Canadian oil patch for sale!

[alertmeipp]

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.

 

 

I think Canadian will like DRIP at this price, but does this become unfair to non-Canadian holders?

[ItsAValueTrap]

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.

 

Or... management is lying to you.  Historically, that has been the case with most companies on the TSX Venture exchange and most independent E&P companies.  These areas of the stock market are usually awful and you should probably stay away from them.

 

If you need a refresher on the dangers of investing in E&P companies, see this thread on CoBaF:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/atpg-atp-oil-and-gas/

 

There are also multiple writeups of ATPG on valueinvestorsclub.com.

[Green King]

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

 

Don't know. That why i think its too hard but if it is economic i think there should be a increase in flow over time as cap ex increases. beyond that is above my pay grade.

I think those who see the value and buy it, will make quite a bit of money but it is beyond my abilities to see it.

 

Asset value plays make me unconformable, maybe one day i will have the understand for these and i can buy a lot.

 

Cheers

 

Gk

[Myth465]

Green I think you have to trust your gut.

Oil and Gas is a very interesting space, as ItsAValueTrap pointed out, there are plenty of ways to lose money, and one of the main ways involves asset plays.

 

I feel comfortable here, but I have been getting burned for years in various O&G holdings.

Made a bit of money as well but it is a tough place to play.

[Aberhound]

Thanks for your suggestion ItsaValueTrap the ATPG thread is a real eye opener.

[kevin4u2]

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

 

Don't know. That why i think its too hard but if it is economic i think there should be a increase in flow over time as cap ex increases. beyond that is above my pay grade.

I think those who see the value and buy it, will make quite a bit of money but it is beyond my abilities to see it.

 

Asset value plays make me uncomfortable, maybe one day i will have the understand for these and i can buy a lot.

 

Cheers

 

Gk

 

Anyone still see value in this sector?

 

GK, I would recommend looking at companies that actually turn a PROFIT. That is how you can determine if the company is economic.

 

Everyone who likes to focus on cash flow are simply trying to distract you from the fact that they don't make money. Also remember that the single largest factor that influences these companies is the price of oil (or gas).

 

I'm going to start reading up on a few of these companies given the big drop over the past few weeks.

[alertmeipp]

>>Everyone who likes to focus on cash flow are simply trying to distract you from the fact that they don't make money

 

I agree partially. I think you will need to look at a few other variables. Still learning on this business.

 

 

[plato1976]

Just wondering from an asset point of view,

is PWE or LTS really much cheaper than US oil&NG corps like SD & CHK

 

 

 

I own PWE and LTS. LTS you get paid to wait and wont be taken under its current price. PWE has a new team, new focus, which works as a great catalyst.

I dont like the small players, they are being taken under on the cheap by foreign companies.

[Cardboard]

I don't know that much about CHK, but if you only compare SD with PWE and LTS on an Enterprise Value to Sales basis, you see right away a discount. Then consider that SD is mainly involved in a play that is in development vs defined, then I would say that their potential but, also their risk is higher. Both PWE and LTS have 100's if not 1000's of drilling targets for oil already known. It is more about execution than exploration. The Mississippian play is also nowhere near the oil content that PWE and LTS have. LTS is 80% and PWE is 65 on its way to 80%. So far SD is happy when it finds 50%.

 

A big advantage that SD has at the moment is a narrower discount to WTI than its Canadian counterparts, but it is also in an area where the infrastructure is not in place which is quite different than what you find in the Cardium for example. That becomes a big problem especially if you produce a lot of natural gas than cannot be flared or shipped by rail.

 

Cardboard

[Myth465]

I can see Cardboard has been watching the oil patch quite closely for some time.

I have held SD over the years and the story has moved around quite a bit. Right now I am down to just holding the convertibles at par. I am happy to wait and see what happens while collecting the yields.

 

Canadian Oil in contrast is some of the cheapest oil based on flowing barrel price, and as Cardboard said you also have hundreds of additional locations with EOR as an option as well. It has only gotten cheaper over the last few weeks though....

 

I think LTS and PWE are going in the right direction, I would have preferred a bigger dividend but the sooner they get over the debt hump the better. I like the ending of the DRIP program. We should see the stock move up on asset sales though.

[Cardboard]

The problem with LTS is leadership. Until Wright is gone, there will be no confidence on the Street. I have seen some analyst comments and it is pretty obvious. They have been burned dozen of times by his rosy forecasts and the one published today still feels like it to me.

 

Unlike PWT, I don't think that he gets the message yet. He is still going after Swan Hills instead of putting that on the back burner for now or even selling it. Just cutting capex by a further $200 million and eliminating totally the dividend would give enough cash to buy back 20% of all shares under a Dutch auction. That is much more than what will ever be accomplished by this full $600 million capex program. Now, of course this wouldn't reduce debt, but the extra capex spending won't either since the majority is for new wells with high initial declining rates.

 

At least they seem more serious now about improving operations with the gas injection program but, I won't hold my breath.

 

Cardboard

[Myth465]

Wright inmo has made some good moves, but he has a market be damned approach. Probably comes from being generally successful in the oil patch.

Its a losing battle because while they are doing things right operationally Mr. Market will continue to sell them off, and eventually you will be taken over

 

They have finally focused on debt, and you are correct they have been talking about the next growth message for a few years which has been a mistake. I also think the DRIP was a huge mistake. He wants to grow his way out of the debt similar to SD, but the growth is much slower then SD and Mr. Market doesnt have the patience. I think LTS will eventually be taken over. Its very cheap oil, he wont leave, people will have a tough time forcing him out, and eventually shareholders will get an offer they cant refuse.

 

Your plan though sounds great and would shake things up.

If they switched to per share reporting, and said they only focus on per share metrics, then buying back 20% would show great growth...

[alertmeipp]

The problem with LTS is leadership. Until Wright is gone, there will be no confidence on the Street. I have seen some analyst comments and it is pretty obvious. They have been burned dozen of times by his rosy forecasts and the one published today still feels like it to me.

 

Unlike PWT, I don't think that he gets the message yet. He is still going after Swan Hills instead of putting that on the back burner for now or even selling it. Just cutting capex by a further $200 million and eliminating totally the dividend would give enough cash to buy back 20% of all shares under a Dutch auction. That is much more than what will ever be accomplished by this full $600 million capex program. Now, of course this wouldn't reduce debt, but the extra capex spending won't either since the majority is for new wells with high initial declining rates.

 

At least they seem more serious now about improving operations with the gas injection program but, I won't hold my breath.

 

Cardboard

 

The market is focus on cash flow to debt ratio, your plan will make it worst.

 

[Myth465]

Not if there is corresponding asset sales which pay off debt in proportion to the decline rate.

His plan is the most logical one.

 

Less assets more value per share, more barrels per share.

[alertmeipp]

Not if there is corresponding asset sales which pay off debt in proportion to the decline rate.

His plan is the most logical one.

 

Less assets more value per share, more barrels per share.

 

What i am saying is cutting capex by 200millions will decrease the cash flow and make the ratio worse.

They need to spend to keep the cash flow and do asset sale to low the debt - working from both angles.

 

Of coz, after buyback, every share will have more asset.

[Myth465]

Not if there is corresponding asset sales which pay off debt in proportion to the decline rate.

His plan is the most logical one.

 

Less assets more value per share, more barrels per share.

 

What i am saying is cutting capex by 200millions will decrease the cash flow and make the ratio worse.

They need to spend to keep the cash flow and do asset sale to low the debt - working from both angles.

 

Of coz, after buyback, every share will have more asset.

 

 

And what I am saying is that is not true if you do what Cardboard suggested. Pair that with none core or even core asset sales, and apply the cash towards debt reduction.

[Cardboard]

Look, their cash flow spending efficiency is highly debatable. There was a very good challenging question yesterday in the Q&A. Basically, they keep saying that all their drilling was successful but, cash flow did not show up on some of these wells because they could not be tied up. How successful is that?

 

These wells in the Cardium could not be tied up because there was no capacity from other operators in the area to accept the natural gas that they produce. Since gas cannot be flared in Alberta, these new wells were shut in. This is just one example of poor planning and execution with this company and this has been going on for a long time. We just hear it now because investors are more critical of them.

 

So trust overall is broken and I have a really hard time too trusting their outlook. I shall remind you that they still project average production of 47,000 boe/d in 2014 and related cash flow or without accounting for asset sales. What a forecast! PWT took a very different approach.

 

Cardboard

[alertmeipp]

Not if there is corresponding asset sales which pay off debt in proportion to the decline rate.

His plan is the most logical one.

 

Less assets more value per share, more barrels per share.

 

What i am saying is cutting capex by 200millions will decrease the cash flow and make the ratio worse.

They need to spend to keep the cash flow and do asset sale to low the debt - working from both angles.

 

Of coz, after buyback, every share will have more asset.

 

 

And what I am saying is that is not true if you do what Cardboard suggested. Pair that with none core or even core asset sales, and apply the cash towards debt reduction.

 

I am confused, to be clear, I am not talking about per share basis.

[alertmeipp]

IMO, the author is too optimistic on the price tag but otherwise, a good insight on how cheap this has become.

 

http://seekingalpha.com/article/1865161-lightstream-resources-two-options-to-eliminate-debt-and-potentially-triple-its-share-price?source=yahoo

 

Lightstream Resources - Two Options To Eliminate Debt And Potentially Triple Its Share Price

 

 

[alertmeipp]

PWT - heavy insider buy continue

http://canadianinsider.com/node/7?menu_tickersearch=pwt

 

LTS - insider buy starting up.

http://canadianinsider.com/node/7?menu_tickersearch=lts

 

 

When will the differentials start to tighten again and tax loss selling stop?

[Cardboard]

Alertmeipp,

 

Actually, I don't think that the author is that optimistic about the prices that it could get for the Cardium or Bakken asset. A recent transaction between Angle Energy and Bellatrix was done at about 6.5 times cash flow for mostly Cardium assets. However, it was much lower on a $/boe/d at about $52,000, but Angle was producing a lot of gas and only in Q3 were they able to reach 58% liquids. It is also mostly a share for share exchange so NGL holders get to participate in the better managed BXE and overpaying would not be good for the combined company.

 

So he is probably on the high side, but I would envision $1.8 to $2.0 billion a reasonable amount that they could get now. Doing as he says would dramatically transform the company and would be a path to make a lot of money as shareholders. However, as I said before, Wright seems to be a corporate builder. He likes acquiring assets or kind of like Tom Ward. Although, I have not seen him switching back and forth between strategies and the assets he has bought are top notch. I have not seen corporate abuse either other than for his involvement with Petrobank where one could question if there is a conflict of interest or not.

 

Also, the plan presented by management does not align at all with the scenario from the author or the article. It is more about squeezing through the issues and hoping for the best vs really redefining the company. The thinking may change but, we have not gotten any hint of that. The risk becomes dilution, some bank review or being forced to sell assets too cheaply if events turn negative against the company.

 

I welcome them finally buying some shares on the open market, but I wish we could see more of it, a potential change in direction like the author suggests and more focus on per share metrics and realizing the importance of a sound financial structure in such a volatile and risky sector. I added recently by the way, but I can't go "all in" because of my concerns.

 

Cardboard

[xtreeq]

Keystone XL Pipeline (KXL): A Potential Mirage for Oil-Sands Investors

 

http://www.carbontracker.org/wp-content/uploads/2013/11/KXL-FINAL-Sun-24-Nov-CLEAN-FINAL.pdf

[alertmeipp]

LTS - the CEO just bought another 130,700 shares. Hope he knows what he is doing.

[gordoffh]

by my count wright has invested 1.3 million in the last couple of weeks in LTS  -  thats not chicken feed  -  have been adding at these levels

[alertmeipp]

It sure does not hurt to see the aggressiveness.

He will be happy with the 4 cents dividend. :)