- I think Northern Tier is getting closer to fair value.
- What we like about Legacy is its high netbacks.
- Legacy is growing its fair value.
Randall Abramson: Juniors Clean Up Behind the Elephant Hunters
Junior explorers and producers may be at the mercy of market forces, but an opportunistic management team can control its own destiny by capitalizing on industry opportunities. In this interview with The Energy Report, Randall Abramson, president, CEO and portfolio manager at Trapeze Asset Management Inc., tells the story of how one junior company cleaned up on an asset the majors overlooked. He also shares compelling oil and gas names from Canada to Tanzania.
TER: Northern Tier Energy LP (NYSE:NTI) is an independent, downstream, energy master limited partnership [MLP] with refining, retail and pipeline operations that serve the Petroleum Administrative for Defense District [PADD] 2 region of the United States. What's your recommendation for Northern Tier?
RA: I think Northern Tier is getting closer to fair value. There is still probably 10% or 15% upside there, particularly if its large owner, Western Refining Inc. (NYSE:WNR), which owns close to 39% of the company, decides it wants to have the rest of the company for itself, to unlock significant value. This transaction could diversify Western Refining by geography, end-markets and feedstock, and allow a cash-flow boost in Western Refining's own MLP by adding Northern Tier's significant assets in retail, pipeline and storage facilities.
TER: How does the cyclical nature of the refining industry affect Northern Tier's earnings?
RA: I think Northern Tier is a bit of a standout. There is a shortage of refinery capacity within the U.S., which makes the refining industry less cyclical than it used to be. And Northern Tier should be even less cyclical than the group because there's a more pronounced supply/demand issue in its region. The company should also have better margins: It gets a Bakken feed of light oil, and at the same time there's a significant shortage in its Minnesota backyard, which allows it to get a better margin when it sells the refined product. Northern Tier also has some vertical integration because of its ownership of the retail downstream.
TER: Corridor Resources Inc.'s share price is up more than 300% over the last year. What's driving that?
RA: One of the key ingredients is that natural gas prices themselves have been rocketing up to where they sit today, just shy of the $5 per thousand cubic feet [$5/Mcf] range from as low as $2-and-change a year ago. That's attributable to storage inventory dropping as the number of gas rigs has plummeted, and to the fact that we had a disgusting winter. Demand has also been up because there has been switching from coal to gas for economic reasons, although, bizarrely, it's been going slightly back in the other direction recently because of the change in prices. But the carbon footprint issues have put upward pressure on the natural gas price.
At the same time, what's really helped Corridor, specifically on the gas price front, is the higher gas price in its specific market, which is the U.S. Northeast, as it sells into the New England area. There's been a tremendous shortage there. Gas refineries and natural gas plants were lying idle on the coldest days of the year simply because they couldn't get enough product.
There isn't enough pipeline capacity coming into New England right now. Corridor ships its gas through the Maritime Northeast Pipeline into New England. It has already locked in US$11/Mcf for a good part of next winter. That's been a huge change for Corridor, to be able to lock in those prices and to start capital spending again in a significant way both at its McCully Field, which is its main field, and its Frederick Brook shale field.
Corridor also took on partners for exploration and production on Anticosti Island in the Gulf of St. Lawrence: the Québec government and Maurel & Prom (OTC:MRELF), out of France. Corridor has about 22% of the Anticosti play. The partners will put in the money to drill on that property over the next couple of years. We think anticipation of that event and the event itself have helped propel the share price. Anticosti Island is a shale oil project similar to what we've seen in the Utica Shale. It still requires some work to assess the viability of the project, but on the holes that the company has looked into thus far, the core samples look exactly the same as what we've seen in the Utica. Corridor should be drilling and doing more work through the rest of 2014 and 2015 to determine flow rates.
Corridor has two other properties, one called Old Harry, offshore Newfoundland and Québec, and Frederick Brook, the shale property. Those two fields need partners because they require tens, if not hundreds, of millions of spending to bring them to fruition. But they are massive projects.
What's amazing about Corridor is that it's still trading, in our opinion, below the breakup liquidation value of the company. If you took the land value, the value of existing production and the value of its compression gas plant, and sold those off, you'd probably get more than the share price today. Because that's not going to happen, we still believe that we're getting those megaprojects for free. The company has no debt and about $35 million [$35M] in cash on hand.
TER: Corridor has one producing property in New Brunswick. Is that shale gas or conventional gas?
RA: Most of it is conventional, but there is a little shale gas on the Hiram Brook zone, which is on the company's McCully property. Underneath the Hiram Brook zone, Corridor has discovered a zone called the Frederick Brook, and it's one of the most prolific shales in North America. It's more than 1,000 meters thick.
The problem for Corridor has been that it requires $100M-150M to begin developing it, and the company needs a partner to pull that off properly. Repsol-YPF S.A. (OTCQX:REPYY) has an LNG import facility nearby that it has been talking about converting into an import/export facility. That would create instant demand for Corridor and others' gas in the region, not just to sell into the Maritimes and into the Northeast of the U.S., but also to Europe and elsewhere. That can be done at a much lower cost than what we're seeing with export facilities in Louisiana or on the coast of British Columbia.
TER: Are the protests against fracking in New Brunswick threatening Corridor's operation?
RA: I don't think they've had an impact on Corridor because Corridor operates away from metropolitan areas. The protesting has led to more stringent regulations. That's a positive. To think that we're not going to have fracking at all is somewhat ridiculous because, again, circling back to conventional versus unconventional, this isn't the Beverly Hillbillies anymore, where the oil gurgles up to the surface. With Corridor, its rock has to get fracked. That's the case with most unconventional formations, which means most of the formations and reservoirs that exist today. Fracking is just reality.
TER: What are some other companies you're excited about?
RA: We like Legacy Oil + Gas Inc. (OTCPK:LEGPF). It's a mid-cap company with just over a billion dollars [$1B] of market value in the Saskatchewan/Dakota area. It's an unconventional play and has essentially batted 1.000 on its drilling. I think last year it went 99% because it missed one, but in the most recent quarter it hit them all.
What we like about Legacy is its high netbacks. It's virtually all light oil, with a high IRR. It trades at about a 20% discount to its asset value. We see that changing over the next 6-12 months as the company makes accretive acquisitions or gets the balance sheet more in line with what the market would like to see. In the meantime, Legacy is growing its fair value. This is not a small company. This is a company that has forecast an exit rate of about 24 Mbbl/d production for this year.
TER: Thank you very much for your thoughts.
RA: My pleasure.
This interview was conducted by Tom Armistead of The Energy Report and can be read in its entirety here.
Randall Abramson, CFA, is CEO and Portfolio Manager of Trapeze Asset Management Inc., a firm he cofounded in 1999 shortly after founding its affiliate broker dealer, Trapeze Capital Corp. Abramson was named one of Canada's 'Stock Market Superstars' in Bob Thompson's Stock Market Superstars: Secrets of Canada's Top Stock Pickers [Insomniac Press, 2008]. Trapeze's separately managed accounts are long/short or long only, and have either an all-cap orientation or large cap-only mandate via the company's Global Insight model. Abramson graduated with a bachelor's degree in commerce from the University of Toronto in 1989, and his career has spanned investment banking, investment analysis and portfolio management.
For additional comments on Corridor Resources Inc., Legacy Oil + Gas Inc., Northern Tier Energy LP, and Western Refining Inc. from newsletter writers, money managers and analysts, click on their respective links or visit The Energy Report.
1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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3) Randall Abramson: I own, or my family owns, shares of the following companies mentioned in this interview: Corridor Resources Inc., Northern Tier Energy Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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