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    Sunday, July 25, 2010


    Valuation of Eagle Rock Energy (EROC) post transactions

    Eagle rock energy has completed the transactions noted here and here .

    As part of the proxy solicitation process EROC disclosed management estimates for 2010 through 2013. These were used by Madison Williams and Company to provide a fairness opinion on the transaction. We can use the data to value EROC based on management’s view of Distributable Cash flow over that period.

    Management provided optimistic, pessimistic and base case estimates where the fee to NGP is paid in units, which is what occured.

      2010 Q3 2010 Q4 2011 2012 2013
    DCF Base 20,474 21,820 105,966 111,516 116,504
    DCF Optimistic 25,673 27,126 161,501 178,239 253,168
    DCF Pessimistic 15,624 17,116 31,806 27,915 (44,981)

    DCF – Distributable cash flow

    Using that data and taking a weighted average (base*4+optimistic+pessimistic)/6 we can do a dividend discount model valuation. With an 11.8% discount rate (calculated using a fundamental beta – if anything this is a little high as average debt over the life of the cash flows will be lower than the starting debt) the weighted average value is $9.81 using the shares outstanding also provided in the disclosure documents.

    The proxy also include a relative valuation of EROC based on various valuation metrics and comparable transactions. This values EROC between 7.37 and 11.06, with an average of $9.22.

    This data can further be used to estimate the value of the warrants at 3.13.

    A reasonable valuation for EROC is around $9 and the warrants around $3. This is higher than my earlier estimates due to a number of factors. The public equity raising has not been required. New hedges have been acquired and a lot has happened to the company and the economy

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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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