ARRIK ENERGY/ CGHI VALUATIONS: COMPARISIONS AND ASSESSMENTS
Introduction
I have carried out an assessment/ overview for the valuation of Arrik Energy/ CGHI and the findings are in Parts I to V below. In summary:
Part I: Covers an assessment/ overview of Arrik Energy valuations based on the Investec Research Report (“Arrik Energy, Exploring Alaska’s Cook Inlet, IPO Research” dated 18th August 2006);
Part II: Briefly reviews other sources/ approaches for the ‘ballpark’ valuation of O+G Companies, for use in comparison with the INVESTEC’S findings in Part III;
Part III: Compares the INVESTEC market valuation (based on GCA estimates of O+G reserves) with the reserve estimates prepared by Arrik Energy/ Escopeta and also considers other valuation approaches to assess the market valuation;
Part IV: Looks at the possible implications to the CGHI share price given these various scenarios;
Part V: Summary.
PART I: OVERVIEW OF THE INVESTEC MARKET VALUATION OF ARRIK ENERGY (BASED ON GCA ESTIMATES FOR O+G RESERVES)
INVESTEC carried out a valuation for Arrik Energy in their IPO Research report (“Arrik Energy, Exploring Alaska’s Cook Inlet, IPO Research” dated 18th August 2006);
It is important to note, however, that the valuation only included for estimates of the East Kitchen and North Alexander leases and not the Kitchen and South Kitchen leases which are currently held under options. The estimates, based on the work carried out by Gaffey Cline Associates (‘GCA’- Petroleum Engineers) put the ‘most likely’ reserves for the two areas at:
1. East Kitchen: (150 million bbl oil, 750 bcf gas = 275 million BOE)
2. North Alexander: (82 bcf gas = 13.67 million BOE)
Total= 288.67 million BOE
The total valuation of these two leases is, therefore, estimated at $14.43 billion (i.e. 288.67 million x $50 bbl oil)
[The estimates by GCA for North Alexander and East Kitchen work out at 32.1% of the Arrik Energy/ Escopeta estimates for the same areas. If the same margin of difference were used for the Arrik Energy/ Escopeta estimates for Kitchen and South Kitchen, GCA would estimate an additional 503 million BOE for these areas. Whilst this is not claiming to be scientific, it does enable valuation to be made between GCA and Arrik Energy/ Escopeta on a ‘like for like’ basis, with the obvious caveat that the figures for the Kitchen and South Kitchen areas for GCA are formed as ‘educated’ estimates from the Arrik Energy/ Escopeta figures. This is dealt with further in Part III]
[ Note: BOE stands for Barrel of Oil Equivalent and includes both oil and gas. The estimate for the natural gas at North Alexander is 85 bcf which equates to 13.67 million BOE. In calculating BOE, 6000 cf natural gas = 1 BOE]
In their estimate, INVESTEC used a price of $50 bbl oil for their calculations. Based on these estimates and prices, they valued Arrik Energy at $153 million (their original valuation was $257 million, but they used an increased risk factor of discovering reserves as well as possible future financing issues and came up with a more conservative final estimate).
A common means by which Oil and Gas Companies are valued is based on a dollar value per barrel of oil. Therefore, if Arrik Energy has reserves of 288.67 million BOE and the company valuation is $153 million (based on oil price @ $50 bbl), the dollar value per barrel is equivalent of $0.53/ BOE (or 1.06% of the total O+G reserve valuation).
[ Note: With oil at c.$60 bbl, the market valuation of Arrik Energy (i.e. 1.06% of the total O+G reserve valuation) is $183.59 million]
PART II: OTHER VALUATION METHODS FOR O+G COMPANIES
I’ve looked for comparisons and other information that assists in O+G Company valuations. Any comments, or other supporting information is welcome. These approaches are simple and are meant to provide a quick ‘ballpark’ figure for the ‘fair’ market valuation of O+G companies for ease of comparison/ assessment.
Generally, I have used a percentage figure of reserves to estimate the potential ‘fair’ market value of market caps for O+G Companies. The figure I use is 7.45% of the total reserves estimates. This figure of 7.45% is derived from valuation information included in newsletters I receive from Michael Schaeffer, a well respected trader/ investor in the commodities market, about other O+G Companies (www.WealthDaily.net).
I checked on the web to see if there was any information that can support this figure, and came across the following article dated July 5th 2006.
www.fool.co.uk/news/comment/2006/c060705h.htm
In the article, the author states that in recent months they have seen analysts use a figure of “between $4 and $10 dollars a barrel when valuing individual companies.” At the time of the article recent oil prices had been between the $60 and $70 range.
Based on a figure of 7.45%:
7.45% at $50 barrel equates to $ 3.73
7.45% at $55 barrel equates to $ 4.10
7.45% at $60 barrel equates to $ 4.47
7.45% at $65 barrel equates to $ 4.84
It would seem, therefore, that a valuation of between $ 4.00 bbl to $ 4.50 bbl or 7.45% of reserves would seem reasonable for an O+G Company in production, and conservative when compared to the higher range valuations mentioned in the article. The INVESTEC valuation at $0.53/ BOE (or 1.06% of total O+G valuation) is, therefore, significantly less, but includes risk factors, including the fields are yet to be drilled and the possible requirement to raise additional project financing for the East Kitchen lease in the future.
PART III: COMPARISON BETWEEN THE INVESTEC VALUATION (BASED ON GCA ESTIMATES FOR O+G RESERVES) AND ARRIK ENERGY (ESCOPETA) ESTIMATES FOR RESERVES, INCLUDING OTHER VALUATION METHODS TO DETERMINE FAIR MARKET VALUE
The following attempts to compare the estimates prepared by:
A. INVESTEC based on GCA reserve estimates for North Alexander/ East Kitchen;
B. INVESTEC based on GCA reserve estimates for North Alexander/ East Kitchen + ‘educated’ reserve estimates for Kitchen and South Kitchen based on a 32.1% proportion of Arrik Energy/ Escopeta original estimates for these areas)
C. Arrik Energy/ Escopeta reserve estimates for North Alexander/ East Kitchen/ Kitchen/ South Kitchen.
For each case, four valuations are calculated for Arrik Energy. These reflect the different market valuations as used by INVESTEC in their more conservative estimate (1.06% of reserves) and the estimate often used to estimate the market value of an O+G company in production ((7.45% of reserves). In addition, two scenarios for the price of oil are used, one at $50bbl and one at $60bbl for sake of comparison:
A. Valuation prepared by INVESTEC based on GCA estimates for North Alexander/ East Kitchen.
1. East Kitchen: (150 million bbl oil, 750 bcf gas = 275 million BOE)
2. North Alexander: (82 bcf gas = 13.67 million BOE)
Total (above 2 leases) = 288.67 million BOE
Total Value @ $50 bbl = $14.43 billion
Total Value @ $60 bbl = $17.32 billion
The market cap valuations for Arrik Energy based on the two valuation parameters (1.06% and 7.45% of reserves) and oil prices of $50 and $60 are as follows:
1. Arrik Energy Market Cap Valuation (1.06% of reserves/ $50bbl) = $153.00 million
2. Arrik Energy Market Cap Valuation (1.06% of reserves/ $60bbl) = $183.59 million
3. Arrik Energy Market Cap Valuation (7.45% of reserves/ $50bbl) = $1.075 billion
4. Arrik Energy Market Cap Valuation (7.45% of reserves/ $60bbl) = $1.29 billion
B. INVESTEC based on GCA reserve estimates for North Alexander/ East Kitchen + ‘educated’ reserve estimates for Kitchen and South Kitchen based on a 32.1% proportion of Arrik Energy/ Escopeta original estimates for these areas)
As mentioned above, the estimates by GCA for North Alexander and East Kitchen works out at 32.1% of the Arrik Energy/ Escopeta estimates for the same areas. If the same margin of difference were used for the Arrik Energy/ Escopeta estimates for Kitchen and South Kitchen, GCA would estimate an additional 503 million BOE. Whilst this is obviously conjecture, it does give some indication for comparative purposes. The estimates, therefore, for these areas are as follows:
1. Kitchen: (828 million bbl oil, 3.9 tcf gas = 1.479 billion BOE x 32.1% = 475 million BOE )
2. South Kitchen (512 bcf = 85 million BOE x 32.1% = 27.28 million BOE )
Total (above 2 leases) = 503 million BOE
Total Value @ $50 bbl = $25.15 billion
Total Value @ $60 bbl = $30.18 billion
The overall total for all four lease areas (North Alexander/ East Kitchen/ Kitchen/ South Kitchen) would be:
Overall Total (All 4 leases) = 288.67 + 503 = 791.67 million BOE
Overall Total Value (All 4 leases) @ $50 bbl = $39.58 billion
Overall Total Value (All 4 leases) @ $60 bbl = $47.50 billion
The market cap valuations for Arrik Energy based on the two valuation parameters (1.06% and 7.45% of reserves) and oil prices of $50 and $60 are as follows:
1. Arrik Energy Market Cap Valuation (1.06% of reserves/ $50bbl) = $419.5 million
2. Arrik Energy Market Cap Valuation (1.06% of reserves/ $60bbl) = $503.5 million
3. Arrik Energy Market Cap Valuation (7.45% of reserves/ $50bbl) = $2.95 billion
4. Arrik Energy Market Cap Valuation (7.45% of reserves/ $60bbl) = $3.54 billion
C. Valuation based on reserve estimates by Arrik Energy/ Escopeta reserve estimates for North Alexander/ East Kitchen/ Kitchen/ South Kitchen.
North Alexander (350 bcf natural gas = 58.3 million BOE)
East Kitchen (457 million bbl oil, 2.3 tcf gas = 840 million BOE)
Kitchen (828 million bbl oil, 3.9 tcf gas = 1.479 billion BOE)
South Kitchen (512 bcf = 85 million BOE)
Total = 2.462 billion BOE
The market cap valuations for Arrik Energy based on the two valuation parameters (1.06% and 7.45% of reserves) and oil prices of $50 and $60 are as follows:
1. Arrik Energy Market Cap Valuation (1.06% of reserves/ $50bbl) = $1.30 billion
2. Arrik Energy Market Cap Valuation (1.06% of reserves/ $60bbl) = $1.57 billion
3. Arrik Energy Market Cap Valuation (7.45% of reserves/ $50bbl) = $9.17 billion
4. Arrik Energy Market Cap Valuation (7.45% of reserves/ $60bbl) = $11.00 billion
PART IV: POSSIBLE IMPLICATIONS TO CGHI SHARE PRICE
Well this is the bit you’ve probably skipped straight to :)
CGHI own c. 47% of Arrik Energy. The following assumes that that proportion of the market cap of Arrik Energy will be reflected in the market cap (and hence future share price) of CGHI.
To keep things simple in this section, the current shares o/s for CGHI is taken to be 300 million and the price of oil at $60 bbl .
A) Valuation prepared by INVESTEC based on GCA estimates for North Alexander/ East Kitchen.
Total= 288.67 million BOE ($17.32 billion)
1. Arrik Energy Valuation (1.06% of reserves/ $60bbl) = $183.59 million
CGHI 47% = Market Cap $86.43 million
CGHI (estimated share price) = c. $0.30
2. Arrik Energy Valuation (7.45% of reserves/ $60bbl) = $1.29 billion
CGHI 47% = Market Cap $606 million
CGHI (estimated share price) = c. $ 2.00
B) Valuation prepared by INVESTEC based on GCA reserve estimates for North Alexander/ East Kitchen + ‘educated’ reserve estimates for Kitchen and South Kitchen based on a 32.1% proportion of Arrik Energy/ Escopeta original estimates for these areas)
Total= 791.67 million BOE ($47.50 billion)
1. Arrik Energy Valuation (1.06% of reserves/ $60bbl) = $503.5 million
CGHI 47% = Market Cap $236.65 million
CGHI (estimated share price) = c. $0.80
2. Arrik Energy Valuation (7.45% of reserves/ $60bbl) = $3.54 billion
CGHI 47% = Market Cap $1.66 million
CGHI (estimated share price) = c. $ 5.50
C) Valuation based on Arrik Energy/ Escopeta reserve estimates for North Alexander/ East Kitchen/ Kitchen/ South Kitchen.
Total = 2.462 billion BOE ($147.72 billion)
1. Arrik Energy Valuation (1.06% of reserves/ $60bbl) = $1.57 billion
CGHI 47% = Market Cap $738 million
CGHI (estimated share price) = c. $2.45
2. Arrik Energy Valuation (7.45% of reserves/ $60bbl) = $11.00 billion
CGHI 47% = Market Cap $5.17 billion
CGHI (estimated share price) = c. $17.20
PART V: SUMMARY
This analysis has attempted to compare and contrast the more conservative reserve estimates prepared by GCA for the initial two leases of North Alexander and East Kitchen, with the higher estimates which Arrik Energy/ Escopeta have prepared for the four leases of North Alexander, East Kitchen, Kitchen and South Kitchen.
As GCA only considers the initial two leases in their estimates, a direct comparison with the Arrik Energy/ Escopeta estimates is not possible unless a reasoned estimate is also made for both the Kitchen and South Kitchen areas. GCA estimates for the North Alexander and East Kitchen leases, were 32.1% of the reserves estimated by Arrik Energy/ Escopeta. If this same ‘rule’ is applied to Kitchen and South Kitchen estimates by Arrik Energy/ Escopeta) at least an indication of what the GCA estimates for all four leases can be established.
The valuations show a range for each estimate which can be used as initial benchmarks. These ranges set the ‘minimum’ level using the INVESTEC’S lower valuation parameter of 1.06% of reserves as the valuation method and the ‘upper level’ using 7.45% of reserves. Whilst some analysts have used a percentage higher than 7.45% in their market valuations of O+G companies, for the purpose of this valuation 7.45% is seen as being a realistic/ achievable figure, rather than being overly optimistic.
Based on the GCA estimates for the two leases only, the minimum share price for CGHI should be in the region of $0.30 (i.e. using INVESTEC’S lower valuation parameter of 1.06% of reserves). If valuations reflect the broader market average for O+G companies, this figure could be around $2.00 (i.e. 7.45% of reserves). These estimated share prices do not include, however, the potentially larger reserves located in the areas of Kitchen and South Kitchen which are held under option by Arrik Energy. If estimates for these areas are included, as outlined above, the minimum share price for CGHI should be in the region of $0.80 (i.e. using INVESTEC’S lower valuation parameter of 1.06% of reserves). If valuations reflect the broader market average for O+G companies, this figure could be around $5.50 (i.e. 7.45% of reserves). (Note: Variations in the actual amount of O+G discovered in these initial two fields will naturally affect these valuations, either up or down accordingly).
The Arrik Energy/ Escopeta’s estimates include all four lease areas and the following valuations reflect this. The minimum share price for CGHI could be in the region of $2.45 (using INVESTEC’S lower valuation parameter of 1.06% of reserves). If valuations reflect the broader market average for O+G companies, this figure could be as high as $17.20 (i.e. 7.45% of reserves). These valuations assume 100% of Escopeta’s estimates are recovered and price of oil remains at $60 bbl. If only 50 % of the estimates are recovered, then these share prices are $1.22 and $8.60 respectively (reflecting the different valuation parameters).
In summary, the potential CGHI share prices based on GCA 'educated' reserve estimates for all four lease areas range from $0.80 to $5.50 and for the higher Arrik Energy/ Escopeta estimates they range from $2.45 to $17.20. The closer the valuations are to those that reflect the broader market average for O+G companies, the closer the share price should be to the upper ends of these ranges.
CGHI share price will also be affected by the exchange it is currently on, irrespective of the fact that Arrik Energy trades on AIM (although this does help with credibility). I would have thought a move to a higher exchange would be part of the future plans of CGHI and essential to achieve ‘fair’ market value.
Anticipated increases to the price of oil in the future will also affect these valuations/ estimated possible share prices, so they will almost certainly increase over time.
Ok, hope this helps with the ‘bigger picture’ and any further thoughts/ comments/ corrections are welcome.
Good Luck:)
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