BXE - Bellatrix Explorations

[influx]

Page 18 of the BXE's August Presentation provides a list of items included in half-cycle and full-cycle F&D costs.

 

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I read sometime ago, that presentation are not necessarily reliable and safe source for data/numbers because it is "unofficial" document - for example it is not filled with sedar. Or am I mistaken and it is ok to read/look and use the data in the corp presentations?

[yadayada]

So all capex? Is not completely clear to me. You would say that besides assets, there are other cash costs associated with installing those assets? And operating those rigs?

 

Also wilson, why not go off on insider purchases? It seems to me that those insiders with extensive knowledge of geology almost always know it better then us? For that reason im only sticking to a basket aproach with these things and go by insiders, developed reserves/last year's production (bigger the better), profit margins and debt levels/cashflow.

 

Final note is, PEY is apparantly amazing, but how much of that is luck? The fact that they are so head and shoulders above everyone else in costs makes me think it is a lot of luck as well (with skill). And why do people love that thing anyway. In 2005 the share price was 30$ now it is below 30$... I don't see the amazing returns there. ]

 

edit: One final thing, hate to get offtrack here, but as for TOU it seems they are lowering operating costs this year. Here is the reason:

On a per-boe basis, the costs decreased from $5.24/boe for the second quarter of 2014 to $4.10/boe in the

second quarter of 2015. For the six months ended June 30, 2015, operating costs were $4.40/boe, down from

$5.09/boe in the prior year. The lower per-unit operating expense is mainly due to the decrease in third-party

processing, gathering and compression fees, which were approximately $0.78/boe or 19% of total operating costs

in the second quarter of 2015 compared to $1.51/boe or 29% of total operating costs in the same period of 2014.

The Company’s significant investments in processing facilities in 2014 have reduced the volume of gas flowing to

third-party facilities, leading to the reduction in operating expenses on a per-boe basis.

 

That might be why insiders like that stock so much. Costs coming down.

[Wilson-TPC]

So all capex? Is not completely clear to me. You would say that besides assets, there are other cash costs associated with installing those assets? And operating those rigs?

 

Also wilson, why not go off on insider purchases? It seems to me that those insiders with extensive knowledge of geology almost always know it better then us? For that reason im only sticking to a basket aproach with these things and go by insiders, developed reserves/last year's production (bigger the better), profit margins and debt levels/cashflow.

 

Final note is, PEY is apparantly amazing, but how much of that is luck? The fact that they are so head and shoulders above everyone else in costs makes me think it is a lot of luck as well (with skill). And why do people love that thing anyway. In 2005 the share price was 30$ now it is below 30$... I don't see the amazing returns there. ]

 

edit: One final thing, hate to get offtrack here, but as for TOU it seems they are lowering operating costs this year. Here is the reason:

On a per-boe basis, the costs decreased from $5.24/boe for the second quarter of 2014 to $4.10/boe in the

second quarter of 2015. For the six months ended June 30, 2015, operating costs were $4.40/boe, down from

$5.09/boe in the prior year. The lower per-unit operating expense is mainly due to the decrease in third-party

processing, gathering and compression fees, which were approximately $0.78/boe or 19% of total operating costs

in the second quarter of 2015 compared to $1.51/boe or 29% of total operating costs in the same period of 2014.

The Company’s significant investments in processing facilities in 2014 have reduced the volume of gas flowing to

third-party facilities, leading to the reduction in operating expenses on a per-boe basis.

 

That might be why insiders like that stock so much. Costs coming down.

 

Okay, lots of questions.

 

It's all capex for the first question.

 

Operating expenses do not need to go up if you add more reserve, please refer to Peyto.

 

BXE is currently the cheapest on every single valuation metric you can possibly use, there's a reason attached to it.

 

Canada has never had activists get involved, there's a discount for just the activist getting involved. Management has historically done value destroying capital allocations via ill timed share issuances, ill timed acquisitions, and by providing bad guidance.

 

The discount is warranted, but not this much.

 

Peyto has done very well, share split and dividend reinvestments won't show up on that chart. So take that into perspective.

 

Insider buys are good gauges, but not really the key. There could be a lot of personal reasons as to why they aren't buying.

 

I think one thing everyone should REALLY focus on is the opex/boe. Peyto is inherently low and that's not due to luck. The Western Alberta Deep Basin provides predictable permeability and return profiles. Unlike U.S. shale plays, none of the plays in the deep basin has water issues, hence the opex/boe is so much lower. Also, having sweet gas as opposed to sour gas reduces opex/boe, and having light crude versus heavy crude reduces a lot of the expenses. You throw in the fact that Peyto owns all of their own gas plants, and you have a winning combo. Peyto also doesn't drill in areas where it has a much higher opex/boe profile.

 

The easiest way to know what play is economical in this price environment is by taking a look at BXE's spirit river opex/boe versus the cardium opex/boe. It's $3.6 opex/boe versus $8.5 opex/boe. The spirit river is much much much more profitable, and unfortunately, a good chunk of the current productions from BXE is still derived from the Cardium thanks to 100+ oil last year. So it will take 1-2 years for the decline rates to play in and the new spirit river wells to overtake opex/boe. I think reasonably speaking, in 5 years, opex/boe COULD go down to $5. I can't say with 100% certainty, but it is likely given the spirit river's drilling economics.

 

Capital efficiency is also $8,000/boe/d in the spirit river which is substantially lower than a lot of the U.S. shale plays. It's only that low because the Spirit River (ferrier) play is the LOWEST cost Spirit River play in Alberta.

 

 

[yadayada]

Thanks for response. I guess last offtopic mention of TOU, I get this cost structure roughly at 28$ average price (35$ in 2014 and 22$ this year):

Assuming 58m barrels produced this year:

Royalties 10%, 4.3$ p/boe operating, 2$ transport, G&A .6$, depletion , 12$,

interest 44m$

 

So then I get 300m$ operating profit, or 18.4% operating margins. And at 2014 levels that would be 2 bn$ revenue and 200m$ royalties and rest the same. So then I get 691m$ operating profit. Or 34% margins. That seems pretty up there?

 

At 22$ (realized price in Q2), I still get 60m$ operating profit on 1.2bn$ revenue.

 

Bellatrix had only 15% operating margins in 2014. And I don't really see any reduced operating expenses in Q2 report this year. So Even if they have a massive cost cut at some point, that would still only get them even to TOU?

[Wilson-TPC]

Thanks for response. I guess last offtopic mention of TOU, I get this cost structure roughly at 28$ average price (35$ in 2014 and 22$ this year):

Assuming 58m barrels produced this year:

Royalties 10%, 4.3$ p/boe operating, 2$ transport, G&A .6$, depletion , 12$,

interest 44m$

 

So then I get 300m$ operating profit, or 18.4% operating margins. And at 2014 levels that would be 2 bn$ revenue and 200m$ royalties and rest the same. So then I get 691m$ operating profit. Or 34% margins. That seems pretty up there?

 

At 22$ (realized price in Q2), I still get 60m$ operating profit on 1.2bn$ revenue.

 

Bellatrix had only 15% operating margins in 2014. And I don't really see any reduced operating expenses in Q2 report this year. So Even if they have a massive cost cut at some point, that would still only get them even to TOU?

 

Tourmaline's costs will go down by a good amount. I haven't done any pro-forma on TOU, so i can't really comment on the accuracy of the numbers.

 

BXE's new gas plant was operational in July, so that's not included in the quarter. Cardium is still a big part of the expense as it's almost 9opex/boe. So the cost curve everyone is assuming is a blended spirit river and cardium. But the company has already said that it will only be spirit river going forward.

 

BXE also gets a higher liquid yield and with propane prices negative, it definitely affects the margins. So keep that in mind as well.

[yadayada]

Alright thanks, I guess then it will start looking a lot like PEY.

 

Edit: So they did 38k barrels per day in 2014. If we assume things go back as they were I get the following numbers:

 

This assumes they can jack up production to 60k boe p/d (assuming this is possible with their new gas plant?). Im assuming 50% more profit to be safe. So then take 87m$ op profit (subtracting special items and interest),

 

I get 130m$. Normally operating costs would be about 185m$ then. But with 6$ per BOE then I get 130m$. So 55m$ lower. So you would then get 185m$ in operating income. You are right that is cheap!

[Packer16]

What is interesting here is the the full cycle F&D costs at Peace River are only 6.7/boe so your F&D and ops costs are 10.5/boe vs. the operating costs at Cardium of 8.5/boe.  So you adding reserves at a cost close to what it takes to pump the existing reserves out of the ground. 

 

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[influx]

Tourmaline's costs will go down by a good amount. I haven't done any pro-forma on TOU, so i can't really comment on the accuracy of the numbers.

 

Just wondering, if you can share please, what do you think, which are say, the three cheapest plays with possible asymmetric gain/loss, and your investment horizon (in time, 1-3 years or more) for each?

 

 

Thanks

[Guest qanary]

Sorry for the ignorant question, I'm getting up to speed on O&G financials.

 

On slide 18, the profit margin provides $1.47/Mcfe, but it costs more to replenish/replace the depleted well.  So, shouldn't we regard the actual net profit as significantly less?

 

Or rather than a model that assumes replacement and perpetual cash flow, are you discounting the proceeds from the proved assets and assuming they wind down to zero?

 

Thanks.

 

Page 18 of the BXE's August Presentation provides a list of items included in half-cycle and full-cycle F&D costs.

 

Packer

[Guest qanary]

After reviewing the thread, it looks like you guys use the later method, which is what I figured.  NPV10 (or whatever your hurdle rate is).

 

Thank you for the spreadsheet Wilson-TPC!

 

Sorry for the ignorant question, I'm getting up to speed on O&G financials.

 

On slide 18, the profit margin provides $1.47/Mcfe, but it costs more to replenish/replace the depleted well.  So, shouldn't we regard the actual net profit as significantly less?

 

Or rather than a model that assumes replacement and perpetual cash flow, are you discounting the proceeds from the proved assets and assuming they wind down to zero?

 

Thanks.

 

Page 18 of the BXE's August Presentation provides a list of items included in half-cycle and full-cycle F&D costs.

 

Packer

[Wilson-TPC]

Sorry for the ignorant question, I'm getting up to speed on O&G financials.

 

On slide 18, the profit margin provides $1.47/Mcfe, but it costs more to replenish/replace the depleted well.  So, shouldn't we regard the actual net profit as significantly less?

 

Or rather than a model that assumes replacement and perpetual cash flow, are you discounting the proceeds from the proved assets and assuming they wind down to zero?

 

Thanks.

 

Page 18 of the BXE's August Presentation provides a list of items included in half-cycle and full-cycle F&D costs.

 

Packer

 

Several ways to model this out really, you can model this out based on current well economics, project out what you think is a reasonable production level, commodity pricing, cost, and royalties, and get an EBITDA number, then slap a multiple on it. (Which is probably the right way to think about this.)

 

Another way is to do a PV-10 type analysis, but that really ignores a lot of assumptions in between like balance sheet health and cash flow and debt levels.

 

Tourmaline's costs will go down by a good amount. I haven't done any pro-forma on TOU, so i can't really comment on the accuracy of the numbers.

 

Just wondering, if you can share please, what do you think, which are say, the three cheapest plays with possible asymmetric gain/loss, and your investment horizon (in time, 1-3 years or more) for each?

 

 

Thanks

 

I've been researching this space extensively for the last 9 months or so. Here are my ranked picks.

 

Compounder + safe bet on a commodity price rebound category, return profile (20-25% per annum):

 

PXD, EOG, PEY, TOU, CLR, COG, AAV are some of the best I know of. They all own super plays and have sweet spots in all of those acreages.

 

So-so balance sheet (getting shit on category), OCF - maintenance capex = positive, and probably the highest risk-return profiles (60-65% per annum):

 

BXE, CRC, OAS, are some of the top ones I can pick off the top of my head.

 

Terrible balance sheet, ocf-maintenance capex = negative, and the riskiest bets in the O&G space (a derivative bet on rising commodity prices):

 

SD, PWE, PVA, REN and more.

[yadayada]

Thoughts on CHK and TET?

[Wilson-TPC]

Thoughts on CHK and TET?

 

CHK has great assets, a shitty balance sheet, and not cash flow positive.

 

It's like right in between the second and third category. If it can become cash flow positive on maintenance capex, then CHK is definitely a worthy bet. Current cash burn looks to be about 3 years... So if commodity prices don't go up in 3 years... It's tough to say where CHK should be trading at.

 

TET's cost of operations is WAY too high. Company is shrinking productions because maintenance capex would be over OCF... That's always a troubling sign. Whenever an E&P has to start shrinking productions, current commodity prices aren't supportive of any productions in current fields... Not exactly a good bet. Trilogy HAS to cut costs, but I don't see any indications of that happening within the next 1-2 years.

 

BXE is just fortunate that the Spirit River opex/boe is so freaking low, if it wasn't, we wouldn't even be talking about it here.

[finetrader]

I'm trying too evaluate oil and gas companies and I was reading a presentation of Pine Cliff Energy(PNE-to), which seems to be a good natural gas producer.

 

In this presentation p.13 , the graph seems to indicate that BXE has the worst declining rate of the group.

 

http://www.pinecliffenergy.com/upload/media_element/74/04/august-2015-investor-update-v2---without-new-slide.pdf

 

Any comments?

[Wilson-TPC]

I'm trying too evaluate oil and gas companies and I was reading a presentation of Pine Cliff Energy(PNE-to), which seems to be a good natural gas producer.

 

In this presentation p.13 , the graph seems to indicate that BXE has the worst declining rate of the group.

 

http://www.pinecliffenergy.com/upload/media_element/74/04/august-2015-investor-update-v2---without-new-slide.pdf

 

Any comments?

 

Great questions finetrader.

 

A few comments with regards to Pine Cliff first... Pine Cliff have low decline rates, but all of its productions are acquisitions of other existing operations. So it's a roll-up of small operators who can't handle the low pricing environment. In shale drilling, if you look at the normal decline curve, year 1 typically has the highest decline - 70% followed by 35% and then so on. So if you buy operations that are already in place in acreages with low decline rates but low productions, then the production decline rates HAVE to be low.

 

If you look at the cost of drilling for someone like Pine Cliff... They aren't profitable in this pricing environment as its operating expense is too high.

 

Now I don't have access to that sellside report chart that Pine Cliff cited, but what I can tell you is that if you look at BXE's production growth, 2013-2014 had a huge bump. And anytime you get organic capex fueled production growth, the following year's decline rate will be in the 40s due to that initial cliff fall in production volumes.

 

Corporate decline rate for BXE is around 35% now, so that 45% is a bit outdated... Like I said, I need to read that report to see where they got 45% from...

[RadMan24]

I'm trying too evaluate oil and gas companies and I was reading a presentation of Pine Cliff Energy(PNE-to), which seems to be a good natural gas producer.

 

In this presentation p.13 , the graph seems to indicate that BXE has the worst declining rate of the group.

 

http://www.pinecliffenergy.com/upload/media_element/74/04/august-2015-investor-update-v2---without-new-slide.pdf

 

Any comments?

 

Great questions finetrader.

 

A few comments with regards to Pine Cliff first... Pine Cliff have low decline rates, but all of its productions are acquisitions of other existing operations. So it's a roll-up of small operators who can't handle the low pricing environment. In shale drilling, if you look at the normal decline curve, year 1 typically has the highest decline - 70% followed by 35% and then so on. So if you buy operations that are already in place in acreages with low decline rates but low productions, then the production decline rates HAVE to be low.

 

If you look at the cost of drilling for someone like Pine Cliff... They aren't profitable in this pricing environment as its operating expense is too high.

 

Now I don't have access to that sellside report chart that Pine Cliff cited, but what I can tell you is that if you look at BXE's production growth, 2013-2014 had a huge bump. And anytime you get organic capex fueled production growth, the following year's decline rate will be in the 40s due to that initial cliff fall in production volumes.

 

Corporate decline rate for BXE is around 35% now, so that 45% is a bit outdated... Like I said, I need to read that report to see where they got 45% from...

 

I think finetrader dug up a good one. Pine Cliff--they have a large amount of acreage and untapped reserves, won't be on balance sheet. They acquire companys for good value==they are also a low cost operator. Management is very smart and able.

 

I'd keep doing research finetrader, after all...being FCF positive in this environment could yield untold benefits when prices recover years from now.

[finetrader]

I'd keep doing research finetrader

 

What got me interested in this company is the fact that George F. Fink, the same that ran Bonterra stocks from a few pennys to 60$ last year , is involved in Pine Cliff.

 

maybe we could start a thread about Pine Cliff.

[yadayada]

Netback per boe seems to be quite low, or am i missing something on pine cliff.

[Guest wellmont]

here is how the investing mind works. if you were looking at the pinecliff presentation and they didn't have that slide in it that said these were the bonterra guys, would you give it a second look? The slide says bonterra is trading at $24.10. It's now $16 and change with a probably dividend cut imminent. much of the gains in bonterra came when it was a tiny under the radar company and nobody knew about it or were invested in it. over the last 10 years it has not done very well. it is down, but has paid dividends along the way. And Bonterra is giving a lot of it back in this environment because they go unhedged. that particular slide is a calculated attempt to "persuade" the investor into not doing more research.

 

I agree that's it's a roll up, they don't have a deep base of reserves, they are not in the montney which is a lower cost more liquid rich basin, and they aren't buying the best properties. they need to keep buying properties to grow because they don't have inventory. Positive is that the management team has access to capital at any price environment. people will give them money. they buy on the cheap. they go unhedged so it's a proxy for NG prices and this will do better in a rising price environment. there are lots of good gas companies that are cheap. I think there are a number ahead of this one on the buy list. but this one does have it's advantages. homework.

[theantilibrary]

Wilson-TPC, have you looked at AR? If so, any thoughts? Much appreciated.

[Wilson-TPC]

Wilson-TPC, have you looked at AR? If so, any thoughts? Much appreciated.

 

The discrepancy between value and price in AR is getting to retarded levels. Remember, that AR owns its own midstream assets (AM).

 

But the problem with AR is that it's not cash flow positive, and if it wants to keep productions flat, it would be cash flow negative...

 

The current realized price on nat gas and NGL are too low and that's due to infrastructure constraints in NE. That will alleviate by next year, but... that would be another year before the pricing differential is fixed. Also be mindful that although AR says it hedges till 2019, Henry Hub prices could move significantly differently than nat gas prices in NE. So that creates basis risk, thus it's not a complete hedge.

 

Overall, the value is much greater, but an investor has to ask what company offers the HIGHEST risk-to-reward. RRC and COG are some other names in the area.

[jawn619]

Added more at today's prices

[Wilson-TPC]

Nice. PWE asset sale gives light to the end of the tunnel.

 

Strachen and Harmattan will most likely be sold. If sold at similar multiples 43k flowing boe/d, then BXE can reduce debt by 230 million after subtracting 50 million for capex to replace production lost.

 

Strachen and Harmattan are 60% liquids versus Penn West's asset sale of 72% liquids. BXE's asset sale would have lower opex/boe, but Penn West has lower decline.

[Picasso]

I wanted to mention this before given some experience with other Klarman involved commodity plays.

 

At one time a few years back, Baupost had a large position in Allied Nevada (ANV).  Given their large production in Nevada (one of the largest mines in the world) and decline in share price relative to gold, it seemed quite interesting.  I bought around $27 (below Klarman's cost) and eventually sold for $19.  Shares ended up going to zero.  It looked inexpensive all the way down to zero.  All the stock needed was a streaming deal of the silver byproduct to cover the debt.  I haven't followed it recently to see what happened, but if the deal ever happened it happened too late.

 

Another one Baupost was involved with at the time was Gabriel Resources (GBU).  That one's done a bit better.  Went from $8 to $0.32. 

 

I only mention them because it became clear to me that Baupost is involved with securities that on their own have no margin of safety.  However as part of a basket they represent something like call options on various situations.  It also explains the small size relative to the entire Baupost portfolio.  Managing that probability gives you a margin of safety but on their own they are speculations.

 

I don't think I would buy into BXE because of similarities I see in this Baupost strategy.  Will they get to the goal post (assets sales + withstand low commodity prices?) to get investors their multi-bagger returns?  It's possible, but you need to size it that way just the way Baupost has.

 

In my opinion BXE is a speculation on multiple variables that are difficult to handicap. 

[Packer16]

IMO opinion the reason BXE was bought is not a play on oil or gas prices but due to its low cost position/high capital efficiency in the Spirit River.  It has better economics than Peyto in this formation and is in the process of focusing there.  They are no longer drilling in the Cardium but focusing on being a lower cost producer.  This is much different than buying a call option, like IMO buying a gold producer or the C warrants the Baupost has purchased.  If they do not do an asset sale, they will do fine but the realization of the hidden gem, the Spirit River asset.

 

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