- ASX and TSX listed E&Ps often trade lower than US listed peers.
- ASX tends to have more opportunities than TSX.
- US investors get easy access through ADR listings.
Over the past couple of years, the North American shale "revolution" has been well documented by the popular and financial press. It's estimated that $800 billion in CAPEX will be invested in the US alone in 2014 and according to a recent PwC report, a staggering $5 trillion will be invested over the next 20 years. The majority of the capital will flow through about 75 US-listed public E&P companies and numerous private equity backed independent oil companies. Some however will be spent by foreign listed public companies exploiting the incredible opportunities in US oil and gas. Occasionally these companies trade at a discount to their US listed peers creating an attractive investment opportunity for savvy investors. Many also have ADR listings in the United States making it easy for domestic investors to take advantage of the trade.
Since the days of Mick Dundee, the Australian Securities Exchange has been home to natural resource companies including (by my estimation) 139 that focus on exploration and production (E&P). About a third (47) of those companies are focused on exploiting oil and gas assets in the United States. The majority are valued at less than $25 million and I recommend most investors to look upstream. Some of the remaining companies include:
AURORA OIL & GAS
SUNDANCE ENERGY AUSTRALIA
MAVERICK DRILLING AND EXPLORATION
RED FORK ENERGY
NEW STANDARD ENERGY
SAMSON OIL & GAS
EMPIRE ENERGY GROUP
Readers are likely familiar with some and perhaps less familiar with others. Aurora Oil & Gas (OTCPK:AAGLF) [ASX:AUT] is in the process of being acquired by Canadian company Baytex Energy (OTC:BTEXF) [TSX:BTE]. Early investors in the Eagle Ford focused company saw the stock price increase well over 1,000% since 2010 as institutional investors in North America became more familiar with the company.
A similar story unfolded at Antares Energy (OTCPK:AZZEF) [ASX:AZZ] in 2009 as savvy North American institutional investors picked up on their Eagle Ford position began to pile into the stock driving a near 600% share price increase from March through June (see slide 7 in their September 2009 investor presentation).
AusTex Oil (OTCQX:ATXDY) [ASX:AOK] is another example of an under the radar foreign listed company. They recently released a reserve report for their Mississippian Lime project indicating that the enterprise value is barely higher than the value of their PDP and PDNP reserves, never mind the $217 million total proved value.
An Australian company that has been in the news recently is Eagle Ford and Mississippian Lime focused Sundance Energy (OTCPK:SDCJF) [ASX:SEA]. The company recently pulled an attempted IPO on the NASDAQ creating a little bit of a damper on the stock. Just like investments in any other market it's important for investors to thoroughly research investments to make sure fundamentals are in place throughout their holding period. In an article published on Seeking Alpha, I outline in detail an example in Red Fork Energy (OTCQX:RDFEY) (ASX:RFE).
Recently I've had a couple of well known North American and Australian investment banks ask about my opinion on Lonestar Resources [ASX:LNR]. The company is focused on the Eagle Ford and Bakken. I always take note when the bankers are asking about small cap E&P names.
Another market with substantial exposure to US E&P is the TSX and TSX Venture exchanges in Canada. Some examples include:
ARGENT ENERGY TRUST
PARALLEL ENERGY TRUST
EAGLE ENERGY TRUST
Well known Houston based hedge fund manager John Lovoi of JVL Advisors has bet big on this strategy. From late 2012 through 2013 in a series of trades he built up a 25% position in Wolfberry focused Lynden Energy (OTCPK:LVLEF) [TSXV:LVL] eventually putting a colleague on the board. Around the same time period JVL invested significantly in Marcellus focused Epsilon Energy (OTCPK:EPSEF) [TSX:EPS] effectively taking the company over when Lovoi installed colleague Michael Raleigh as CEO and took the chairmanship for himself.
There are a number of drivers behind this phenomenon of US focused E&P companies with primary listings abroad trading at a discount to their US listed peers. Often investors in their home markets are not intimately familiar with US E&P and shy away from investing in those issuers. Further, they tend to not closely track developments by US listed companies that are operating nearby which often provide good read through both on the positive and negative.
Another driver is that US institutions are sometimes restricted from investing in foreign listed securities. My experience is that most US funds can invest on the TSX and to a lesser extent the TSXV but far fewer can invest on the ASX. While most ASX and TSX companies have ADR listings in the US, their home market listings tend to be more liquid. This is significant for institutional investors, as they need liquidity in order to accumulate significant positions. Also, many funds find the significant time difference in trading hours unattractive. Since most US retail investors don't need the extra liquidity available in the primary listing, they can usually pick up a personally significant position in the ADR with little trouble.
My experience over the years is that both the ASX and TSX exchanges provide opportunities for investors to exploit. Historically, I've found more opportunities on the ASX than the TSX. I suspect this is mostly driven by the fact that Canada is a neighbor of the US and institutional investors have a long history of trading on both sides of the border. It's also noteworthy that there are less Canadian issuers active in the US than there are in Australia. Given Canada has a shale and heavy oil revolution within their own borders they tend to stay local.
I look forward to reader comments and please do share any trades that you have identified that exploit this strategy.