Lucas Energy, Inc (LEI)

Lucas Energy is a small oil and gas company with assets concentrated in the Eagle Ford shale play at various depths (mainly Austin Chalk, Buda, Eagle Ford, and Eaglebine trends). The company acquires what they believe are undervalued oil and gas properties and looks to sell or develop them. The company does not have the money to develop the properties so in order to monetize the assets it has historically either (a) raised equity capital to finance this or (b) made use of joint ventures with producers in the area (e.g., Marathon). Method (a) has diluted equity holders, while they have blundered somewhat using method (b). 

Ryan Morris, an activist investor, has recently taken control of the company in an attempt to extract value for shareholders. His thesis appears to be here, which provides insight into how value might be extracted, and which also seems largely in tact to me. Since gaining control of the company, he has continued buying shares, e.g., here, here, and here.

I would point out that Morris appears to be double counting certain assets by mixing asset conversion activities with proceeds from ongoing production, i.e., the full inclusion of both PV10 and the salable value of the Eagle Ford formation properties. No matter. Roughly adjusting the numbers and estimating taxes due on the sale of certain properties, I peg an estimate of realizable net asset value in the $1.70 - $1.75 range:

Asset	Estimate (000s)
Austin Chalk/Buda production1	40,488
Eagle Ford trend2	77,500
Eaglebine trend3	18,500
Liabilities
Liabilities and preferred	67,140
Rough taxes on gains	23,133
NAV estimate	46,215
Per diluted share	1.73
1. PV10 of 75.3mm, reduced by the percentage of proved reeserves associated with the Eagle Ford formation assets
2. Per prior management presentation 2,400 net acres at $25,000/acre in Gonzales Counties 3,500 net acres at $5,000/acre in Karnes, Wilson and Atascosa Counties
3. Per prior management presentation 3,700 net acres at $5,000/acre in Leon and Madison Counties

This estimate ignores the rescission rights related to LEI's JV with Marathon Oil (Marathon failing to develop wells as agreed). Given language in Morris' 13D filings and thesis, we know this is on the mind of management. At the $25,000/acre that Marathon purchased the property (originally sold by LEI for $1,000/acre), even modest probabilities of exercise dramatically increases estimates of net asset values, roughly $0.06 per share per 1% after tax (so a 5% probability brings the NAV estimate to $2.00 per share). At recent market prices (~$1.55) for the stock, this option is free.

This analysis actually also ignores the $4mm transaction referenced below which is certainly accretive to value.

Several recent transactions indicate acreage prices well in excess of those assumed in the above estimate, for example:

• Throughout 2012, Marathon has purchased 25,000 Eagle Ford acres for $1 billion ($40,000/acre)

• LEI itself sold a royalty on 51.915 acres for $4mm or $77,000/acre; note one should adjust this figure for production costs

Potential catalysts are on the horizon in the form of:

• An announced deal with Milestone - the details of this are still unknown, but it will likely shine a bright light on value (or lack therof) because it will essentially involve the sale of acerage

• New management that is obviously keen on extracting value and that are large shareholders

My main concern with this situation is the fact that acreage prices are dependent on many specific factors that I do not have particular expertise in, including obviously the price of oil and gas. However I feel comfortable enough to have initiated a small position as I continue to research the E&P space and this opportunity specifically.

Disclosure: Long LEI