Investing

Eagle rock energy has completed the transactions noted here http://longterm.blogspot.com/2009/09/natural-gas-partners-ngp-proposed.html and here http://longterm.blogspot.com/2009/10/revised-ngp-proposed-transaction-with.html .

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.

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

posted by Neil  # 1:39 AM