Lightstream (OTCPK:LSTMF) is a Canadian oil and gas producer with production focused on light oil (80%) in the Bakken and Cardium formations. Concern over its high debt and dividend payout have hammered its stock dramatically over the last few years.
In an announcement this morning, the company finally announced steps to address these concerns. In a nutshell, the company is doing the following:
- Reducing capex, to hold production flat for the year, rather than increase it
- Cutting the dividend by half
- Eliminating the dividend re-investment plans
- Targeting $600 million of non-core assets for sale
We think these are all excellent ideas. In fact, they are precisely the moves we recommended in this article two months ago and probably should have been implemented two years ago. The market has reacted in an irrational, knee-jerk fashion because the company's new, prudent capital plan involves a dividend cut. The reality is the company earns what it earns. That hasn't changed at all. Limiting dividends to what the company actually earns makes it more valuable, not less valuable.
The dividend re-investment plans, while conserving cash, have resulted in tremendous dilution at the recent low share prices. If anything, the company should use the cash to buy back shares itself. Now there's some indication the company may do just that. Recently, the company instituted a "Normal Course Issuer Bid" (NCIB), which allows it to buy back its own stock over the next year. Lightstream could actually purchase production more cheaply by buying its own stock rather than by drilling.
Going forward, Lightstream will yield 8.5%. But now it will be a highly sustainable yield, with no more dilution, and the possibility of further growth down the road.
With its long slide capped by another 7% plunge today, Lightstream has approached absurd levels of valuation:
|Enterprise Value ($1000s)||$2,781,000|
|206 Million BOE booked reserves - Net Present Value estimated by Sproule:||$4,014,000|
|274 Unbooked Cardium locations at $3 million each||$822,000|
|553 Unbooked Bakken locations at $2 million each||$1,106,000|
|Other undeveloped Land at $1000/acre||$1,000,000|
|Total Estimated Asset Value||$6,942,000|
To look at it another way, Penn West (NYSE:PWE), another Canadian producer that has been brought down 30% this year, trades for roughly $55,000/flowing barrel -- a little less than Lightstream's $59,000 flowing BOE. However, Lightstream's netbacks are $50/BOE, whereas PWE's are only $28. On a per-barrel basis, its production is worth nearly twice what PWE's is.
Management Needs to Go
If anything is clear from the company's conference calls, it is that management has a slow and plodding style. Its uninspired moves over the last three years have driven the stock from $35 to $6. We, along with numerous other analysts and shareholders, have been calling for a dividend cut and asset sales for years. Yet it has taken all this time for management to finally switch to a more prudent, responsible course.
One caller to today's conference call suggested that the company put itself up for sale. The CEO John Wright noted that as a public company, Lightstream is always up for sale. That sounds a lot like an invitation. Even with its outsize debt, Lightstream is a bite-size $3 billion acquisition for a major integrated oil company. There is also tremendous scope for a Carl Icahn-like activist. The consensus among investors and analysts is that removing management would, by itself, be worth several dollars a share.
Disclosure: I am long OTCPK:LSTMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I also own LTS.TO shares on Canadian TSX.