Quickview: BNK Petroleum

BNK Petroleum’s (BKX.TSX) recent $147.5m deal to sell its Oklahoma Woodford shale assets to XTO has crystallised value for shareholders and removed a looming funding overhang. The deal leaves BNK with all the upside from appraisal of the shallower oil-rich Caney and upper Sycamore formations, while also funding the Gapowo B-1 re-entry well in Poland. BNK has plenty of near-term catalysts, and with the stock trading only marginally above post-deal cash we see plenty of scope for gains in 2013 from drilling, with downside protected by a robust balance sheet.

Funding resolved; upside retained
BNK’s sale of c 36mmboe 2P Woodford shale interests to XTO represents a 45% discount to the independently assessed PV10. However, with depressed gas prices and a $250-300m development capex bill (and $76m credit facility) the deal looks to represent good value for BNK shareholders when considering the potential short-term equity dilution risk. By segmenting its Oklahoma blocks, the XTO deal leaves BNK with the Caney and upper Sycamore formations to drill, which management consider could be yet more prospective than the Woodford. We expect 2013 to focus on lower Caney, and in particular the ‘T’ zone, with a programme of up to four wells. BNK anticipates a net capex bill for drilling all four wells to be c $16m.

Poland offers longer-term play
Exploration in Poland represents the most potential for share price re-rating. A critical re-entry of the company’s Gapowo B-1 well and 10-12 stage horizontal multi-frac will tell us much about the long-term potential of BNK’s Baltic Basin shale acreage. However, as is common across much of Europe, regulatory approval is slow, meaning a well could spud any time from late Q213 to year end. Gross well cost estimates to re-enter and frac are c $11m. BNK is seeking a partner to farm-out up to 20% to carry costs, although this can be funded internally if required.

Valuation: Downside protected, catalysts aplenty
Current analyst valuations range from $1.65 to $6.80 per share, suggesting valuation is open to interpretation. We expect net cash post the Woodford disposal to be around 80c per share. Not including a Poland farm-out we anticipate 2013 cash burn to drive an end-2013 cash position of c $0.50 per share. With potential for the Caney/Sycamore Lime prospects to be larger than the Woodford (sold for $1.02 on a per share basis) low-end analyst estimates appear reasonable based on the US asset base, with material potential upside coming from Poland.

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