SSN - An undiscovered Oil Mine?
$ = USD, A$ = AUD, NPV-10 = Net present value discounted by 10%
Samson Oil & Gas (SSN) is a small Australian-based E&P company, but operates out of Lakewood, Colorado. Samson holds an interest in multiple oil & gas producing properties throughout the United States, and holds leases on extensive, undeveloped acreage in Wyoming.
The price per ADS as of this writing is $1.15, and the company has 83.15mm ADS-equivalents outstanding, for a current market capitalization of $95,622,500 in the U.S. Samson also trades on the ASX, where it is awarded a market capitalization of approximately $95,682,368 based on the current currency exchange rate. Samson is a micro-cap company, and it may not be suitable for some investors.
Unlike most of the companies that I choose to invest in, Samson's financial statements aren't particularly attractive. Samson has failed to show a profit since FY '05, and lost A$30,159,175 in FY '09, A$21,706,181 of which were non-cash impairments due to the decline in natural gas prices. As of the most recent quarter, Samson had USD-equivalent of ~$6,208,494 of cash in the bank after a recent stock offering, compared with outstanding debt of $11,386,248.
Clearly, Samson was quite cash poor as of the most recent quarterly report even after its stock offering, but as you'll soon see, Samson's true value comes from its assets.
Samson owns oil & gas producing assets throughout the United States, as well as leases on extensive amounts of undeveloped acreage.
As of July '09, Samson's proven and probable oil & gas reserves were calculated as having had a NPV-10 of $27,991,300. Additionally, Samson holds leases on acreage in the following locations.
Lookout Wash Field - 18.2% Working Interest - Carbon County, WY
Greens Canyon - 100% Working Interest - Sweetwater County, WY
Firehole Canyon - 100% Working Interest - Sweetwater County, WY
Browns Ranch - 100% Working Interest - Sweetwater County, WY
Flaming Gorge - 50% Working Interest - Sweetwater County, WY
Hawk Springs - Various Working Interests - Goshen County, WY
Jonah Field - 21% Working Interest - Sublette County, WY
North Stockyard Field - ~30% - Williams County, ND
Various New Mexico & Texas fields - Various Working Interests - NM & TX
Some of this acreage is currently producing, much of it is not, but virtually all of these fields have the possibility for additional production. More importantly, the Williams County acreage is important to immediate operating cashflow and the Goshen County acreage should make this a completely different company when compared to what it was even six months ago.
Turning the Corner? - Williams County and the Bakken
Despite Samson's weak historically ugly results, it is now well on its way to becoming cash flow positive. In the most recent quarter, Samson produced 23,240 barrels of oil and 183,147 MCF of gas, compared to only 5,030 barrels of oil and 166,143 MCF of gas in the previous quarter. This is a substantial increase - Samson nearly doubled its revenue from its previous quarter, increasing to A$2,622,293 from A$1,434,465 in the previous quarter. It has done this by drilling one well in its Williams County acreage, targeting the Bakken shale formation - the Gene #1-22H (30.6% Working Interest) which had a 2,936 BOE/d initial production.
Don't let the high initial production fool you, though, production from shale wells decline very rapidly from their initial production. As of the most recent quarterly report, the Gene #1-22H well had already declined to an average of just over 575 BOE/d, or a little over 175 BOE/d to Samson pre-royalty interests. Regardless, the Gene seems to have helped cashflow tremendously - Samson was actually nominally positive cashflow to the tune of A$84,000 before exploration and development expenses, as opposed to negative cashflow to the tune of A$397,000 on the same metrics in the prior quarter.
More importantly, this isn't the only well Samson is drilling in Williams County. Two more wells are being worked on as I write this - the Gary #1-24H (37% Working Interest) and the Rodney #1-14H (27% Working Interest) have both been drilled to total depth and are awaiting completion efforts to begin in the week of August 23rd. Both should prove to be successful and should provide substantial additional cashflow to Samson.
It should be noted that Samson's exposure here is limited - after Gary and Rodney are completed, Samson will only have two more wells to drill in Williams County unless they acquire additional acreage there or current regulations change.
Value Unlocked - The Transformative Power of the Niobrara
While Samson's existing proven and probable reserves and its Williams County wells are part of the company's value, the winds of change blowing in Samson's favor aren't those assets - they're its extensive Goshen County acreage. On June 25th, 2010, Samson announced that it agreed to sell 24,166 acres of its 40,240 Goshen County acres for between $61,000,000 and $79,000,000, or between $2,524.20 and $3,269.05 per acre, and will retain a 4.8% royalty interest on the sold acreage. It should be noted that Samson has taken the appropriate steps to receive the full $79,000,000 and it appears that that will be the case as of this writing.
The original closing date for the transaction was July 26th, 2010, but was delayed until mid-September because the land title office in Goshen County has been packed to the point that the county has had to ration time available to any interested parties to ensure that everyone gets equal access to the records. Because of this, the buyers were unable to complete their due diligence by the closing date but said that they found no defections with any of Samson's leases as of that time. As a token of good faith, they deposited $10,000,000 to an escrow account for Samson, which is refundable only if Samson can't deliver marketable title to at least 20% of the acreage it is selling. Samson is confident that they can deliver title to at least 20% of the acreage, and thinks that the deal will go through as planned.
Samson has chosen to retain the remaining Goshen acreage to develop for itself with the proceeds from the acreage sale. They anticipate drilling 50 net wells on the remaining 16,000 acres.
Though the Niobrara had just recently started receiving industry interest, results to date have been positive. In an article on Investopedia by Eric Fox, it is mentioned that Noble Energy (NBL) has completed eight wells in the Niobrara in Q2 '10, with initial production ranging from 580 and 845 BOE/d from each of them. EOG (EOG) completed two, with initial production at around 600 BOE/d each, and SM Energy (SM) completed one in May with initial production of an average 1,075 BOE/d for the first seven days. As is typical with shale wells, it declined to 500 BOE/d by July. If Samson can produce at similar numbers, the stock will prove to be extremely undervalued at these prices by just about any metric.
Sum of the Parts - Or, I try to kill it by undervaluing everything
It doesn't take a Columbia MBA to put the picture together with this one. You have a company whose market capitalization is $95,622,500 and has cash in the bank of approximately $6,208,494 and debt of $11,386,248, for an enterprise value of $100,800,254. Even assuming a 35% tax on the Goshen County land sale proceeds - it won't be that high, due to past losses and their planning to sell some natural gas assets at a loss - the company will be left with between $39,650,000 and $51,350,000.
In essence, the market is valuing the rest of Samson's assets, including its proven and probable existing reserves of $27,991,300, its Williams County production, its 4.8% royalty interest on the sold acreage, and its 16,000 remaining Goshen County acres at between just $49,450,254 and $61,150,254. Even using the most conservative estimates possible, it's still undervalued.
$27,991,300 Proven & Probable reserves
$22,500,000 Williams County wells after 50% haircut from Samson's estimate
$26,152,400 16,000 Goshen acres at 50% discount from previous sale's price
$0 4.8% Royalty interest on sold acreage
$0 Extensive non-Goshen County acreage
Even after cutting the company's estimates and sales price of the sold Goshen acreage in half, giving no value to Samson's extensive non-Goshen acreage and assuming the buyer of the Goshen acreage never drills a well on that acreage, I come to a value for the remainder of Samson's assets of $76,643,700, still more than the market is valuing them for even in the most pessimistic, the-world-is-ending scenario.
More realistically, it's probably safe to use the same amount per acre on the 16,000 remaining acres as the 24,000 sold acres, Samson's estimates probably aren't that far off when it comes to the Williams County wells, the royalty interest is worth something, as is the non-Goshen acreage. I just wanted to demonstrate that we had a pretty substantial margin of safety here. Here's a slightly more optimistic view of the company's assets (the royalty interest and non-Goshen acreage are still valued at nothing because I'm not comfortable valuing them).
$27,991,300 Proven & Probable reserves
$33,750,000 Williams County wells at 75% of Samson's estimate
$52,304,000 16,000 Goshen acre
$0 4.8% Royalty interest on sold acreage
$0 Extensive non-Goshen County acreage
Using these estimates, the remaining assets would be worth $114,045,300, a far cry from what the market is valuing them at. And that assumes Samson just sells its remaining acreage, instead of developing it as they plan on doing. Even so, however, that implies the NAV of the company is between $1.786 and $1.9268 per share, or 55.3% to 67.5% above current levels. It should be noted that I believe the company's value to be far above either of those two estimates due to the development of the remaining Goshen County acres and, less importantly, that the lease sale will not be fully taxed.
As I wrote earlier, this is a micro-cap company and it isn't for everyone. The two key risk factors here are energy prices and the Goshen County lease sale not going through. Since one applies to all exploration and production companies and therefore comes with the territory, I'll focus on the latter. If the lease sale does not go through as expected, the company's operations could be seriously impaired. It is still negative cashflow, it has more debt than cash, and it is in the middle of modest drilling program in the Bakken (Williams County), which is taking up several million per well. Quite frankly, without the deal, the company isn't in the best health financially. If they couldn't find another buyer for the assets, they may be in trouble.
Fortunately, Samson has several "outs" here, so to speak, because there was more than one company interested in the acreage and industry interest in the Niobrara shale is booming, and the company that is acquiring the leases put $10,000,000 in escrow for Samson as a sign of good will, so we know they're serious. In summary, I think Samson is a great little company that is extremely undervalued by the market, and Managing Director Terry Barr has done a phenomenal job of creating value for shareholders recently. Remember, this company is small and its stock price could easily fall back below $1.00 per ADS if the Goshen deal falls through. I obviously don't think it will, but everyone will have to make up their own minds about that.
Keep in mind that it's very possible I screwed up a number or two somewhere or inadvertently used out-of-date information, especially considering I was using two currencies. It shouldn't be major enough to impact my thesis, but do know that the numbers may be off even to the tune of several million, excluding where I admit my numbers will be too conservative. I hope it's alright for my second attempt at putting some of my analysis to words. As always, do your own due diligence and best of luck to all.
NOTE: The formatting might be screwed up - after I hit "preview your post" the whole thing ran on as one giant block of text. I tried going in and manually fixing it, but the numbers wouldn't line up appropriately, so I had to put spaces between the lines. I still don't know if the post will submit as it appears before me. Sorry if not.