A Look at Valuations
EOG Resources (ticker: EOG) announced yesterday the divestiture of all its assets in Manitoba and certain assets in Alberta in two separate transactions to unidentified buyers that closed November 28 and December 1, 2014, respectively.
The company announced that the net proceeds for the deals totaled $410 million, and that the deal will release $150 million of restricted cash related to future abandonment liabilities on the acreage.
Current production forecast production from the 1.3 million gross acres (1.1 million net) is approximately 7,050 BOPD of crude, 580 BOPD of NGLs and 43.5 MMcfpd of natural gas. Net proved reserves divested are estimated to be 7.7 MMBO, 0.8 MM barrels of NGLs and 78.7 Bcf of natural gas. Based on the proved reserves volumes, the assets were 61% weighted toward natural gas. EOG disclosed that of the approximate 5,800 producing wells sold, 5,255 were categorized as natural gas wells.
EOG retained approximately 382,200 gross acres (282,100 net acres) in Alberta, British Columbia and Saskatchewan.
OAG360 Comments – Valuations & Comparisons
Based on the $410 million deal price, the assets were divested at $372 per acre, $27,553 per flowing BOEPD, or $18.96 per BOE of proved reserves. We noted that the $372 per acre value would put EOG’s retained 282,100 net acres in Alberta at $104 million.
As of December 5, 2014, 22 Canadian E&P companies in EnerCom’s proprietary database traded at an average enterprise value to prove reserves and enterprise value to flowing production of $18.79 per BOE and $73,293 per BOEPD, respectively. Though the proved reserves valuation for the deal is in line with where public comps are trading, the value per flowing production was well below the average comp price. We believe that the additional $150 million of restricted cash that will be released now that EOG has divested these assets and the company’s inventory of high return projects play a part in the company’s willingness to sell the production at this price.
With $560 million of additional capital now available, the company can reinvest in areas within its existing portfolio with high rates of return.
Oil & Gas 360® spoke with Tom Driscoll, Managing Director at Barclays Research, about the price EOG received for the divestiture. Driscoll told Oil & Gas 360®, “the divested assets have a production life of about 4 years,” which would put these assets near the end of their economic life.
According to EOG’s current corporate presentation, the company’s Bakken, Eagle Ford and Delaware Basin assets are at the top of the food chain in their portfolio and all deliver 10% rates of return at $40 per barrel oil prices and in excess of 100% returns at $80 per barrel oil prices.
On the first page of EOG’s Form 10-K each year since 1996, the company has quoted that it is focused on “maximiz[ing] the rate of return on investment of capital by controlling operating and capital costs and maximizing reserve recoveries.”
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Analyst Commentary
Barclays Research:
Stock Rating/Industry View: Overweight/Neutral
Price Target: USD 122.00
Price (08-Dec-2014): USD 88.19
Potential Upside/Downside: 38%
Tickers: EOG
EOG announces sale of majority of its Canadian acreage
Last night, EOG revealed it has closed on two separate transactions to sell assets across its Manitoba and Alberta portfolios. The combined transactions involved 1.1 million net acres and approximately 21.6 mmboe of proved reserves (60% of which are natural gas). Current production on the assets is ~7.1 mbpd of oil, 0.6 mbpd of NGLs and 43.5 mmcfpd of natural gas. We estimate 2015 cash flow on the divested assets is ~$150 million. Proceeds from the divestiture will be used for corporate purposes.
$560 million transaction value
EOG will receive roughly $410 million in proceeds from the deal. The sale also frees up approximately $150 million in cash previously earmarked for AROs on the Canadian assets. We expect little to no tax leakage on the proceeds, which are expected to be received during 4Q. The $560 million transaction value represents a ~3.7x 2015E PICF multiple, which compares to EOG’s current multiple of ~5.8x as of the Dec 8 closing share price.
Remains our top Pick
EOG shares have outperformed the U.S. large cap peers by a wide margin since the start of 4Q (down only 14% vs. a 34% decline for the U.S. large cap peers). We expect the strong relative performance will continue as the oil markets seek equilibrium amid the current commodity price volatility. EOG has one of the soundest balance sheets in our coverage with Debt/Cash Flow of less than 0.7x (vs. a peer average of 2.0x). The company also has the most attractive set of drilling opportunities in the U.S. with strong well economics at oil prices ranging as low as $50/bbl WTI. We expect the company to remain active on the drilling front despite the muted outlook for oil prices in the near term; CAPEX will likely remain within cash flow which, assuming $70/bbl WTI in 2015, will decline roughly 10% next year.
