Description

Crew Energy

I hesitantly recommend a small purchase of CREW ENERGY as a speculative buy with a speculative price target of $35.99/share (CAD).  The current market cap is $472 million (CAD) and the enterprise value is $844 million (CAD). 

The current share price can best be explained by Canadian Natural Resource’s (ticker: CNQ) recent acquisition of a very similar company, Storm Resources, for $878 million (CAD) late last year.  CNQ funded the entire acquisition with a single month's worth of projected 2022 free cash flow.   CNQ has stated their intentions to make more acquisitions.  Crew would be a logical choice.  Hopefully, Crew doesn’t sell out too soon. I think Crew would do better riding the wave of the next commodity frenzy (more on that later).

The Montney resource play is a gas reservoir that is situated in the northeast corner of the province of British Columbia in western Canada.  It ranks among the top natural gas basins in the world.  Like Crew is now, Storm was a pure-play Montney player.   I’m going to start this analysis by comparing Storm and Crew.  Then I’m going to outline the even bigger upside and highlight the ongoing shift in perception of natural gas.  Crew has analyst coverage so if you want a traditional thought process then read those. They're generally bullish and do a fair job explaining the current share price and risks.

Crew and Storm have similar current production, mix and margins:  Both produce ~80% dry natural gas with the balance being NGL and condensate.  Storm was producing 28k barrels of oil equivalent per day in Montney when the deal was announced.   Crew is currently at around 30k/day.

Crew’s reserves are worth more

Storms 2020 reserves were worth $1 billion (@10%)

Table 1: Source Storm 2020 Annual Information Form.

Crew’s 2020 reserves for the same period came in at 60% higher.

Table 2: Source Crew Energy 2020 Annual Information Form.

Crew has more land.  Storm had 120k net acres of land in the Montney.  Crew has 264k net acres.

Crew’s land is closer to CNQ than Storm’s land. 

Map 1:  Source https://xitechnologies.com/xi-data-blueberry-river-first-nations-drilling-overview-dashboards/

Crew has less “Blueberry River” Risk.  Crew has land outside of the disputed “Blueberry River” area.  In July of 2021, the Blueberry River First Nations Tribe won a lawsuit regarding the exploitation of minerals on their land.  Most producers in this region say that it is not going to be impactful but the share price said otherwise when the court announced the surprise decision.  I don’t know how to handicap this uncertainty but Crew has a lot less of the uncertainty than Storm.  Whatever the ramifications, CNQ knew about the risk and it didn’t stop CNQ from buying Storm at the price cited above.

Map 2:  Source Storm Investor slide deck.

Crew is a badass operator.  Even though Crew is small, Crew drilled 2 out of 20 of the top performing wells in the Montney region.  This data is from Tourmaline’s investor slide deck.  Tourmaline ~20x larger than Crew and spending proportionately more capex drilled 8 out of 20 of the top performing wells.  CNQ drilled 2 out of 20.  Where’s Storm?

Graph 1:  Source Tourmaline Investor slide deck

Summary:  Based on all the above, I’d argue that Crew is worth more than Storm, yet it is trading at a slight discount to the price CNQ paid for Storm.  Regardless, that gets you in the ballpark of what Mr. Market is thinking about the current price.

PIE IN THE SKY

Section 2:  What’s the big, speculative upside? $35.99?  The market is not that inefficient!

Aside from another cold winter and more natural gas volatility there is a possibility that we are in the early innings of a commodity boom. Crew is set up to benefit disproportionately from it because of their land base.

Every year energy companies measure their reserves.  Crew has been doing so for 18+ years.  Crew has steadily increased their reserves.  While this is not a conventional way to set a price target, if there is another bull market in commodities it can be inferred that Crew would trade at a similar premium to reserves as it did in the prior bull market.  Eyeball this graph from the company’s recent slide deck - in that situation, $60+ per share, is not out of the question.

Graph 2:  Source Crew investor slide deck

Putting a few crazy numbers to it, a decade ago as the last bull market peaked, Crew peaked at 2.39x their 2010 Pv-10.   Crew’s current PV-10 is $1.6 billion (putting a target of $22/share at similar multiple with existing reserves).  In a bull market, Crew’s PV-10 will start coming in a lot higher as rigs come on and prices increase, such that PV-10 could come in at ~$2.5 billion.  A 2.39x multiple gets you my $35.99 price target.  You are now saying “oh surf1680, you are full of it!”  No doubt about it but on the spectrum of silliness I’d say I’m only about halfway there.  Bitcoin literally has zero value yet crazy people are paying through the nose for it.  If we were to convert Crew’s 1862 bcf of natural gas to energy and then mine Bitcoin with it we’d make enough electrons to make 794k bitcoin, or $206.49 per share in U.S. Dollars.  At $100k bitcoin, Crew would pencil out to $507/share.  When (not if) Bitcoin goes to zero Crew will still have the reserves to heat 750k North American homes for the next couple of decades.

Crew has demonstrated in prior cycles that it has the goods to get Mr. Market excited about the future.  Mr. Market may pay the premium I am targeting, or CNQ may take them out for pennies on the dollar.  There has been a shift in the thinking about natural gas.  Rather than let their citizens freeze, the EU has been discussing labeling natural gas as a “green energy.”  This could improve the flow of capital to pure play, ESG-friendly natural gas players like Crew.  It could easily ignite the frenzy we once saw a decade ago.  https://www.ft.com/content/4e42fe24-e60b-4785-9c46-a51d7d0458a1

Catalyst

Natural gas & commodity frenzy

Acquisition by CNQ, Tourmaline or others