Valuing Goodrich Petroleum's Assets

Mar. 30, 2016 10:08 AM ET  seekingalpha.com|

Summary

Goodrich's assets include a substantial amount of undeveloped acreage in areas that are of limited value in the current oil and gas pricing environment.

Its producing assets and core Haynesville Shale acreage have a combined estimated value of $162 million.

Another $97 million of estimated value is in undeveloped acreage in areas such as the Tuscaloosa Marine Shale which are quite marginal in the current environment.

These areas may have some speculative value currently, but may also not attract interest as companies focus on plays that can be economical at $50 oil or below.

Goodrich's assets may be worth substantially more if it can survive the near-term and keep going until its acreage becomes less marginal due to better pricing.

Goodrich Petroleum's (NYSE:GDP) value currently includes a substantial amount of undeveloped acreage that has limited value in the current oil and gas pricing environment. Goodrich has assets in the Tuscaloosa Marine Shale, Haynesville Shale and the Eagle Ford Shale. I estimate that it has around $91 million in producing assets and another $71 million in undeveloped core Haynesville Shale land that is still valuable in the current environment. Another $97 million is in areas that may gather speculative bids or attract no interest at the current time.

This makes Goodrich's asset value approximately $160 million to $260 million (depending on whether the low value land is included) compared to secured debt of $202 million. I believe the best bet for the unsecureds to recover some value is to tender the bonds in the exchange offer and hope that oil and gas prices recover to a point that makes Goodrich's marginal land semi-attractive again.

Tuscaloosa Marine Shale

Goodrich's main position is in the Tuscaloosa Marine Shale [TMS]. Goodrich indicates that it has 150,000 net acres in the core of the TMS and approximately 307,000 total net acres in the TMS. However, the TMS is considered to be one of the least economical U.S. onshore resource plays, ranking 17th out of 18 plays based on oil prices required for 15% pre-tax IRR and 18th out of 18 plays based on oil prices required for 10% pre-tax IRR.

To achieve a 15% pre-tax IRR, over $55 WTI oil is required for the TMS. This just involves well costs and doesn't include items such as corporate G&A, interest costs or leasehold acquisition costs.

The Uinta Basin has only marginally better economics, ranking 16th out of 18 plays based on required oil prices to reach both 10% and 15% pre-tax IRR, so it may serve as a reasonable proxy for valuing the TMS. Bill Barrett Group sold 17,632 net acres (mostly undeveloped) in the Uinta Basin producing 470 BOEPD for $27 million in September 2015. If production was valued at $35,000 per flowing barrel at the time, the price per undeveloped net acre in the Uinta transaction would be roughly $650. Adjusting for the lower oil price now and the weaker economics of the TMS may make the undeveloped land in the core TMS worth around $400 per acre in the current environment, and the non-core TMS land worth $150 per acre (if that). Goodrich has approximately 125,000 net core undeveloped TMS acres and approximately 157,000 net non-core undeveloped TMS acres, for a total estimated valuation of $74 million in the current market.

Goodrich's Q3 2015 production in the TMS was approximately 2,400 BOEPD. The lack of new activity by Goodrich in the TMS may have resulted in current production levels falling to 1,700 BOEPD. At $30,000 per flowing barrel, the producing TMS assets would be worth approximately $51 million, bringing the total value of its TMS position to $125 million in the current environment. With activity in the TMS grinding to a halt in mid-2015 though, the value of the TMS is largely speculative right now.

Haynesville Shale

Goodrich has approximately 11,760 net undeveloped acres in the core area of the Haynesville Shale and 9,800 net undeveloped acres in the Angelina River Trend. Its Q3 2015 production from the Haynesville Shale was approximately 19.35 MMcf per day, which may result in current production being approximately 16 MMcf per day.

EP Energy recently sold its Haynesville Shale assets for an estimated value of $6,000 per net undeveloped acre and $2,500 per flowing Mcf. A similar valuation would make Goodrich's core Haynesville acreage worth $71 million and its producing Haynesville assets worth $40 million. The non-core Angelina River Trend assets were worth approximately 10% of the core Haynesville assets before, so a similar relative valuation would make them worth $600 per acre now or $6 million in total. The combined value of the Goodrich's Haynesville Shale assets may be $117 million.

Eagle Ford Shale

Goodrich retained approximately 17,000 net undeveloped acres in the Eagle Ford Shale after divesting its proved reserves in the Eagle Ford in 2015. Analysts mentioned that the deal value indicated that there was little value assigned to non-producing acreage. Topeka Capital estimated that the valuation was $2,500 per undeveloped acre.

The remaining acreage appears likely to have less value than $2,500 per undeveloped acre now. Oil prices are around $40 per barrel now, which is nearly 20% less than oil prices at the time of the 2015 Eagle Ford sale. As well, the divested acreage spanned Frio and La Salle counties, while it appears that nearly all of Goodrich's retained acreage is in Frio County.

While there is still some drilling activity in La Salle County, latest reports indicate no drilling activity in Frio County. Frio County is considered a non-core area of the Eagle Ford Shale and tends to have weaker results than Lasalle County. If it is valued at $1,000 per net acre, that would make Goodrich's position in the Eagle Ford worth approximately $17 million.

Conclusion

Goodrich's assets have an estimated combined value of $259 million in the current environment if it was able to sell everything. This is greater than its $202 million in secured debt. However, a significant portion of this estimated value ($97 million) is for undeveloped acreage in areas with minimal or no drilling activity in the current pricing environment. If these assets were put up for sale, they may receive speculative bids from companies intending to accumulate acreage on the cheap in the hopes of a near or medium-term pricing rebound, or they may not receive bids at all as companies focus on core plays. As well, I am uncertain about the lease expirations for some of the acreage as Goodrich has not filed its 2015 10-K yet. As a result, anywhere from around $160 million to $260 million would probably be reasonable for estimating Goodrich's current asset value.

That means that a restructuring plan could justifiably include an enterprise value that leaves the unsecureds out of the money. As well, if a liquidation was to occur instead, the asset sales would probably at least cover most of the secured debt, but the unsecured coverage depends on what the undeveloped acreage could get. Given the uncertainty, I think the best option for the unsecureds would be to tender and hope that Goodrich can last long enough for at least a moderate pricing rebound. There would still be a significant chance that Goodrich will end up filing down the road, but a better pricing environment would increase the chances that the unsecureds get at least a partial recovery (through liquidation or a higher enterprise value in the restructuring plan). 

Link to complete article: http://seekingalpha.com/article/3961947-valuing-goodrich-petroleums...