus on Spirit River.

 

The management buying question is a good one and one we haven't been able to get our heads around. They already get paid a lot in equity incentives, and from my discussions with them, they don't seem very savy as investors. The addition of Steve Toth is great for the BXE team as it gives them more capital markets background as oppose to only being focused on operations.

[kevin4u2]

I ask myself with respect to both BXE and CHK, who is selling at these prices?  What do shareholders expect with commodity prices being so weak?  Logically they must believe commodity prices are going lower or will stay depressed for an extended period i guess.

 

Perhaps some historical perspective.

 

http://scottgrannis.blogspot.ca/2015/07/commodity-prices-in-perspective.html

[Guest notorious546]

 

I don't think the word "known" is associated with the Montney. Advantage became that lean because it cut A LOT of cost. Take a look at the company's history, there's no such thing as a lean asset base unless you make it lean.

 

Spirit River economics allows a similar BOE cost. Look at Peyto's Spirit River operations, it's still low, yet they operate in Spirit River. So I don't think you are referencing the right reason as to why Advantage has such a low cost basis. They own their plants which makes a big difference, they have no JV financing which substantially decreases cost, and they have a lean G&A.

 

Peyto is awesome. I wouldn't want to own Advantage. I think BXE could become the next Peyto. My discussions with Darren illustrates that Peyto's strategy isn't hard to replicate, but requires a long term vision. My discussion with Orange Capital indicates similar objectives, to grow Bellatrix into a Peyto. Selloff all nonecore assets and focus on Spirit River.

 

The management buying question is a good one and one we haven't been able to get our heads around. They already get paid a lot in equity incentives, and from my discussions with them, they don't seem very savy as investors. The addition of Steve Toth is great for the BXE team as it gives them more capital markets background as oppose to only being focused on operations.

 

I think you would need very good capital allocators for a transformation to occur. If they can't allocate capital well to shares that are arguably VERY underpriced how do you expect them to allocate capital well from a corporate perspective? i think the shift in focus to spirit river/falher wells is welcome and definitely highlights they are improving on this front.

 

Not sure if you remember but last december, the company sold a minority interest in their deep cut plant. This is something Peyto has never done to my knowledge. They own, operate and processing just about all of their volumes. I believe their investor presentation highlights >99% of their volumes are processed themselves. If you looked far back enough in Peyto filings, you will see that the company's used to report "other income/gathering and processing revenues," an practice they have since stopped as i believe the company isn't looking to advertise this element of their business.Why advertise the moat? Also note that PEY's operating and G&A costs are net of these revenues earned on processing so they will almost look better than anyone's costs out there. BXE's financials report this separately, so to compare the numbers appropriately adjustments need to be made.

 

PEY is almost more midstream than an E&P!

 

Steve is definitely a great addition. i agree.

 

[Wilson-TPC]

 

I don't think the word "known" is associated with the Montney. Advantage became that lean because it cut A LOT of cost. Take a look at the company's history, there's no such thing as a lean asset base unless you make it lean.

 

Spirit River economics allows a similar BOE cost. Look at Peyto's Spirit River operations, it's still low, yet they operate in Spirit River. So I don't think you are referencing the right reason as to why Advantage has such a low cost basis. They own their plants which makes a big difference, they have no JV financing which substantially decreases cost, and they have a lean G&A.

 

Peyto is awesome. I wouldn't want to own Advantage. I think BXE could become the next Peyto. My discussions with Darren illustrates that Peyto's strategy isn't hard to replicate, but requires a long term vision. My discussion with Orange Capital indicates similar objectives, to grow Bellatrix into a Peyto. Selloff all nonecore assets and focus on Spirit River.

 

The management buying question is a good one and one we haven't been able to get our heads around. They already get paid a lot in equity incentives, and from my discussions with them, they don't seem very savy as investors. The addition of Steve Toth is great for the BXE team as it gives them more capital markets background as oppose to only being focused on operations.

 

I think you would need very good capital allocators for a transformation to occur. If they can't allocate capital well to shares that are arguably VERY underpriced how do you expect them to allocate capital well from a corporate perspective? i think the shift in focus to spirit river/falher wells is welcome and definitely highlights they are improving on this front.

 

Not sure if you remember but last december, the company sold a minority interest in their deep cut plant. This is something Peyto has never done to my knowledge. They own, operate and processing just about all of their volumes. I believe their investor presentation highlights >99% of their volumes are processed themselves. If you looked far back enough in Peyto filings, you will see that the company's used to report "other income/gathering and processing revenues," an practice they have since stopped as i believe the company isn't looking to advertise this element of their business.Why advertise the moat? Also note that PEY's operating and G&A costs are net of these revenues earned on processing so they will almost look better than anyone's costs out there. BXE's financials report this separately, so to compare the numbers appropriately adjustments need to be made.

 

PEY is almost more midstream than an E&P!

 

Steve is definitely a great addition. i agree.

 

Great point on Peyto's accounting reporting. We found this out today with our discussions with a veteran industry expert.

 

Capital allocation in an E&P company boils down to two things:

 

1. Having the right asset base to do it.

 

2. Having the right mentality/guidance.

 

Our discussions with management, competitors, and investors indicate to us that the Spirit River is a great economic play. Check mark on one.

 

The hard part is having the right mentality. Darren alluded to us in our conversation that the right time to invest is actually when commodity prices are down as opposed to being up. We agree, and we think that Orange Capital agrees. There's been extensive back and forth between these two parties, and our talks indicate that is the direction Orange will push going forward. We can't say with 100% certainty and we can't quote anyone, but our due diligence indicates this.

 

With respect to buying shares, I received a bit more clarity today. Management has to use 20% of their gross pay and invest it in the company. After taxes, they are only receiving 50% of gross pay. Now, if I was the CEO of BXE, I would be buying like mad men. But of course, I like to think i'm a decent capital allocator.

 

I think the markets concern with regards to BXE is warranted to an extent. The company does have quite a bit of debt. But the key concern is I think the market doesn't like the BXE management team. They missed production numbers for the last 6 quarters... That's not exactly good guidance, and their historical capital allocation plans blows. So it's easy to understand why when we say that there's a transformation going on, it's hard to believe us. And we understand.

 

But given that we've spent so much time interacting with the many stakeholders involved, our reasoning leads us to believe that there's a different mindset in place, and that it will be for the benefit of shareholders.

 

Can they become Peyto? I don't know, but if the company moves in that direction, there's at least the probability of it happening. So I wouldn't discount that out. Activists can make a difference.

 

P.s. If for some strange odd reason Darren Gee decided to run BXE, the stock price i think would double or triple in a day... Just a few thoughts... (always nice to daydream)