I told you to buy PWE this morning (+9%). Here's my latest valuation attempt.
I always believed that the market was not valuing my largest energy holding, Penn West (PWE) properly. However, I never realized just how undervalued until I saw how much the South Korean national oil company was paying for Harvest's assets this morning.
KNOC is paying $1.8 billion (U.S.) for the equity plus assuming $2.3 billion in debt, $4.1 billion total for Harvest's confirmed reserves of 219.9 mmboe. That comes out to $18.65 per barrel.
Penn West has reported that it has reserves of 727 million boe. At $18.65 boe that's worth around $13.56 billion. Subtract the company's roughly $3.8 billion in long term debt and we're left with $9.76 billion for unitholders. Divide the $9.76 billion by the 416 million units that the company has outstanding and we're left with an approximate valuation of around $23.50/unit.
My guess is that the $23.50/unit valuation of Penn West is actually conservative because as it explained to investors yesterday its new horizontal drilling technology has greatly enhanced its ability to maximize its assets. As a result, I would not be surprised in the least if the company ends up having much larger reserves than the 727 million boe that I mentioned earlier.
On the negative side the actual valuation of Harvest's reserves is less than $18.65/barrel because the company does have some refining "assets" that are involved in the sale, but A) the company's refinery is in need of a major upgrade and B) refining is a terrible business that I doubt KNOC is assigning much value to.
So there you have it, I peg PWE's current value at at least $23.50/unit and probably closer to the high $20's. The company's U.S. listed stock closed yesterday at $16.67 and that was only after rallying substantially from its 52 week low of $6.77, with more than 20% of that increase coming in the past month. The stock is up 9% today to $18.16, which in my opinion is still significantly below its real value.
I'd love to hear others' feedback on my valuation methodology.
References: Penn West October 21 Investor Presentation
Korea's KNOC Will Buy Harvest Energy
With new tech, Canada's oil reserves much larger than estimated: Penn West
KNOC to buy Harvest Energy for C$1.8 bln