A few night’s ago on Christmas Eve, the rest of the house was down for the night, and I was still up drinking hot chocolate, waiting for Santa, and evaluating oilfield deals.
I was on Seeking Alpha, viewing my Oil & Gas portfolio there (a list of oil and gas names that I like to keep track of), and I saw that Diamondback Energy had bought QEP Resources in an all stock deal.
When I see an oil deal happen, I like to compare the acquired company to Ring Energy to see if my theory about Ring’s net assets being undervalued makes sense, given how other oil companies are being valued.
Current daily production – Q3 2020 average production of 76.7 MBOE/d
Reserves -2019 year-end total proved reserves of 382.3 MMboe
Net debt – ended Q3 with $1.6 billion net debt
Standardized measure* – 2019 year end at $2.7 billion
Acquired at – $2.2 billion
*Standardized measure is the after-tax estimate of future net cash flows from an oil and gas company’s reserves, discounted back at 10%. It’s not the be-all-end-all of valuing an oil and gas company, but it (along with a similar measure, PV-10) provides a standardized way of comparing oil companies and their assets.
Let’s compare those numbers to Ring Energy.
Current daily production – Q3 2020 average production of 9.2 MBOE/d
Reserves -2019 year-end total proved reserves of 81.1 MMboe
Net debt – Debt is at $315 million, per this recent update
Standardized measure – 2019 year end at $923 million
Market cap as of 12/24/20 – $59 million
Let’s compare these numbers on a rough basis, looking at enterprise value and implied equity value.
QEP’s enterprise value was $2.2 billion, take away the $1.6 billion of debt Diamondback assumed, and QEP’s implied equity value is $600 million, and that would make sense with their stock trading at about $586 million market cap as of 12/24/20.
The $600 million implied equity in the purchase price, values their standardized measured reserves at 22% of the stated value.
For Ring, if someone came along and bought them, assumed the $315 million of debt, and then valued their standardize measure reserves at 22% of stated value, they’d buy ring for $518 million, with $315 million being debt assumption and $203 million being the implied equity.
Right now Ring’s equity is worth $59 million (their market cap), if they sold at $203 million, it’d be 3.4 times the current price.
So in this depressed oil market, could Ring’s equity be worth $203 million? Hard to know, and there are many other factors to consider beyond this simple comparison. But for now, I’ll call it a night and get ready for the upcoming week. In the coming days I’ll be comparing Ring Energy’s current market value to the recent sales of Concho Resources and Parsley Energy, as well as a recent acquisition that Earthstone Energy made. I hope you had a good Christmas, and we’ll talk soon.
PS – What do you think about comparing Ring to QEP via this enterprise value method? Do you have an opinion on what Ring is worth?
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