Canadian oil patch for sale!

[Otsog]

A western pipeline in Canada is far from a sure thing.  There are people who have been working for nearly a decade on pretty much just the opposition of Northern Gateway.  The First Nations are organized and strongly opposed. The BC public is remarkably strongly opposed.  The BC politicians are remarkably strongly opposed.  Christy Clark can read a poll.

 

It is almost certainly going to federal court either way.  If it does end up being built BC will be kicking and screaming the entire way.  I wouldn't be surprised if Enbridge's ham fisted efforts to get a pipeline built here will materially affect other attempts at major industrial projects in BC.

[no_free_lunch]

I just think there are 1 foot bars to step over in this space

 

What do you see as the one foot bars?

[ThanksAndYouAreWelcome]

I just think there are 1 foot bars to step over in this space

 

What do you see as the one foot bars?

 

I think there is value (as a whole) in Ithaca, Pine Cliff, Crocotta, Long Run, Bellatrix, Zargon, Manitok, CNRL, Athabasca, Encana, TransGlobe, Legacy. I wouldn't want to just own one, but I think a group of them will work out fine over time.

[Myth465]

I just think there are 1 foot bars to step over in this space

 

What do you see as the one foot bars?

 

I think there is value (as a whole) in Ithaca, Pine Cliff, Crocotta, Long Run, Bellatrix, Zargon, Manitok, CNRL, Athabasca, Encana, TransGlobe, Legacy. I wouldn't want to just own one, but I think a group of them will work out fine over time.

 

I agree on the group, a few will be taken over and you will win overtime vs owning one and holding.

What do you think of Iona Energy Inc.

[ThanksAndYouAreWelcome]

I just think there are 1 foot bars to step over in this space

 

What do you see as the one foot bars?

 

I think there is value (as a whole) in Ithaca, Pine Cliff, Crocotta, Long Run, Bellatrix, Zargon, Manitok, CNRL, Athabasca, Encana, TransGlobe, Legacy. I wouldn't want to just own one, but I think a group of them will work out fine over time.

 

I agree on the group, a few will be taken over and you will win overtime vs owning one and holding.

What do you think of Iona Energy Inc.

 

As a stand alone, I haven't done enough work on it (management, decommissioning liabilities, asset history, etc.), but at first glance it looks good.

[no_free_lunch]

Thanks  .. ThanksAndYouAreWelcome

 

I will have a look at these.  Any suggestions on the best metrics to use?

 

 

 

 

[Myth465]

Thanks  .. ThanksAndYouAreWelcome

 

I will have a look at these.  Any suggestions on the best metrics to use?

 

I like Price to CF, but it doesnt work well if they have new production ramping up very fast, or as ThanksAndYou.... pointed out, maintenance capex is very high.

Price to reserves is good but they will need a good business model to bring out the reserves.

 

I think its a tough questions depends on the stage of production they are in, and the business model.

 

---

 

I hear Iona has the same founders as Itacha. I like what I see and am looking for time to really dig in.

I am considering making it a 5% positions, and taking a basketof 5 or 6 other Canadian O&G companies for a full 10% position - perhaps 2% each.

 

The whole patch is on sale.

[jhcap]

Another take over announced tonight. Pacific Rubiales is buying Petrominerales:

 

http://finance.yahoo.com/news/petrominerales-announces-acquisition-pacific-rubiales-001038175.html

 

This just after the Novus and Trioil deals. It seams interest and activity in Canadian oil companies is picking up, perhaps because other markets are fairly priced and this is one of the few places value can be found. I wonder who is next?

 

Long NVS, PWE, LTS, BXE and LRE. Considering positions in MQL and CDH.

 

 

[Myth465]

One of the Petrobank kids is taken over.

http://seekingalpha.com/article/1719332-lightstream-the-cheapest-oil-company-priced-at-half-nav-and-13-4-yield

 

I will go against the grain and say I like Wright. He will get the share price up or be taken over.

Win win either way if you are buying now.

[ThanksAndYouAreWelcome]

Thanks  .. ThanksAndYouAreWelcome

 

I will have a look at these.  Any suggestions on the best metrics to use?

 

Like Myth said it's tough to point to one metric. Some are expensive at 2x cash flow, others cheap at 10x...

 

I would point out only looking at boe metrics (6 to 1) or just netbacks (what about capital?) are sure ways to make bad choices...

 

Also, there are lots of value traps. It's tough to be a value investor because so many of these companies require equity that if they need to raise money at a low value or are increasing debt faster than proved reserve value the real "cheap" ones turn out to be value traps. Also, the businesses are so capital heavy it's tough to use NAV only because valuation is very dependent on its capital program. This has led me to only want to own concentrated positions with the best management teams. So I start by researching the people, seeing how much they own, look at past businesses they have run and decisions they have made at different times in the cycle and other things like that.

 

If you can buy a company below PDP value where the engineers assumptions look conservative this is the closest you'll find to a net net (if they're spending program isn't destroying value). I like to use recycle ratios using cash flow netbacks and go-forward PDP FD&A as a proxy for profitability, although you have to be really careful the assumptions are good...I like to also be able to model out the implied returns for ~3 years using some conservative assumptions way below what the market thinks and see the business still makes me a return...

 

If I had to pick one metric / way to look at it, I'd say once you're comfortable the business and management likely isn't going to destroy value, if you can buy production and reserves in the market for less than the company can replace them for you're probably getting a good deal, didn't do enough work on the first part, or the production and reserves aren't worth replacing. Which ever one it is, if you did the math right and you got there, 1/3 it could be a good one and just a bit more work to find out if it is!

[alertmeipp]

One of the Petrobank kids is taken over.

http://seekingalpha.com/article/1719332-lightstream-the-cheapest-oil-company-priced-at-half-nav-and-13-4-yield

 

I will go against the grain and say I like Wright. He will get the share price up or be taken over.

Win win either way if you are buying now.

 

 

Drop like 10% on higher gas output. Ridiculously cheap now.

[Myth465]

Yes they are in an interesting situation. I bought a more a few days ago. I like the strategy, but Mr Market will force a dividend cut or an asset sale.

They will be punished severely for any bad news. Interesting to watch.

[alertmeipp]

Yes they are in an interesting situation. I bought a more a few days ago. I like the strategy, but Mr Market will force a dividend cut or an asset sale.

They will be punished severely for any bad news. Interesting to watch.

 

I think the comment below on possibility about issuing equity spooked the market. I got a bunch today.

 

We are currently finalizing our operational and financial plans for next year and remain committed to improving our sustainability ratio (cash outflows compared to cash inflows), lowering our debt to cash flow ratio and improving our liquidity through the many options available to us, which include, but are not limited to, modulating capital expenditures, selling assets, terming-out debt, altering our dividend program or issuing equity. Over the long-term, we continue to target a sustainability ratio of 100% and a debt to cash flow ratio of 2.0 or l

[Myth465]

I missed that. Makes sense.

I am ok with every option but that one. All the other ones will create a bit of value and raise the share price. I hope thats boiler plate, and they arent considering issuing equity here. Better to sell assets at 80% of book value then issue equity at 50% of BV.

 

I dont think the dividend is the issue, but Mr Market will not let them continue with their current strategy. I hope they sell the shares in stock they hold, and the Duvernay assets. They can play the M&A game, when they are trading at .8 - 1x BV. They could have bought Trioil with shares if they had a reasonable valuation, so its time for a change in course.

 

Cut capex slightly, sell a decent chunck of assets, and term out the remaining debt at a much lower rate. Then perhaps look at the dividend policy.

Our dividend should be cut if they want to keep the DRIP inmo. We should not be selling equity via DRIP or capital markets at 50% BV. At some point someone offers 75% of book, and will capture the upside in EOR, and undrilled land.

 

[plato1976]

If the managers are consistent reckless risk takers and don't have enough skin in the game;

I can imagine no matter how cheap it is the risk here is huge

 

I missed that. Makes sense.

I am ok with every option but that one. All the other ones will create a bit of value and raise the share price. I hope thats boiler plate, and they arent considering issuing equity here. Better to sell assets at 80% of book value then issue equity at 50% of BV.

 

I dont think the dividend is the issue, but Mr Market will not let them continue with their current strategy. I hope they sell the shares in stock they hold, and the Duvernay assets. They can play the M&A game, when they are trading at .8 - 1x BV. They could have bought Trioil with shares if they had a reasonable valuation, so its time for a change in course.

 

Cut capex slightly, sell a decent chunck of assets, and term out the remaining debt at a much lower rate. Then perhaps look at the dividend policy.

Our dividend should be cut if they want to keep the DRIP inmo. We should not be selling equity via DRIP or capital markets at 50% BV. At some point someone offers 75% of book, and will capture the upside in EOR, and undrilled land.

[alertmeipp]

i don't think they are risk takers if they target to low the ratio to 2.

 

[Green King]

Can someone show me how this is not a house of cards? And if they stop capex the capital structure implode.

 

TIA

[Myth465]

They have assets that dont generate cash flow which have value.

Some of the debt on the books is related to entering new plays, they need to stop expanding into new areas, sell existing areas down (especially undeveloped areas), and pay off the debt.

 

Then when debt is reduced they can reduce the yield they are paying on the remaining debt.

You are right they cant stop drilling due to decline rates, but once the platform is built they will make money via further drilling and enhanced recover options.

 

Also recoverable resource will continue to grow from 15 percent as techniques get better.

 

Its a buyers market, and inmo the CEO thinks like an Owner. He doesnt want to sell into the Canadian market, where everything is cheap. He also doesnt have the capital or share price to expand, and buy cheap assets. He is also being watched like a hawk and any bad news is amplified and good news ignored. Given the status queue they are fine on cash flow, but I dont like the DRIP situation, but it works because Management is buying new cheap shares at a 5% discount. They would prefer to muddle through, hedge a bit, and let high oil prices or a turn in the M&A market bell them out, while everyone enjoys a dividend. They want to pay you to wait.

 

Its not going to happen, people are going to demand change with a share price in the $6 range. Just about everyone right now is sitting on some sort of capital loss.

[Green King]

They have assets that dont generate cash flow which have value.

Some of the debt on the books is related to entering new plays, they need to stop expanding into new areas, sell existing areas down (especially undeveloped areas), and pay off the debt.

 

Then when debt is reduced they can reduce the yield they are paying on the remaining debt.

You are right they cant stop drilling due to decline rates, but once the platform is built they will make money via further drilling and enhanced recover options.

 

Also recoverable resource will continue to grow from 15 percent as techniques get better.

 

 

 

Thanks you i get the story now, but how do you see it from public information ? Does one just need years of experience in the sector ? I've looked at the balance sheet three times now i am drawing blanks.  :-[

[alertmeipp]

They have assets that dont generate cash flow which have value.

Some of the debt on the books is related to entering new plays, they need to stop expanding into new areas, sell existing areas down (especially undeveloped areas), and pay off the debt.

 

Then when debt is reduced they can reduce the yield they are paying on the remaining debt.

You are right they cant stop drilling due to decline rates, but once the platform is built they will make money via further drilling and enhanced recover options.

 

Also recoverable resource will continue to grow from 15 percent as techniques get better.

 

 

 

Thanks you i get the story now, but how do you see it from public information ? Does one just need years of experience in the sector ? I've looked at the balance sheet three times now i am drawing blanks.  :-[

 

Many smaller O&G companies will collapse if they stop drilling, this one is actually one of the better one. Their gap is very manageable. One would argue the best way to get out of the hole if to borrow as much as u can and have a long duration, see TW-era SD. IMO, it makes sense for asset rich company, it's efficient is cost of debt is low.

 

But nobody like it these days.

 

 

[Green King]

They have assets that dont generate cash flow which have value.

Some of the debt on the books is related to entering new plays, they need to stop expanding into new areas, sell existing areas down (especially undeveloped areas), and pay off the debt.

 

Then when debt is reduced they can reduce the yield they are paying on the remaining debt.

You are right they cant stop drilling due to decline rates, but once the platform is built they will make money via further drilling and enhanced recover options.

 

Also recoverable resource will continue to grow from 15 percent as techniques get better.

 

 

 

Thanks you i get the story now, but how do you see it from public information ? Does one just need years of experience in the sector ? I've looked at the balance sheet three times now i am drawing blanks.  :-[

 

Many smaller O&G companies will collapse if they stop drilling, this one is actually one of the better one. Their gap is very manageable. One would argue the best way to get out of the hole if to borrow as much as u can and have a long duration, see TW-era SD. IMO, it makes sense for asset rich company, it's efficient is cost of debt is low.

 

But nobody like it these days.

 

How do you know what they are drilling are economic ?

I've looked at the cash flow for the last few years.

Capex have increased a lot but the bottom line doesn't look like it has changed materially.

[Myth465]

Oil and gas is an interesting beast. Cash flow is not always king, though I am moving towards holdings like Strategic Oil and Gas which trade at low cash flow multiples and have paybacks within a year.

 

Lightstream is fighting a decline rate that is very high, so they have to spend alot of capex to hold production flat, until the production matures. Lightstream is an assets play though, below is very good article inmo.

 

 

http://seekingalpha.com/article/1740362-lightstream-reports-inline-production-and-gets-even-cheaper

[Green King]

Thanks I've read it. I think it is too hard for me to get comfortable. Thanks you for the help Myth465 and alertmeipp.

[alertmeipp]

np, Green, just wondering, what decline rate do you have after year 1 in their properties?

 

[Aberhound]

Its a buyers market, and inmo the CEO thinks like an Owner. He doesnt want to sell into the Canadian market, where everything is cheap. He also doesnt have the capital or share price to expand, and buy cheap assets. He is also being watched like a hawk and any bad news is amplified and good news ignored. Given the status queue they are fine on cash flow, but I dont like the DRIP situation, but it works because Management is buying new cheap shares at a 5% discount. They would prefer to muddle through, hedge a bit, and let high oil prices or a turn in the M&A market bell them out, while everyone enjoys a dividend. They want to pay you to wait.

 

I like the DRIP plan because you get to buy a deeply undervalued stock at a 5% discount without trading costs at an unusually high dividend rate.  I found analyzing the financials difficult. One short thesis was that the company puts too much expenses into capital so expenses are understated and gradually accumulate on the balance sheet. I was unable to judge if this were true or not but the exercise brought two points to mind. First, even if it were true that expenses are capitalized you can see a steady improvement in the capital as the infrastructure on the fields improves. The older plays start out cash flow negative and gradually become cash flow positive as the same assets are used more intensely. Second, the argument that expenses are overstated looked false. Over time the economic value of the assets are increasing as improved cash flow increases the value of the plays and as improved techniques increase the reserves from 5% recovery to 15% and hopefully to 25% eventually. The expenses include a substantial expense for depletion as supposedly the purchased reserves are used up which reduces the acquisition costs on the balance sheet over time. But the reserves are growing substantially. The economic reality is that there should be a non-cash accretion to match the non-cash depletion. This argument applies more so to LTS than other oil companies because of the low field recovery and the substantial improvements. We value investors are supposed to care only about intrinsic value and ignore the accounting misstatements.

 

Consider Norman Wells. After 40 years production the field has more oil than "discovered" despite 40 years of depletion expenses. I think the same thing is going on in LTS. I want management to buy as much land as they sell because they seem to be able to acquire land cheaply which is also worth more to them than others. Keep buying new plays so long as you can continue with the present strategy but cut the dividend so you can do it faster. The oil plays will be cheap so long as the juniors have trouble raising capital and you are able to buy plays where you enjoy this accretion effect which is not reflected on the balance sheet but exists to be captured on the financials only when you sell developed plays at a profit.