In an earlier article, I took an approach to identifying bargains among the natural gas producers. So now I thought to dedicate my time to and write an article about the Canadian oil-weighted producers which have low coverage and low awareness in comparison to their US-based peers. These Canadian companies have also been largely ignored by the other contributors of Seeking Alpha. If one checks the headlines section of Yahoo Finance, he will hardly find an article about the following 5 Canadian oil producers whereas he will find numerous articles about the US-based ones.
Yes I like the junior and mid-cap oil-heavy companies that operate in Canada. Yes we have pipeline issues that are causing a glut in local heavy oil and bitumen in the Western Canadian basin. However have we thought of the risk when we buy oil producers that operate internationally? Why should we worry about the nationalization risk in Argentina or in Venezuela? How likely is a civil war in Yemen, in Kurdistan, in Nigeria, in Egypt, in Libya?
Although the entire Canadian E&P sector was under pressure during the summer, things could change by year-end. Watching the trading over the last two months, the sentiment has been turning around and this could possibly make some of the following plays very profitable trades.
In terms of the oil and natural gas prices, they have ranged widely during the last 6 months. A lot of that has had to do with the global financial crisis. However the global oil demand is still there even in the midst of a slowdown in Europe and this has kept the oil price strong. I continue to see oil in the range of $85-$120 per barrel, where the exploration success and the growth get rewarded. I don't think we are entering into a worldwide Great Depression. I think that the problems we have are solvable if the European leaders take serious action. I think they get the message and they are taking action. On another positive note, the Greek coalition Government passed the austerity measures yesterday. QE3 is also here and a turnaround in Chinese growth seems very likely as of the latest news. Both events will keep the oil price to the mid to high $90 level on WTI. So let's start:
1) Whitecap Resources (SPGYF.PK): As I pointed out in my last article about the acquisition strategy of Crescent Point, Whitecap gave up on Beaverhill Lake and sold it to Crescent Point recently. This acreage was picked up only in Feb 2012 when Whitecap acquired Midway Energy. Whitecap Resources wasn't interested in expanding the Swan Hills assets which were acquired in its takeover of Midway Energy, as evidenced by the fact that it divested those assets within months of acquiring them. Crescent Point Energy clearly felt differently though, as it was the acquirer of the property.
Whitecap produces 16,900 boepd (71% oil and liquids) currently. The Enterprise Value (EV) is $1,370M currently so it trades for $80,000 per flowing barrel. The current market cap is $1,100M and the annualized FFO is around $220M, so the company trades 5x its FFO annualized.
The net debt stands at $343M so the DCF ratio is 1,55. It has 2P reserves of 70.7 MMboe based on the independent reserve reports of Dec 2011 so the company trades for $19.4 per Mboe.
The operating netback is $43/boe assuming Edmonton at C$85 per barrel. The company has been in a strong acquisition mode as it has acquired two companies (Compass Petroleum and Midway Energy) during the last 9 months and it has 4 core areas currently: Peace River Arch, Garrington and Pembina in Alberta and the Viking play in south west Saskatchewan.
The insiders ownership is 7%. According to regulatory filings, the additions and the dispositions from key insiders are balanced during the last 3 months. Some insiders have been adding but some others have been trimming their positions.
2) Spartan Oil (SRTNF.PK): Spartan is run by a management team with a history of creating shareholder value. It produces 2,400 boepd (83% oil and liquids) currently. The current market cap is $404M and the company is debt free so the Enterprise Value is at $404M too. Thus it trades for almost $170,000/boepd which is a very high metric.
The annualized FFO is around $50M, so the company trades as high as 8x its FFO annualized. As the bank line stands at $50M, Spartan has lots of spare borrowing capacity.
It has 2P reserves of 21.4 MMboe based on the independent reserve reports as at Dec 2011 so the company trades for $18.9 per Mboe.
Spartan has extensive infrastructure of oil and gas pipelines in place which is 100% Spartan owned and operated. This helps much the operating netback which is $50/boe assuming Edmonton at C$85 per barrel. The Cardium in Pembina is the primary focus of Spartan Oil. Spartan believes it has between 200 and 300 drilling locations in the Cardium as well as significant potential in the Bakken in Saskatchewan.
The insider ownership is as high as 23%. According to regulatory filings, the insiders have been adding on their positions during the last 4 months. Investors should take note as a pullback might be coming for Spartan. The stock has had quite a ride since July, appreciating about 50%.
3) Renegade Petroleum (RPTTF.PK): Renegade entered a few days ago into an asset purchase agreement with a Canadian senior producer to acquire certain strategic light oil and gas assets within its existing southeast Saskatchewan core area for cash consideration of approximately $405M. The acquired company produces 3,600 boepd (94% light oil). Renegade doubles its production and the pro forma Renegade produces approximately 7,500 boepd (95% oil and liquids) currently. The Enterprise Value of Renegade is around $720M currently so it trades for $96,000 per flowing barrel.
The market cap is $476M currently and the annualized pro forma FFO is around $110M, so the company trades 4.3x its FFO annualized. The net debt rose to $244M on a bank line of $325M and consequently the DCF ratio is 2,2.
2P reserves of 30.6 MMboe based on the independent reserve reports as at December 31, 2011 and updated to August 31, 2012 by a member of Renegade's management who is a qualified reserves evaluator in accordance with National Instrument 51-101 so the company trades for $23.5 per Mboe.
The metrics above are not low but this premium is justified by the dividend. Once the acquisition is completed, the company will initiate a monthly dividend of $0.0192 per share which provides an annualized yield of 9,6% currently. This is a significant yield that will definitely attract many income investors.
The operating netback of the pro forma Renegade is around $50/boe assuming Edmonton at C$85. Renegade focus the majority of its capital program in its two core areas of southeast Saskatchewan (Bakken and Spearfish plays) and the Viking play in west central Saskatchewan with continual potential consolidation opportunities within these core focus areas. In addition, Renegade currently holds significant land at the Slave Point oil play but due to the transformational shift in Renegade's strategy, Renegade does not anticipate allocating capital to the Slave Point play for the remainder of 2012.
4) Pinecrest Energy (PNCGF.PK): Pinecrest has a good management team based on their experience and their track record. Its CEO and CFO were founders of Crescent Point (CSCTF.PK). After Crescent Point, the Pinecrest team built up Peerless Energy, growing production from 0 to 6000 boepd, then selling it to Petrobank (PBGEF.PK) and generating significant returns for Peerless investors.
Pinecrest produces 3,100 boepd (99% oil and liquids) currently. The Enterprise Value is 390$M currently so it trades for $125,000/boepd which is a rich metric. The current market cap is 390$M and the annualized FFO is around 80$M, so the company trades almost 5x its FFO annualized.
It has zero bank debt while the credit facility is $125M so the spare borrowing capacity is significant. It has 2P reserves of 8.4 MMboe as of Dec 2011 so the company trades for $46 per Mboe which is another rich metric. This huge premium is mitigated partially by the operating netback which is as high as 64$/boe.
The company has initiated Waterflood operations in May 2012 with an initial expected response in 3-4 months and a full response in about 12 months. If things work for Pinecrest, the production could rise 2-2,5x. Pinecrest's core area is the Slave Point play. Pinecrest holds 260 net sections in the play, focusing on the Otter, Evi, Loon and Red Earth fields. Over 80% of this land remains undeveloped. Assuming 8 wells per section, Pinecrest has over 12 years of drilling inventory in the play. The insiders ownership is 12,4%.
5) Legacy Oil and GAS (LEGPF.PK): Legacy produces 17,400 boepd (87% oil and liquids) currently. The Enterprise Value is $1,400M currently so it trades for just $80,000/boepd.
The current market cap is $970M and the annualized FFO is 220$M, so the company trades 4.4x its FFO annualized. The bank debt stands at 444$M in a bank line of $525M so the DCF ratio is 2.
It has 2P reserves of 88MMboe as in Dec 2011 so the company trades for $16 per Mboe which is a low metric.
The operating netback is $43/boe. The company holds 455,000 net acres undeveloped land in Southern Alberta targeting the Cardium formation and in Williston Basin targeting the Bakken and Spearfish formations.
The insider ownership is 2,7%. According to regulatory filings, there is one insider who has been adding on his position during the last 5 months.
Disclaimer: This article is not an investment recommendation and does not provide a view on the value or price direction of any security. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment professional for advice on your own investment strategy.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LEGPF.PK over the next 72 hours.