TT.TO - Terra Energy

[sculpin]

Could Terra Energy be the Ultimate Distressed Natural Gas Play?

 

Have attached a write-up on Terra Energy as Word doc. Comments welcome. Summary below...

 

Terra Energy is a Western Canadian Oil & Gas Exploration and Production Company which has entered into a strategic initiative to realize shareholder value. The Company is asset rich with undeveloped land of 400,000 acres in Alberta and British Columbia, 134,000 net acres of Montney lands in British Columbia.  Current production is 5,500 boe/d. Conservative estimates put the break-up value far above the Company’s current $130 million enterprise value, as concern over Terra’s debt load and the extremely negative natural gas pricing environment have undermined the share price.

 

TSX Symbol “TT”

Shares Outstanding 101.7 MM

Market Capitalization (@ $0.34/share) $34.6MM

Net Debt $94.7 MM

Enterprise Value (fd) $130 MM

Operational

Q1‐12 Average Daily Production (boe/d) 5,564

Proved Plus Probable Reserves (mmboe) 33.9

Q1‐12 Production Mix (oil/liquids/gas) 9%/8%/83%

 

Trading at a recent price of $0.34/share, a conservative sum of the parts estimate could see the Company liquidated at a value of $1.50 per share (see table at the end of the report). The June 2012 sale of Progress Energy (a Montney focused Canadian natural gas producer) to Petronas was done at a metric which would value Terra’s contingent natural gas resource in the Montney in excess of $500 million alone. The most significant risk is the inability of Terra management to execute a sufficient dollar amount of asset sales in the current negative macro & commodity price environment. Terra is  asset rich but current natural gas pricing has placed the Company in an untenable position of not producing enough cash flow to ensure it can remain a going concern. The Company is also facing land expiries in certain areas that make it paramount that deals be reached in order to harvest some value from these assets.

 

Value Catalysts

 

Currently, Terra is marketing 3 asset packages. All packages contain attractive assets & the process is very advanced. Unfortunately, the marketing of these assets comes at a time when natural gas prices have hit decade lows & access to capital to many in the energy space is limited. If management is unable to realize value in the next few months, Terra would make an excellent hostile takeover target (insiders only own 25% of the shares outstanding) for a strategic or financial buyer with the financial ability to develop these assets to their full potential. 

 

Terra_Energy.doc

[sculpin]

Some good commentary on Montney & LNG from Haywood Securities. Have to believe that Terra’s 100K acres in between Talisman/Sasol and Shell have significant value beyond the Company’s current enterprise value.

 

 

LNG Commentary:

 

We have long been proponents of the “LNG is Coming” thesis.  The bidding war over Montney producer PRQ (PETRONAS currently the high bidder at ~$22/sh) highlights a couple of themes that are generally long term in nature yet are inter-related and seem to be accelerating.

 

Covered names that we have been really focusing on (especially with the sell off) with Montney exposure include YO (coincidentally, YO’s Montney partner is PRQ....) and CTA. 

 

Uncovered BC names with large scale Montney exposure includes: PPY, AAV, CR, ARX, PGF. 

 

Theme #1:  Canada has cheap gas and the world is starting to recognize it

 

Case in point is the bidding war for PRQ.  Clearly the scope and scale of PRQ’s asset base and the ability of that asset to backstop an LNG facility has excited at least a couple of buyers.  Prior to PETRONAS’ bid PRQ was approached by another “multi-national” oil company.  It is not known whether this prior bidder was the same party that submitted a new bid last week, forcing PETRONAS to match it.  The market narrative prior to this new bid was that PETRONAS was simply acquiring a partner and that there was no read through to other Montney producers.  With another potential buyer in the wings this narrative is simply inaccurate.  The global rush for Canadian resources (specifically natural gas) is in the early stages but is clearly, at this point, underway. 

 

The NXY transaction also has a sizeable shale gas component to it, although we doubt that was the primary reason for the deal.  Nevertheless, the general theme is evident.

 

Theme #2: LNG is coming

 

PETRONAS has clearly stated the goal of the PRQ purchase is to backstop an LNG facility.  We can surmise that the mysterious other bidder also has this goal.  Moreover, Shell just filed its application with the NEB for a max ~3.4 bcf/d facility at Kitimat.  Shell is 40%, Korean Gas, PetroChina and Mitsubishi are all 20% partners in the project that is targeting first gas in 2019. 

 

Key highlights from the filing:

 

1.        Annual maximum capacity is 3.4 bcf/d over 25 yr term.  This requires 34 Tcf of natural gas over that period;

2.      The partners current supply capability is approx 29 Tcf leaving a shortfall that will be filled either via exploration, or more likely, M&A.  Shell/PetroChina account for about 22 Tcf, Mitsubishi 5.7 Tcf and Kogas ~1 Tcf.  Kogas remains severely short gas and will have to backfill, most likely via M&A.

3.      TRP will construct a 700 km pipeline to the coast with about 1.7 bcf/d capacity;

4.      Each LNG train will require about 300 MW of electricity; the BC govt updated legislation to exclude gas powered generation from clean air legislation (another sign that these approvals are forthcoming and are strategically important)

5.      Primary markets for the output will be Japan, South Korea and China

 

Canada retains a competitive advantage at this point over the US re LNG because export licenses are extremely difficult to obtain in the US.  Cheap gas has been the fuel for a manufacturing renaissance of sorts and there are very strong industrial consumer interest groups who make it very difficult for export licenses to be granted.  Canada, on the other hand, needs LNG.  It is likely that sometime in the next 8-10 years that growth in US shale gas production could essentially displace Canadian exports to the US.  The trend has been ugly – net imports are down 26% through the first 4 months y/y and are at the lowest level since 1990.  Marcellus gas is the main culprit and is likely to remain thus.

 

The NEBC Montney remains the most attractive resource play for foreign buyers.  The Montney is close to infrastructure, closest to the coast and is probably the best gas play in Western Canada.  Canada, as a potential exporter, has a number of advantages including the country will be a new source of supply (energy diversification for customers is important as 50% of this decade’s growth in LNG comes from Australia), proximity (Kitimat to Japan takes about 9 days vs 14 from Qatar and 7 from Australia) and a well developed upstream business with untapped resource (the various shale basins including Horn River, Montney, etc.). 

 

The additional bid on PRQ has let the cat out of the bag: resource acquisition will be a recurring theme in the Montney and may very well occur ahead of schedule.  Companies with serious LNG ambitions will be severely disadvantaged if they do not move quickly to secure resources ahead of facility construction.  One main risk remains how eager governments are to see the resource industry fall into foreign hands, particularly if there are a number of transactions in a short period of time.

 

 

[sculpin]

Here is Dan Loeb’s (a very successful US hedge fund manager) take on the Montney gas play as discussed in his purchase of Progress Energy:

 

“Long Equity and Debt: Progress Energy Resources Corp.

 

We initiated a position in Progress Energy Resources (PRQ), a Canadian mid‐cap E&P company based in Calgary, Alberta, early in 2012 after the significant sell‐off in natural gas prices and natural gas‐related equities. Progress’s primary asset is an 825,000 net acre position in the unconventional Montney gas play in British Columbia. Our thesis was that despite temporarily low gas prices, Western Canadian natural gas producers had strategic advantages due to their ability to monetize their gas in higher‐priced Asian LNG markets. The difference between the price of gas in Asia ($15 or more per mcfe) and the low F&D costs of unconventional gas in Western Canada (~$1 mcfe) caught our attention and Progress was an appealing way to access this arbitrage.

Western Canadian gas assets are more attractive than US shale assets for two main reasons. First, these assets lie in closer proximity to Asia, offering lower costs of shipping LNG products than proposed LNG projects in the US Gulf of Mexico and East Coast. Further, because Canada is an incumbent energy exporter, the country has a favorable regulatory environment, meaning LNG exports to Asia encounter minimal political opposition. We viewed Progress as an ideal target for a larger company with LNG ambitions, given Progress’s large, concentrated asset base in the Montney and small size. Our thesis about Progress’s attractive assets proved correct, and the Company recently agreed to be acquired by PETRONAS, the Malaysia National Oil Company for C$20.45, a 77% premium. Third Point held both equity and convertible bonds in Progress, which we sold into the acquisition for +67% and +17%, respectively, returns on average exposure.

 

http://www.gurufocus.com/news/184385/daniel-loeb-comments-on-yahoo-delphi-europe-in-second-quarter-letter/affid/81000

 

[sculpin]

Terra announced they have entered into agreements to sell about 150,000 acres of undeveloped land for about $80 million. So would pretty much repay all debt & we would be left with 5,000 boed & oodles of land. All for market cap of $35MM right now. Should be worth quite a lot now that debt will be essentially erased.

 

Bare bones valuation but could improve with better natural gas market:

 

Production : 5,000 boed @ $15,000 EV/boed + $75,000,000

Raw land: 350,000 acres @ $100/acre $35,000,000

Less residual debt/liabs $10,000,000

 

Total amount $100,000,000

 

Or about $1.00/share

 

Terra Energy Corp (C:TT)

Shares Issued 101,663,422

Last Close 11/5/2012 $0.18

Tuesday November 06 2012 – News Release

Mr. Bud Love reports

TERRA ENERGY ANNOUNCES FURTHER EXTENSION TO LENDING FACILITY TO ACCOMMODATE ASSET SALES

Terra Energy Corp. has determined that it is in the best interest of its shareholders for the company to proceed with the sale of various assets with a view toward substantially paying down the company’s indebtedness with senior lenders and other creditors, and to not proceed with subordinate financing.

Terra was recently engaged in two marketing processes: the marketing of the company’s unconventional Montney assets and the parallel company-wide marketing process for its non-Montney assets. The bid date for each of these two marketing processes was Oct. 15, 2012.

Accordingly, management of the company has been authorized to proceed with the immediate sale of assets with total gross proceeds in excess of $80-million, which transactions are in various forms of letters of intent and agreements of purchase and sale. Completion of the sale transactions will be subject to customary industry due diligence, standard requisite approvals and the entering into of definitive agreements, with various closings being targeted from now until Dec. 15, 2012. The company’s senior lenders have granted a further extension to the company’s existing credit facility until Dec. 15, 2012, in order to accommodate these various sale transactions.

The sale of assets will result in a substantially strengthened balance sheet for the company. Following the completion of the sale transactions, the company’s current production base of approximately 5,000 barrels of oil equivalent per day will remain substantially intact. Terra will continue to own over 350,000 net acres of undeveloped land, which will provide the potential for future development and growth.

[ItsAValueTrap]

I think that most E&P companies would likely fall into the "too hard" pile if you really understood them.  When private buyers look to purchase oil&gas assets, they do due diligence at a level far higher than retail and institutional investors.  Terra sets up a data room when it wants to sell assets... this is because buyers want to know things like decline curves, estimates of reserves based on volume and pressure, etc. etc.  The technical data is needed to value the assets.

 

2- The lack of cash flow from operations suggests that the existing production is extremely marginal and may not be worth as much as $75M???  The filings show that Terra is thinking about shutting down some production.

 

3- Tom Stanley, who seems to be a value-oriented investor, is Terra's largest shareholder and seems to be selling his stake? 

http://www.resolutefunds.com/philosophy.html

 

4- You need to be really careful with small E&P companies (and with junior companies).  For example:

- Look for the ATPG thread on this board.  (*I'm a little biased because I shorted ATPG and made money, though I covered way before bankruptcy.)

- Look at the ATPG writeups on valueinvestorsclub.com

- Read Contango Oil & Gas' presentation on E&P 101.  The ex-CEO runs an independent E&P company and straight up tells you that independent E&P companies, as a sector, have not made money for investors.  http://www.contango.com/investor/events/E_P_101_The%20Short%20Course.ppt

[sculpin]

Terra has completed its debt restructuring. Should be at about 4,000 boed of production in early 2014 levered to natural gas (80% NG with 20% approx. oil & NGL's) with about 350,000 net acres of undeveloped land. Current bank debt of $15MM & market cap of $25MM for a total enterprise value of $40 million.

 

2013-12-23 07:52 ET - News Release

Shares issued 101,663,422

TT Close 2013-12-20 C$ 0.225

 

Mr. Bud Love reports

 

TERRA ENERGY ANNOUNCES NEW $25MM LENDING FACILITY WITH SENIOR LENDER

 

Terra Energy Corp. has entered into a new $25-million secured lending facility with a senior Canadian chartered bank.

 

The facility is composed of a $22.5-million revolving operating demand line and a $2.5-million non-revolving acquisition/development demand line with an annual renewal date of May 1. The proceeds of the facility will initially be utilized to repay and replace the company's former lending facility, with the balance being applied toward working capital.

 

In accordance with the terms and conditions of the agreement, Terra will continue to strengthen its balance sheet with the objective of adding $5-million of additional net capital during calendar 2014 through a combination of equity capital (common or preferred), subordinated debt capital or non-core asset proceeds, $2-million of which will be targeted prior to the scheduled annual review in 2014. In addition, Terra has, subject to availability and pricing, committed to entering into various defensive natural gas hedges on a minimum volume of 7.5 million cubic feet per day on a quarter-by-quarter basis through to the end of 2015 at pricing equivalent to $3.25 per thousand cubic feet, or better.

 

In the near term, the facility will allow the company to proceed with many capital projects that have been placed on hold pending completion of this refinancing, including the financing of certain pipeline projects to tie in existing tested wells and many recompletion projects targeting oil and natural gas liquids.

 

With the support of a senior banking partner and a strengthened balance sheet in place, Terra is now in a position to advance its post-Montney strategy for 2014 and beyond. Additional guidance on this strategy will be shared with the marketplace in the coming weeks.

[sculpin]

Probably the cheapest natural gas producer out there. Market cap is $35 million, producing about 4,000 boed of which 82% is natural gas with low price hedges ending in March. Production should begin to grow once again as Company once again has funds available to connect previously drilled wells.