NVA’s recent Montney Pipestone acquisition from CVE highlighted how Canadian investors value acreage acquisitions versus investors in the Lower 48. After backing out current production, NVA ended up paying about C$11,000/acre for the top-tier liquids-rich acreage. While this is the highest acreage transaction we’ve seen in the play, deals of this magnitude or more occur frequently in the Lower 48 shale plays. We thought this might signify a shift in how Canadian investors view Canadian transactions; rather than valuing oil and gas assets on a financial multiple basis, use a future free cash flow measure, which we think is the appropriate way to look at it.
FIGURE 1 | Map of NVA’s Pipestone Acquisition
For unconventional plays RSEG uses a developed acreage valuation to evaluate and compare different assets. Acreage NPV is calculated by multiplying the NPV per well by the percent viability of the area and a discount factor that is based on development time frame, then dividing that by a single well’s drainage – which is based on lateral length and spacing.
For example, this area of the Montney assumes a 75% viability, a typical well design that works out to 160-acre drainage and a NPV per well of $8 million – working out to $22,875/acre.
FIGURE 2 | Acreage Valuation Definition
If the type curve is adjusted by lowering the EUR, drainage increased or the time frame expanded to 20 years, these would all lead to a drop in acreage valuation.
From the perspective of future free cash flow on a developed acreage standpoint, we were positive on the NVA deal as it shows plenty of upside potential remains. It was clear from NVA’s stock performance that Canadian investors did not favor the deal as they were not looking at it from an acreage NPV perspective and instead saw it as dilutive to where the stock was trading at the time.
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