Galleon Energy (OTC:GLNYF) ("GO"), or Guide Exploration (the proposed new name for GO, effective November 1, 2011), is an oil and gas exploration and production company trading on the Toronto Stock Exchange with a market cap of C$214 million and a share price of C$2.55 (based on October 14, 2011 market close). I first became aware of GO when Sprott Resource announced a 12.2% holding of the company back in July 15, 2011. With the recent C$2.2 billion offer from Sinopec for Daylight Energy (OTC:DAYYF) ("DAY") and various other catalysts, including change of management and Sprott Resource adding to their position, I believe GO is a very attractive investment with limited downside risks.
Possible reasons for the current undervaluation
GO is currently trading at 2.2x cash flow, 41% of NAV, and EV of C$33,000 per BOE/d. So why is GO trading at the current depressed price? Here are the possible reasons:
- Declining production rate: GO was producing close to 20,000 BOE/d back in 2008 (including the Puskwa property that GO disposed in June 2010), and the production rate declined gradually to the current 12,500 BOE/d.
- Previous management consistently over-promised and under-delivered since 2008: Forecasted production rate by management was almost always higher than the actual production rate since the 2008 peak, and the game plan of focusing on oil developement since 2008 has not actualized.
- Too gas weighted: the price of natural gas is now at around $3.60, whereas it was $12 back in 2008. It is widely believed that natural gas price will stay low due to new technology that makes producing natural gas much cheaper.
- The whole Oil & Gas industry has been selling off recently.
For investment thesis, we will start with valuation because it will paint a clear picture of how undervalued GO is compared to peers. I will focus just on comparable companies' valuations in this case because that's what I believe is the best and clearest method for placing value on an oil & gas explorations company like GO.
The first comps will be with Daylight Energy. Sinopec offered to acquire Daylight Energy for C$2.2 billion last week, a 43.6% premium over the 60-day weighted average trading price of Daylight. Daylight is chosen here because it has a similar gas / oil weight compared to GO (around 35% oil and NGL and 65% gas), and they both have substantial land potential.
1. GO vs. DAY Comps
|GO||DAY||Multiple (Day / GO)|
|Market Cap, C$ million (10/14/2011)||214||2,080||10x|
|Gas / Oil Weight||67% Natural Gas / 33% Oil, NGL1||64% Natural Gas / 36% Oil, NGL2||-|
|Proven & Probable Reserves (MMBOE)||654||1743||2.68x|
1On October 4, 2011
2End of Q2, 2011
3End of 2010
4June 2011 Corporate Presentation
As seen from the above chart, DAY trades at almost 10 times the market cap of GO after the Sinopec offer, yet GO has double the land of DAY. DAY's production and proven and probable reserves also show a much lower multiple compared to GO than their market cap multiple. One thing to note is that GO has 546,000 net acres of undeveloped land with multi-zone potential - this can prove to be very valuable for buyers with deep pockets to develop the land, as was the case with Sinopec and DAY.
The second comps will be with GO's Puskwa property that GO disposed of back in June 2010. GO sold its Puskwa property in June 2010 for C$134.8 million in cash. The Puskwa property is 86% Oil and NGL. Crude oil price was around $76 in June 2010, and is around $85 now.
2. GO vs. Puskwa Property Comps
|GO||Puskwa||Multiple (GO / Puskwa)|
|Market Cap / Disposal Price, C$ million (10/14/2011)||214||135||1.59x|
|Gas / Oil Weight||67% Natural Gas / 33% Oil, NGL1||14% Natural Gas / 86% Oil, NGL2||-|
|Proven & Probable Reserves (MMBOE)||653||154||4.33x|
|Proven Reserves (MMBOE)||353||84||4.38x|
|Proven Developed Producing Reserves (MMBOE)||153||34||5x|
1On October 4, 2011
3June 2010 Corporate Presentation
4End of 2009
Again, GO is clearly undervalued here based on the chart above. GO's current production of Oil and NGL is 3,950 BOE/d (3,600 for oil and 350 for NGL). If we assume that GO's natural gas operations and undeveloped land are worthless, and just value GO for its Oil and NGL operations using the production rate multiple to the Puskwa disposal, such a valuation gives a value of C$333 million*, a 55.6% premium to the current market cap of GO.
*C$134.8 million x (3,950 / 1,600) = C$332.8 million
Last comps is taken directly from GO's most recent presentation (October 12-13, 2011). It is GO vs. peer average.
3. GO vs. Peer Average1
|Peer Average||GO||Adjusted GO price based on peer average|
|Debt / Cash Flow||2.2x||1.7x||-|
|Capex / Cash Flow||1.6x||1.4x||-|
|EV / DACF||5.8||3.9||$3.58|
|Price / Cash Flow||4.2||2.2||$4.60|
|EV per BOE/d||$52,000||$33,000||$5.28|
|Price / NAV||75%||41%||$4.40|
1GO's most recent presentation (October 12-13, 2011), based on First Energy September 30, 2011 estimates.
The chart pretty much tells the story itself. Note that there is no view on the valuation of the oil & gas industry - in fact, the whole oil & gas industry is, in my view, undervalued due to the recent sell-off. Therefore, a bounce-back of the whole industry will be good for GO's share price as well. It is also important to note that GO has a good hedge book on oil and natural gas prices.
2. Recent Management Change
GO changed its management team on August 12, 2011 with Bill Andrew leading the new management. Bill Andrew is the co-founder of Penn West Petroleum (PWE) in 1992, and has led the company from a small capital explorer to one of Canada's largest senior oil & gas exploration and production companies, with a market cap of close to $8 billion currently. The new management could take advantage of GO's substantial land potential, and make efficient use of funds for GO's operations.
3. Sprott Adding to their position (from 12.2% on July 15, 2011 to 18% on October 4, 2011 at an average purchase price of C$2.94)
Sprott Resource Corp, a natural resources company headed by Eric Sprott - a famous natural resources investor in Canada, has been accumulating GO. For those not familiar with the track record of Sprott, the track record of the Sprott Resource Corp can be found at the company's most recent presentation here.
Also, GO has been aggressively buying back its shares for the past few weeks, with the company announcing a stronger share buyback plan. Several GO insiders have also been buying the stock.