Cubic Energy – QBIK – A Penny For Your Thoughts

 

Cubic Energy - QBIK - Haynesville Minnow ($2.94 as of 6/03/08). I don't often traffic in penny stocks and when I have in the past, the results have often been painful, especially in this "everything over $10 goes up, everything under $10 gets forgotten market". I pointed these guys out way back in March when HK first highlighted the Haynesville as an oddity that was so low dollar that buying the shares of the company amounted to a call option in an of itself. But ya know, these guys are drilling wells in the play, so I decided to have a closer look. In a nutshell, they produce a little gas from conventional zones and have 6,326 net Haynesville acres "on structure" and have identified 300 drilling locations (although many of those will be traditional can't miss Lower Cotton Valley wells).

 

The Last Look At Reserves:  3P reserves (proved, probable and possible) of 30.8 Bcfe were estimated in October 2007. This was all attributable to the Cotton Valley formation and economics were based on a pretty conservative price deck (prevailing at the time) of $60.59 oil and $6.66 natural gas. Implication is that at current prices economic reserves would expand and that this report did not take into account Hayneville Shale potential.

 

Properties - Extreme Northwest Louisiana - Two fields in the heart of Lower Cotton Valley (and now Hayneville Shale) country. This is also stacked pay country as you have five plays on the way down to the Haynesville at just over 10,000 feet. They have drilled 20 wells to date with 100% success which is not as impressive as it sounds in the Lower Cotton Valley. Three of wells, all verticals, went deep enough to see the Haynesville Shale and their fourth Haynesville well, the Estes 7 No. 1, was spud June 2.

• Johnson Branch, Caddo Parish, LA. Due west of the Elm Grove field, QBIK they are 12 for 12 with wells drilled here.

• Bethany Longstreet, border of Caddo and De Soto Parish's to the south of Johnson Branch lies they are 8 for 8 with wells here. This is where they spud the Estes 7, No. 1 test which will be completed as a vertical well with the option of a horizontal lateral to be drilled in the future. They have a 35% working interest in the Este well which is operated by Fossil Operating who has drilled a number of wells in the area to this depth. They plan to drill a fifth well immediately following the Estes. 

Chesapeaks Surrounds QBIK's Johnson Branch Acreage. In the immediate vicinity of QBIK's three deep tests, CHK is producing from 3 horizontal wells (rates not yet disclosed), is currently drilling another six horizontals (as of Mau 28) check Sonris and is in the process of permitting initial wells. Chesapeake has said they will announce test rates from a number of their horizontal Haynesville tests in early August on their 2Q conference call. 

Goodrich Acreage Surrounds QBIK's Bethany Longstreet Acreage. (GDP) has a number of wells that are currently testing in the Bethany Longstreet Field. Click here to see the State of Louisiana's latest scout report on the field, search for Bethany Longstreet. 

You can see Cubic's somewhat acreage doughnut holes on the following map. Note the high number of CHK tests ...this area has been the heart of CHK's Haynesville drilling to date.  

Thoughts on Value of QBIK Acreage:

• Lease value: Were they to sell their acreage now they could probably get 15,000 to 20,000 per acre for it. At 6,326  net acres X $15 to $20,000/ac = $95 to $126 million.

- or -

• OGIP - Original Gas In Place Is Estimated To Be High.  Third party reserve engineer puts OGIP at 217 to 245 Bcf per secton (640 acres) for the Haynesville and another 20 Bcf per section for the Cotton Valley. That would could put OGIP reserves at 2.3 to 2.6 Tcfe. 

• If we assume a 10% recovery factory that still puts recoverable gas at 230 to 260 Bcf. A pretty favorable comparison vs the 3P reserves of 30 Bcfe mentioned above from their October 2007 analysis. The recovery factor here may possibly reach 20% which would double those numbers.

• Taking the process one step further and assuming that a potential acquirer, someone with deep pockets, might want to take them out for around $2 per Mcfe acquired. Using the midpoint of the 10% recovery factor case that would yield a purchase price of 245 Bcfe x $2 = $490 million. See TEV calculation below.

 

 

QBIK's Total Enterprise Value: (using 1Q08 Balance Sheet data and current market price) 

Management Not New To Game. Highly experienced, with technical backgrounds, professional lives spent at Majors, service co's, E&Ps.  So unlike some of the new shale chasers I've highlighted as pure hype plays these guys actually know what they've been doing (average management experience > 20 years).

I'm still in the due diligence phase here and will have more to say in coming days. The stock has been a volatile trader and will likely continue to act that way as more news is revealed about the play. In some cases this may lead to errant valuation but at present they do show potential and could be in a sweet spot of the Haynesville Shale play. I don't own it as of the time of this posting but plan on taking a piece in the near future. I will average in over a number of days or weeks as swinging for the fence in single-digit-midget land can leave you with a broken bat.

Addendum: Purchased a starter position on 6/3 for $2.99.

Addendum #2, 6/5/08 Recent Haynesville regional acquistion metrics:

(COG) East Texas Acquisition. Last night highly experienced gas E&P (COG) announced a $603 million producing property acquisition in East Texas with "Haynesville/Bossier" potential, essentially doubling their exposure to this shale play. Here's the deal:

• Purchase price $602.8 million
• 25,000 gross acres
• Associated Reserves: 176 Bcfe (primarily attributed to Lower Cotton Valley but implication is at least some of this is Haynesville potential)
• Produces 32 MMcfepd at present
• Associated Infrastructure valued at $26 million. 

So how's this stack up from an acreage and acquired reserves basis? After backing out the value of the infrastructure this transaction has a pricey feel to it but given the potential companies, analysts, and other interested see in the play I think they will be quickly forgiven. They also hedged out a good portion of the expected production at very favorable prices.

• On an Acreage Basis: $23,000 per acre
• On an acquired reserves basis: $3.28 per Mcfe

GDP Transaction At Bethany Longstreet Field, LA. This was announced on 5/30/08 but it provides a second recent acquired acreage/reserves set of data points. The deal was $32 million for 3,250 acres with associated proved reserves of 12.3 Bcfe (again, lower cotton valley with little to no reserve potential allocated (yet) for the Haynesville).

• On an Acreage Basis: $9,800 per acre
• On an acquired reserves basis: $2.60 per Mcfe

Interesting Takeaways  From The Two Deals As It Pertains To Stocks We Care About: The numbers here get big very fast and would likely not even be realized in a takeout but they represent the upside limits and as you can see when comparing them against the companies' market caps you can see the market could run these names quite a bit further (and this is just one play

• HK - now "over 150,000" acres in the area. Value as bounded by the two transactions above on an acreage basis would be $1.5 to $3.4 billion.  The potential reserves based valuation is in excess of $15 billion. Current market cap: $6 billion with a TEV close to $7.5 billion.   

• PQ - about 24,000 acres, acreage basis would yield a value of $240 to $550 million; reserves basis gets you $2.7 to $3.4 billion. Current market cap $1.15 B, TEV $1.33 B. This one is also cheap on a forward CFPS basis trading at 4.2x 09 estimated CFPS.   

• QBIK - On an acreage basis this is simply overpriced with a range of $63 to $145 million vs a market cap of $230 million. However, looking at them on a $/Mcfe potential basis yields a range of $700 to $900 million. This equates to a share price of $9 to $12. Admittedly those are pretty pie in the sky numbers and they will never get them. Obviously the reserve potential of GDP's recent acquisition (as it was adjacent to part of QBIK's acreage) would be the better metric to use and even that would yield an astronomical per acre acquisition basis so I don't expect the stock to move much above its current range (other than spikes on news which will likely be unsustainable) until the company is able to prove up more of its potential reserves. Again, I'm not swinging for the fence here.

Addendum #3: 6/6/08: Analyst Comment Regarding Haynesville Acreage Potential Pricing. 

A little Birdy dropped a CHK analyst review of the PR today and to make a long story short they think acreage could eventually go for $45,000 to 50,000 per acre. At $50,000 per acre that would value QBIK at $4.10 on a fully diluted share count.