A bizarrely-ignored Permian blue chip

An oil-rich growth story with proven operators

Dear Reader,

Management/governance is paramount in resource investing. Most of us bumbling generalists spend too much time analyzing the company and not enough time focusing on management’s track record of delivering for shareholders and operating through multiple cycles.

Primeenergy Resources (PNRG 0.00%↑) is a $275mm market cap founder-run acreage-bank + operator with operations primarily in the Permian and additional acreage in Oklahoma and the Gulf Coast. Public since at least 1984, management has steadily reduced the share count and navigated through difficult environments with a strong balance sheet, but is currently guiding towards a growth cap-ex plan that could exceed the company’s current market cap over the next several years with plans to take on substantial debt.

On the surface level the stock looks approximately fairly priced due to low proven oil reserves (only 7.5 years at the 2024Q1 run-rate), but I think that’s an overly punitive angle compared to most E&Ps since they own well over 20k acres (about 10k in the Permian) and their ability to farm out that acreage is what really counts. Since they do also regularly monetize non-care acreage — around $10mm in sales over the last few years — it’s extremely conservative to value this business just for its proven oil NPV. Their other assets include a small services business at ~$15mm annual revenue and a 33% interest in a 138,000 square foot retail center shopping center in Pratville, Alabama.

Results ramping up

In 2024Q1 we got some concrete results as oil production soared to 431k barrels (up from 330k in 2023Q4 and 193k in 2023Q1) with some of those wells coming online mid-quarter and more wells associated with significant capex coming online in Q2. And although the new wells likely have high rates of decline, we are still so early into their current wave of cap-ex I think the peak quarterly production number is likely still ahead of us. Was it just one huge gusher that came online in Q4/Q1 or have we entered a new wave of some very profitable wells?

Similar to NGS 0.00%↑ under its former CEO Stephen Taylor, you are betting that a very experienced, financially-conservative management team is correctly signaling opportunity to invest at exceptional rates of return, ignoring the broader market preference for immediate return of capital. The idea is to front-run a market response to dramatically-improved operating results with some insulation from market risk from management’s proven buyback program. This bet is about confidence in management’s stated optimism regarding opportunities in the Wolfcamp and Spraberry formations.

Valuation

Current Reserves incl Services Division and shopping center

Stripping out a $400k gain on disposition, the company brought in $10.7mm net income even with $10.3mm DDA expense. Realized prices for the quarter were $77.26 oil, $1.17 gas, and $21.19 NGLs. At a 5x multiple, that run-rate is worth $214mm.

Land

9300 acres in the Permian can vary a lot in value. I saw one table of industry transactions with a floor at $10k/acre. In 2023Q1 they sold 7.8 acres in Texas for $436k, over $50k/acre. Let’s call it $10k/acre, $93mm.

10k acres in Oklahoma, call it $1k/acre, $10mm.

A 60-mile pipeline offshore. I’m seeing this could be worth anywhere from $100k/mile to a lot more.

30k acre royalty interest in West Virginia. No idea how to value this.

Capital Plan

Capex peaked in 2017 at $59.4mm until it soared to $137mm in the trailing 12 months, with $95mm planned for the remainder of 2024 and another $95mm already identified $95mm for 2025. Given management’s experience and the context here I’ll go out on a limb and say I expect them to generate at least 20% NPV from the near-term investment pipeline. That would be another $38mm.

Note that I’m not giving any credit for a decent chunk of recent capex that hasn’t come online operationally or been officially counted in reserves yet.

Optionality / Asymmetry

I think I’ve made some fairly conservative assumptions above if you have confidence in management. Our downside is that the oil price could go down or the recent production growth could have a very steep decline curve. Since management is not under the obligation to do more capex, our downside is mitigated; but our upside is that we are in the early innings of drilling some serious gushers which, given management’s history of buying back shares, would directly support the share price. So I won’t put a number on it, but we all know that the market loves a good growth story.

It’s not a home run, but it’s a prudent way to own oil

Resource investing can be perilous and downright shady. If you’re interested in getting long oil, I think this is a good route for investing with proven management, which might end up being more important than the valuation details anyway.

My valuation is crude (pun intended), but hopefully conservative. It implies a share price of over $140 with the idea being that we have a favorable margin of safety and more upside than, say, an index of oil producers. I expect YTD outperformance vs XOP 0.00%↑ to continue. In particular I am bullish on being long this name into earnings, and bought some shares recently.

(Note: watch out when placing orders, as it tends to trade low volume and high spread.)