Calculating SPI's value using Goldman Sachs' latest research report

Goldman Sachs (GS) issued a report on December 16. Within that report, they state that Exxon’s takeover of XTO shows that buyers are willing to pay for unbooked resource potential as evidenced by their offering a substantial amount for XTO’s “additional potential.” GS is currently targeting 3P resource valuation for the companies it covers from $0.50/mcf to $2.05/mcf as they state in their report. Evaluating Canadian Spirit Resources Inc.’s (SPI) Montney prospective resource using GS’ valuation metrics leads to the following:

Talisman estimates up to 300 bcf/section in the Montney alone as they stated at the Peter’s & Co. conference in New York. With SPI’s 44 sections, 35% interest and using a recovery rate of 40%, SPI has a possible 1.85 tcf. At the low end of GS’ 3P valuation, SPI’s Montney resource alone could be valued at (1.85 tcf x $0.50/mcf) = $925 million. This equals ($925 M/48.7M shares) = $19/share!!! Now obviously a lot would have to be accomplished in order to realize a price like that but if substantial progress is made, then a significant increase in the stock price could happen.

Currently, the market is valuing SPI’s Montney resource below $0.035/mcf or less than 7% of GS’ low end valuation. As SPI expects to begin moving their Montney and Gething prospective resources into the 3P reserve category, possibly as early as the beginning of 2010, SPI’s stock price should begin to reflect similar values. Even a move to the low end of the GS valuation range would lead to a significant increase in SPI’s stock price.