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Natural Gas Valuations Jump Up with Buyout – Who’s Next?

Companies / Natural Gas Jul 13, 2010 - 01:31 PM GMT

By: Keith_Schaefer


Valuations in the Canadian gas patch took a BIG jump today as Pengrowth Energy Trust (PGF-TSX) bought out junior gas producer Monterey Explorations (MXL-TSX) for its Montney gas play in NorthEast British Columbia.   Monterey’s stock jumped 80%, up $3.46, to close at $7.74 on 6.3 million shares.

Pengrowth paid well over $200,000 per flowing barrel for a natural gas producer – when the average for junior producers is $55,000 – $70,000 per flowing barrel, according to Canaccord Genuity and BMO Nesbitt Burns recent data. Storm Exploration (SEO-TSX), one of the most respected teams and lowest cost gas producers on the TSX, sold for $69,000 per flowing barrel exactly one month ago.

Now, there were some mitigating reasons for this very high valuation – which I will explain briefly – but it has investors wondering – which junior gas producer is next? With premium buyouts that high, these previously moribund junior gas stocks could have some profit potential for investors this summer.

There are several junior Montney gas players, including – in alphabetical order – Advantage Energy, Birchcliff Energy, Celtic Energy, Cequence Energy, Cinch Energy, Crew Energy, Crocotta Energy, Delphi Energy, Insignia Energy, Orleans Energy, Painted Pony Explorations, Progress Energy, Rock Energy, Seaview Energy and Terra Energy and Trilogy and Yoho Resources.

One factor driving valuations could be the new focus on the deep (3500 m) Duvernay shale, the bottom formation in the Montney area, which is pervasive yet unexplored. The Duvernay shale is believed to be the source rock for all the prolific oil producing reef structures in the Beaverhill Lake and Leduc formations just above it.  Over $450 million was paid for Alberta oil and gas rights last week, and most analysts believe the bulk of it was spent for the Duvernay shale.  Many junior gas stocks with Duvernay rights had an uptick last week after the sale.

All this is happening while natural gas prices are still low.  Production in the US is still increasing, especially in the Marcellus shale of Pennsylvania, although demand is also up.  Many companies still must drill or lose their gas lands regardless of price. 

But low gas prices have not impacted mergers & acquisitions in the US.  Canadian brokerage house GMP Securities estimates more than $70 billion in transactions in natural gas producers have been completed in the US in the last two years.

In speaking with Calgary CEOs and investment bankers today, nobody understood why Pengrowth paid that much for Monterey.  But, while Monterey has only 1,700 boe/d now, it has 20 million mmcf/d (million cubic feet of gas per day production) ready to go into a new 28 mmcf/d facility.  The industry converts gas into oil at 6:1, so that 20 mmcf/d=~3,333 boe/d. Pengrowth clearly paid for that, and Pengrowth expects to exit 2010 with 6,000 boe/d on the Monterey lands.   At 6,000 boe/d, Pengrowth says the valuation metrics are just under $50,000 per flowing barrel.  Pengrowth already owned a big chunk of Monterey, but good for Monterey management for getting that priced in.

And their latest 3 wells AVERAGED 7 mmcf/d on short term IP rates – you do see these bigger numbers, but not often as an average.  That’s good consistent high rates of production.

Also, Monterey spent the money to acquire the Duvernay rights to its properties.   Many analysts are calling the Duvernay the next “Horn River” play, referring to the huge new shale play on the Yukon-BC-Alberta border.  Except the Duvernay – if it works – is in the middle of lots of oil and gas infrastructure, like pipelines and suppliers, and doesn’t need tens of kilometers of roads built through tough northern bush.

All this is good news for investors in junior and intermediate natural gas stocks, as the industry is clearly saying – build it, and we will come (buy you out).

About Oil & Gas Investments Bulletin

Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets - and stocks - in a simple, easy to read manner. He uses research reports and trade magazines, interviews industry experts and executives to identify trends in the oil and gas industry - and writes about them in a public blog. He then finds investments that make money based on that information. Company information is shared only with Oil & Gas Investments subscribers in the Bulletin - they see what he’s buying, when he buys it, and why.

The Oil & Gas Investments Bulletin subscription service finds, researches and profiles growing oil and gas companies.  The Oil and Gas Investments Bulletin is a completely independent service, written to build subscriber loyalty. Companies do not pay in any way to be profiled. For more information about the Bulletin or to subscribe, please visit:

Legal Disclaimer: Under no circumstances should any Oil and Gas Investments Bulletin material be construed as an offering of securities or investment advice. Readers should consult with his/her professional investment advisor regarding investments in securities referred to herein. It is our opinion that junior public oil and gas companies should be evaluated as speculative investments. The companies on which we focus are typically smaller, early stage, oil and gas producers. Such companies by nature carry a high level of risk. Keith Schaefer is not a registered investment dealer or advisor. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer to buy or sell the securities mentioned, or the giving of investment advice. Oil and Gas Investments is a commercial enterprise whose revenue is solely derived from subscription fees. It has been designed to serve as a research portal for subscribers, who must rely on themselves or their investment advisors in determining the suitability of any investment decisions they wish to make. Keith Schaefer does not receive fees directly or indirectly in connection with any comments or opinions expressed in his reports. He bases his investment decisions based on his research, and will state in each instance the shares held by him in each company. The copyright in all material on this site is held or used by permission by us. The contents of this site are provided for informational purposes only and may not, in any form or by any means, be copied or reproduced, summarized, distributed, modified, transmitted, revised or commercially exploited without our prior written permission.

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