Insiders Place Bets on Wyoming Coal Bed Methane Reserves
By Michael Brush
March 08, 2005
After posting huge gains in the past two months, small-cap energy stocks are getting picked off one by one this week as pullbacks in oil prices give traders the excuse they need to take profits.
But the long-term trends behind higher energy prices – China’s demand for oil to support growth, global economic expansion, and the terror premium – are still in place. So pullbacks in promising small-cap energy names with significant insider buying look like buying opportunities.
On Monday, for example, a small cap energy company we featured two weeks ago (http://www.investorideas.com/Companies/NaturalGas/Articles/Energy_Stock.asp) called Tri-Valley (TIV) got knocked down to $14 from $17. But by late trading the next day, it was closing in on old highs of $17 once again.
Warren Resources
Tuesday, it was time for another small energy company with insider buying to take its turn – or Warren Resources (WRES). Following a brokerage downgrade, Warren Resources traded as low as $10.50 Tuesday from above $12.50 the day before. There’s no guarantee Warren Resources will snap back as quickly Tri-Valley. But given the promise for the company, it’s probably a good idea to take advantage of the weakness and buy some shares.
Based in New York, Warren Resources has several projects in places like California and Texas. But let’s focus on what looks like the most interesting holding: 146,000 acres of coal bed methane reserves in the Washakie Basin in Wyoming.
The company has proved only a small portion of its Washakie Basin reserve base – or 5%. But the present value of that portion is $236 million. This is impressive, because Warren Resources has a market capitalization of just $326 million. So that means the market is assigning a value of only $100 million to all of the rest of Warren Resources operations and holdings – including 95% of its Washakie Basin reserves.
This doesn’t seem right. Let’s assume Warren Resources only ever proves and develops half of its 146,000 acres of coal bed methane reserves in the Washakie Basin. That would still add another $2 billion in net present value to a company whose market cap is just $326 million.
It’s this kind of logic that explains why the brokerage Jefferies & Company recently described Warren Resources shares – at around these levels -- as a “cheap option” on the potential for Warren Resources to prove the rest of its Washakie Basin coal bed methane acreage.
Will it? No one knows for sure. But the underground structures throughout the Washakie Basin holding are similar – suggesting there is a good chance that much more of it will eventually be proved. Insider buying in the stock in December supports this.
Jefferies projects Warren Resources production will move from 3,735 million cubic feet of gas equivalent per day (MMCFEPD) in 2004, to 6,170 in 2005, 19,300 in 2006 and 46,620 in 2007. Warren Resources recently raised $75 million in an initial public offering (IPO), which it will use to develop wells in Wyoming. Following the IPO, insiders put over a quarter million dollars into the stock in the $8 range in December.
At the time of publication, Michael Brush held shares of Tri-Valley and Warren Resources.
<<I don't know this newsletter, but occasionally we see some of Jefferies work on Oil Views. I'd love to see a link to the full Jefferies piece as the production growth forecasted is pretty handsome.>> |
