Calculating SPI's net asset value

Using the resource numbers and unbooked resource values from the previous posts, we can calculate the Net Asset Values of Canadian Spirit Resources Inc. (SPI) Since there is a range of the potential resource in place and potential recovery rates, several scenarios can be run. In addition, we can use the low, mid and high values for the unbooked resource from Goldman Sachs’ recent report.

Resource numbers range from 100 bcf/section to 350 bcf/section as publicly stated by Talisman Energy (TLM) for the Montney shale in the Farrell Creek area. TLM also stated that recovery rates range from 10% to 30% (it’s worth noting that SPI stated that recovery rates based upon public data are estimated at 30% to 50%). Goldman Sachs’ values for unbooked resource range from $0.30/mcf to $0.68/mcf.

We have calculated the net asset value using the following three scenarios (note that the highest recovery rate used in the valuation is 20%):

Low Range: 100 bcf/section, 10% recovery rate and $0.30/mcf
Mid Range: 225 bcf/section, 20% recovery rate and $0.49/mcf
High Range: 350 bcf/section, 20% recovery rate and $0.68/mcf

Assets included in the net asset value calculation include: $10.1M of cash, $15.0M of present value to SPI from Shell’s capital expenditures in the Gething coals, $10.2M of present value to SPI from Canbriam’s capital expenditures in the Montney shales, $6.5M of present value from $45.9M in SPI tax pools, and $4.0M of present value for infrastructure related to the Spectra tie-in. No value for the unbooked resource in the Gething coals has been included.

Note that there are higher range scenarios that have not been calculated. Recovery rates can be much higher than 20% and once SPI moves their prospective resource into reserves, much higher values can be assigned to the recoverable gas. This would translate into even higher net asset values than have been calculated!

Under the 350 bcf/setion and 20% recovery rate, NAV ranges from $7.58 to $15.99/share. Currently, Canadian oil and gas companies are trading at 1.7 times their net asset value.