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I told you to buy PWE this morning (+9%). Here's my latest valuation attempt.



October 22, 2009 – Comments (3) | RELATED TICKERS: HTE , PWE

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


3 Comments – Post Your Own

#1) On October 22, 2009 at 4:46 PM, TMFDeej (97.89) wrote:

Moves like this are almost enough to make one want to ignore the one-truck-pony fearmongers out there who are shorting everything into the teeth of this massive rally.  Oops.

I have been able to talk freely about this stock because it was already my largest position and I didn't want to increase my exposure to it.  Hence no TMF trading restrictions to worry about.


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#2) On October 22, 2009 at 5:48 PM, cutchemist42 (81.73) wrote:

I had HTE picked months ago, loved the gain on it today. Great call.

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#3) On October 22, 2009 at 5:59 PM, F111Driver (50.40) wrote:

Well laid out valuation, Deej.  I picked PWE, HTE and PGH for my CAPS lineup last January and then followed up with real money a month later.  At the time the Div's were even more impressive.  I'd be curious as to what you would value HTE and PGH.

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