There’s no doubt that the U.S. shale oil boom is an overcrowded trade, and for investors seeking value, there are few opportunities to take advantage of in the sector. However, there is one domestic oil producer that has recently caught my attention; Triangle Petroleum.
Triangle Petroleum Corporation (NYSEMKT:TPLM) is essentially a holding company for three oil-industry subsidiaries. The subsidiaries are, wholly owned Tusa (an exploration and production company), RockPile (a wholly owned energy services subsidiary), and Caliber Midstream (of which Triangle is the majority owner).
Triangle Petroleum’s Tusa subsidiary undervalued by 80%
And this is where the value is to be found. A sum-of-the-parts valuation reveals that Triangle Petroleum’s Tusa subsidiary is undervalued by around 80%.
Tusa is Triangle Petroleum’s most interesting asset. The E&P subsidiary owns acreage within the Williston Basin, where it is currently in the middle of a four-rig drilling program, a key part of the company’s goal to drive production up to 12,600 barrels of oil per day, in the best-case scenario, by the second half of 2015.
For the most part, Triangle Petroleum Corporation (NYSEMKT:TPLM)’s wholly owned energy services subsidiary, RockPile is doing most of the drilling work. Tusa however is not RockPile’s only customer. During the first quarter, RockPile completed five wells for Tusa and five for third parties, so RockPile is not wholly dependent upon the success of its parent. By the fourth quarter, management expects around 64% of RockPile’s business to be with third parties RockPile’s earnings before interest, taxes, depreciation and amortization is expected to expand 75% during fiscal 2015.
Triangle Petroleum’s Caliber embarked on an aggressive expansion plan
Triangle Petroleum’s midstream subsidiary, Caliber has just embarked on an aggressive expansion plan, building a network of essential infrastructure within the Williston Basin. The subsidiary’s EBITDA is expected to jump 400% during fiscal 2015.
Back to Tusa. With its planned drilling program, if the company hits production targets, Tusa is expected to report adjusted EBITDA of $225 million at the high end for fiscal 2015. Tusa’s fiscal 2014 has just ended, and the company reported adjusted EBITDA of $112 million for the period.
Despite Triangle Petroleum Corporation (NYSEMKT:TPLM)’s attractive growth prospects, the company is seriously undervalued based on a sum-of-the-parts valuation. Management has actually put together a valuation of the separate businesses within May’s corporate presentation. The valuations are based on estimated 2015 EBITDA forecasts and current enterprise values, although it would seem that this has gone unnoticed
For fiscal 2015, management expects RockPile to report EBITDA of $86 million, RockPile’s EV stood at $572 million during May of this year. Applying a peer average valuation of 6.6x EV/EBITDA to RockPile gives a value of $6.66 per Triangle share — there are 85.9 million shares outstanding.
Further, Caliber Midstream is slated to report EBITDA of $15 million for fiscal 2015, the subsidiary has an EV of $212 million. Apply a peer average multiple of 14.1x EV/EBITDA, and Caliber is worth $2.47 per Triangle share.
Caliber and RockPile together are worth $9.13 per Triangle Petroleum share
All in all, Caliber and RockPile together are worth $9.13 per Triangle Petroleum Corporation (NYSEMKT:TPLM) share, implying that the market is valuing Tusa, Triangle’s E&P division, at only $1.93 per share. At time of writing Triangle is trading at a price of $11.06.
With 85.9 million shares in issue, this valuation means that Triangle Petroleum Corporation (NYSEMKT:TPLM)’s E&P business is only worth $166 million. With Triangle’s E&P division expected to report adjusted EBITDA of $225 million for fiscal 2015, the E&P division is trading just above 0.7x forward EBITDA. Triangle’s E&P peers currently trade at 5x their forward EBITDA. Apply a valuation of 5x forward EBITDA to Triangle Petroleum ‘s E&P arm gives a per share value of $13. After including both the Caliber and RockPile valuations, the figures suggest that Triangle is worth upwards of $22.13 per share — based on a sum-of-the-parts calculation.
The author owns shares in Triangle Petroleum Corporation (NYSEMKT:TPLM)