Equity Research: Why Triangle Petroleum is an attractive investment (Part 2 of 4)
TUSA is Triangle’s wholly owned E&P subsidiary located in the Williston Basin that generated ~$160 million of revenue and ~$110 million of EBITDA in 2013 (fiscal year 2014 because it ends January 31). The Williston Basin is home of the Bakken Shale and Three Forks formations that are estimated to have ~7.4b barrels of recoverable oil, representing one of the largest oil deposits in North America. TUSA is in the crux of the Bakken, with ~45,000 acres in McKenzie and Williams counties, which are the first- and third-largest-producing counties in that shale. Its proved reserves and production grew threefold from 14.6 million boe and 2,700 boepd one year ago to 40.3 million boe and 8,250 boepd today, with guidance to increase production by another 33% to 11,000 boepd before year end.
RockPile Energy Services (RockPile)
RockPile is the wholly owned subsidiary providing hydraulic pressure pumping and ancillary services that produced ~$195 million of revenue and ~$40 million of EBITDA last year. It began operating a second pressure pumping spread in 2H13 resulting in ~$50 million of run-rate EBITDA and recently added a third spread that should enable RockPile to produce ~$70 million of EBITDA this year. Third-party customers now represent half of RockPile’s revenue and this share is only expected to grow, which increases its attractiveness as a stand-alone business.
Caliber Midstream (Caliber)
Caliber, formed through a JV with First Reserve, provides gathering, transporting, and processing services in the Williston Basin. Its assets include 20 miles of crude gathering & transportation pipe, 29 miles of gas gathering and transportation, 19 miles of produced water transportation, and 22 miles of freshwater delivery. Some of these systems are complete, allowing Caliber to earn ~$10 million of EBITDA in 2013, while the rest will be finished by July. In 2014, management expects Caliber to produce ~$45 million of total EBITDA, but this is based solely on TUSA’s production and assumes zero demand from third parties. If its sales force has some success winning new clients, then EBITDA could be much higher considering the completed system should generate ~$100 million of EBITDA if only half of its capacity is being utilized. As Caliber’s profit expands, Triangle will benefit exponentially through greater ownership because of their warrants package.
History of the company’s transition
From 2005 until 2009, Triangle was exploring for emerging shale gas in Canada without much success, considering it had less than $200 thousand of revenue. In December 2009, Palo Alto Investors, the largest shareholder at the time, led a large restructuring that consisted of:
- Adding three directors to the board, including Gardner Parker (an Ernst & Young partner that had served on the boards of other oil and gas companies), Dr. Peter Hill (an oil and gas veteran), and Jon Samuels (an analyst at Palo Alto covering the energy sector)
- Naming Mr. Parker as chairman, Dr. Hill as CEO, and Mr. Samuels as CFO
- Shifting Triangle’s strategy to focus on unconventional oil plays in the U.S. Triangle entered the Bakken with the acquisition of 4,000 acres only one month after forming this new plan
Over the next 18 months, it increased its acreage position with ~$200 million of funding raised through various public and private equity offerings. Due to limited availability of pressure pumping and well completion services, particularly for a small operator, the company started RockPile Energy Services in October 2011 to ensure capacity and to profit by also providing these services to peers facing the same difficulties.
In April 2012, after more than two years since their initial election, Mr. Samuels replaced Dr. Hill as CEO, who then replaced Mr. Parker as Chairman of the Board, which seemed to always be part of the transitioning process. To secure takeaway capacity and fill this void for other operators, Triangle formed Caliber Midstream six months later through a JV with First Reserve, which is a highly reputable private investment firm focused on the energy sector. The structure enables Triangle to increase its ownership from 30% today to nearly 60% if Caliber Midstream exceeds certain valuation thresholds. In only four years, management and the board have done an impressive job transitioning Triangle from a cash-burning exploration venture to an oil and gas company with three separate businesses generating a combined ~$150 million of run-rate EBITDA (before intercompany eliminations).
The Market Realist Take
Triangle’s wholly owned subsidiary RockPile’s services lower Triangle’s realized well completion costs and enable Triangle to exercise greater control over completion schedules, quality control, and pay cycles. On March 25, 2014, RockPile entered into a credit agreement that provides for a $100.0 million senior secured revolving credit facility with an accordion feature that allows for the expansion of the facility up to $150.0 million. The credit facility is expected to support RockPile’s growth initiatives and enable it to remain self-funded as it contemplates additional investment in the infrastructure and equipment necessary to support broad-based growth across its service lines. A portion of the credit facility proceeds will be utilized to refinance RockPile’s existing indebtedness.
In FY2014, RockPile completed 31 TUSA wells and 50 third-party wells, compared to 12 TUSA wells and five third-party wells in FY2013. It deployed a second hydraulic fracturing spread into service and its first wireline unit and acquired Team Well Service, Inc. (TWS). TWS operates three work-over oil rigs and provides a variety of oilfield services.
RockPile’s competition includes large integrated oilfield services companies, a significant number of regional competitors, and a limited number of smaller service companies. Triangle’s filing stated that RockPile’s competitors include Halliburton (HAL), Schlumberger (SLB), and Baker Hughes (BHI). These companies are also a part of Market Vectors Oil Services ETF (OIH) and the Energy Select SPDR ETF (XLE).
Market Realist noted in an article earlier this month that most major oilfield service companies such as Halliburton (HAL), Schlumberger (SLB), and Baker Hughes (BHI) expect U.S. onshore rig counts to be slightly up in 2014, compared to 2013, driven mostly by higher activity in the Permian Basin in West Texas. The report added that oil prices remained relatively buoyant over 2013, and most analysts expect price levels to remain economic enough to drill in the major U.S. oil shale plays (the Bakken, Eagle Ford, and Permian). For more on this outlook, please read the Market Realist article Must-know: Why rig counts matter, and where they’re increasing.
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