There are a lot of companies that are spending vast amounts of money searching for oil and gas in the Utica and Marcellus Shale formations of Ohio and Pa. Big international oil companies such as British Petroleum (BP) and smaller independent drillers such as Halcon Resources (HK), are committing vast amounts of capital into this region. It certainly is helping to stimulate economic activity in the normally depressed region of the country.
One such company that is beginning to see direct benefits from all this activity and has strategically positioned itself for future benefits is Avalon Holdings Inc. (AWX).
In a recent 10Q filing, Avalon reported revenue growth of 29% for the first six months of the year and disclosed the following:
Due to the increase of oil and gas drilling in the Marcellus Shale and Utica Shale regions located in northeast Ohio and western Pennsylvania, Avalon purchased options on a number of properties for the purpose of drilling salt water injection wells for the disposal of the brine waters from the oil and gas drilling. In December 2011, Avalon submitted two applications for permits to the Ohio Department of Natural Resources (the "ODNR") to drill and operate salt water injection wells. The ODNR reviewed the permits and on July 18, 2013, issued Avalon two permits to drill, construct and operate two salt water injection wells. Avalon is currently reviewing the installation requirements and costs to drill and construct the salt water injection facility in accordance with the permits issued by the ODNR.
These permits being approved is good news for the company as it will allow Avalon to generate future revenues from the disposal of waste water generated from the fracking process once these wells are brought online.
Also disclosed in the 10Q is that Avalon's Golf and Country Club business is showing growth as the average number of members during the second quarter of 2013 increased to 3,653 compared with 3,378 in the prior year's second quarter.
In years past the golf business has been a bit of a drag on the company's bottom line, but membership has grown over 20% in the last 2 years and the renewed economic activity brought on by the Oil & Gas boom in the region should allow for continued growth in membership and a positive contribution by the golf business to Avalon's bottom line.
Lastly, the company is also in line to receive royalties from Halcon Resources if a well currently being drilled by Halcon on Land owned by Avalon and leased to Halcon proves fruitful. Halcon seems to already expect the well to be productive as they recently proposed that a pipeline be built at the well site.
HK has drilled other wells in Trumbull County, Ohio that are currently producing and these wells are only 15 miles from the Avalon Drill site. The amount of royalties has yet to be determined, but with only 3.8 million shares outstanding, this potential revenue source could have a significant impact on Avalon's bottom line.
The company currently has a market capitalization of only $17,000,0000 yet is currently on pace to do $60,000,000 in revenues this year. It has an incredibly strong balance sheet with over $2 per share in cash, no long term debt and a tangible book value of $10.50.
With a price to sales ratio of less than .33 and a price to tangible book value of less than .45, the stock is a great value play. If you look at the potential growth for both of Avalon's core businesses in the coming years from the economic benefits of continued energy exploration in the region and the real possibility of future royalties for the company from Halcon on the Avalon Well, AWX at current prices is a solid long term investment idea for a Roth IRA.
The only negative I can see at current prices is the lack of liquidity due to the size of the company and the size of the float. There is also the possibility of the Avalon Well being dry and Avalon not pursuing the waste water disposal business, but from what I see it looks like AWX is sitting on oil and gas and they will pursue the waste water disposal business.
There are not too many true value stocks that are this deeply discounted and have real growth potential moving forward, but Avalon seems to be well positioned to be just that.