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Robert King  

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  • Cano: A Closer Look at Valuation [View article]
    I think (1) is certainly more worst case than (2). I think (2) is more likely than (1).

    It's tough to choose between collateral seizure and partial asset sale. The former introduces timeline uncertainty whereas the latter introduces operational uncertainty. For what it's worth, I think the former would create more value overall, even though it might take a longer time and introduce the possibility of some macro risk intervening in the meantime.

    I don't think that collateral seizure is likely though. Why would Union Bank seize the assets? It would just introduce a delay. They would have to file the paperwork to seize the assets and then set up another sale. They have enough leverage right now to just outright force Cano into enough of a sale to pay off the debt.
    Sep 29, 2010. 02:57 PM | Likes Like |Link to Comment
  • Cano: A Closer Look at Valuation [View article]
    They seem to be pretty competent advisors. Usually, these guys are paid on a success fee rather than by the hour. (That's the province of consultants and lawyers.) They both have significant experience in this space and geography -- I also believe one of them had experience with the TXCO bankruptcy a while back.
    Sep 29, 2010. 02:51 PM | Likes Like |Link to Comment
  • Cano: A Closer Look at Valuation [View article]
    I think it's certainly possible for the time frame to extend beyond September 30th, and they do not need to disclose if they receive an LOI/bid. The only reason to think they did not have an LOI for the entire company is the disclosure in the 10-K indicating that they did not turn over an executed LOI to Union Bank.

    I think it's also very possible that the diversity in the properties means that a complete purchase could come as a consortium.

    And yes, I think CFW might sell just enough assets to pay down debt and continue trying to run the business, which would be problematic because their expenses are so high.
    Sep 28, 2010. 09:06 AM | Likes Like |Link to Comment
  • Cano: A Closer Look at Valuation [View article]
    None of the numbers for the reserves estimates have changed since the April 2010 press release.

    The problem for me is that (1) there was no delivery of a LOI from Cano to Union Bank, (2) Cano had 7 days to work out a formal agreement with Union Bank before the 10-K, (3) Cano could have delayed the 10-K and earnings release if they were confident of closing a deal to sell the whole company by September 30, and (4) the wording referencing "transaction structures" indicates to me that they might be considering a partial asset sale to get rid of the debt rather than a complete sale of the company.
    Sep 25, 2010. 10:38 AM | Likes Like |Link to Comment
  • Just One Stock: Buying Oil Reserves In the Ground, On the Cheap [View article]
    I was thinking about Cano today, and -- assuming that there was not a breach of the forbearance agreement -- I realized that we can look at the assets in the following way:

    As noconce pointed out, Linn Energy picked up 30 million barrels of oil equivalent (72 percent oil) with 7Mboe proved developed and 23Mboe proved undeveloped for $352.2 million.

    Based on Cano's Mid-Year Fiscal 2010 Reserves report, Cano has 1.82Mboe proved developed and 13.22Mboe proved undeveloped in the Permian Basin for a total of 15.04Mboe total.

    If we assume that they get half of what Linn Energy paid a few days ago, then that's $176.1 million just for the Cato property alone. (15Mboe total is half of 30Mboe total and we would get $1 per share in equity already.) If we assume they only receive money for the proved developed resources, then that's $91.57 million for the Cato property alone. (1.82Mboe/7Mboe * $352.2 million). Let's go with the latter assumption for conservatism.

    Then you'd have to ask yourself what they would get for the remaining 6.98Mboe proved developed and 21Mboe proved undeveloped (27.98Mboe total) in the other properties + the net operating losses (page F-34 of the last 10-K). Assuming a discount on the NOLs for uncertainty of when the acquirer can use them, my calculations show that in order to get less than $1 per share for the equity, the remaining properties would have to be priced at less than $2.46/boe.

    So I think that if we can get past the Tuesday evening deadline and see that there was an LOI, we should be in a pretty good place.
    Sep 18, 2010. 03:01 PM | 1 Like Like |Link to Comment
  • Brookfield Infrastructure: A Play to Watch [View article]
    I think that it's a great acquisition for Brookfield.

    I don't have a lot of visibility over how this changes BIP's debt load though, so I'm uncertain how this will play out w.r.t. my TEV calculations. Post-merger, BIP should be throwing off 7% in yield, which is a pretty high for a company of this caliber.
    Aug 25, 2010. 02:32 PM | 2 Likes Like |Link to Comment
  • Brookfield Infrastructure: A Play to Watch [View article]

    Thanks. I don't think it's a sell right now at all -- I just don't think it's a hopping buy yet.

    I don't know a lot about Canadian Oil and Gas MLPs, but if you're interested in getting exposure to Canadian O&G, I'd suggest looking into Sprott Resource Corp. They have a collection of cash, gold, oil & gas and agriculture assets, and they are also, similarly, expertly run.

    I have a writeup on the company in my instablog.

    Aug 20, 2010. 05:43 PM | Likes Like |Link to Comment
  • Brookfield Infrastructure: A Play to Watch [View article]
    Thanks Tim.

    I really like the assets, and the BAM team is filled with exceptional capital allocators. I was discussing the company with a friend, and he made a very good point that given BAM's capital allocating abilities, the stock really should trade at a premium to NAV of around 1.25x to 1.3x, which I agree with wholeheartedly.

    My only issue is that I'd rather not have to pay for the premium. I'd rather get the assets for a healthy discount to NAV and pick up the superior asset allocation abilities for free. For instance, at the nadir of the last financial criss, BIP traded for about $9.50 a share. On the other hand, BIP has picked up a bunch of assets from BBI, which has helped diversify its infrastructure assets some more, which might shield them from a similar downturn in the stock -- so I don't know if we'll get as good an entry point in the future.
    Aug 19, 2010. 01:36 PM | 3 Likes Like |Link to Comment
  • Just One Stock: Buying Oil Reserves In the Ground, On the Cheap [View article]
    Thanks for the great article, Shaun. I agree with your assessment.

    As for the Union Bank covenant situation, Cano filed an 8-K this morning indicating that they've come to a forbearance agreement.
    Aug 10, 2010. 08:41 AM | 6 Likes Like |Link to Comment
  • Cano: A Closer Look at Valuation [View article]

    I think we're having this conversation across two channels. You're the same person I'm talking to on the Yahoo Finance boards, right?

    As a reproduction of my post from that board:

    The Cato fields didn't receive their water injection permit until 09/2008 and their new water injection source didn't come online until 09/2009. At that point, they had entered into the merger with Resaca because they were starting to run out of money.

    Additionally, they seemed to have some regulatory issues re waterflooding at Cato:

    "We averaged 14,000 barrels of water injection per day (“BWIPD”) during the quarter ended September 30, 2009. We experienced a decrease to 12,000 BWIPD during our second and third quarters as we measured increasing injection pressures in the northern part of the flood area and we were required, under our existing waterflood permit, to reduce the injection rate in these wells. On May 6, 2010, we received administrative approval from the New Mexico Oil and Gas Conservation Division to increase injection pressures at the 14 active wells to our current physical plant capabilities of approximately 21,000 BWIPD. "

    As for the Panhandle fields, I'm a little less certain why production hasn't lifted. I know they shut down production for a while in 2009 to produce an isolated mini-flood, but I don't know the results.

    This is part of the reason why I think bids will come in below the $5.50 mark that you indicated in "Marbob comparison."
    Aug 1, 2010. 12:31 PM | Likes Like |Link to Comment
  • Cano: A Closer Look at Valuation [View article]
    I think that's a pretty good comparison point. I didn't have access to Concho's Marbob documents when I first wrote this post.
    Aug 1, 2010. 10:32 AM | Likes Like |Link to Comment
  • Cano: A Closer Look at Valuation [View article]
    I don't seem to understand your comment here. (Note: I'm only analyzing Cano and not the post-merger Resaca entity.)

    I would agree with you that cash flow and debt servicing are important for companies that are ongoing concerns, but that doesn't necessarily mean asset values aren't a consideration. Moreover, I don't understand why asset values wouldn't be a consideration considering that Cano is currently in play as an asset buy -- if you read through the associated documents, you'd see that the Cano-Resaca merger is essentially an asset buy on the part of Resaca.

    Also, I probably should have been more clear in stating that Parallel Petroleum and Linn Energy were both a sale and purchase, respectively, of companies rather than assets. The other transactions, on the other hand, were comparable sales metrics of property buys and not "viable companies" -- so I think the comparisons still hold.

    Finally, I'm not sure that you have to assume anything concerning additional debt and/or equity if you take the view that Cano is in the process of selling its assets. The only think you'd need to consider is the possible run-rate for a further auction in case the Resaca deal blows through. Besides, Cano's total debt load is only $65 million, which is relatively low compared to its asset value.

    Thanks for the heads up on Coastal Energy, though. I'll have to take a look.
    Jul 13, 2010. 11:17 PM | 1 Like Like |Link to Comment
  • Cano: A Closer Look at Valuation [View article]
    I'm not particularly skilled in figuring out short-term price movements, but here's my two cents. You saw about 2 million shares (out of 45 million) trade on the day that the equity raise was postponed. I think those were the arbs coming out of the trade. This may or may not have triggered some technical indicators for a downward drift. As that continued, I think we saw some stop losses (mechanical or psychological) at the $0.50 range yesterday -- that created a little more than 1 million shares of trade.
    Jul 8, 2010. 11:51 AM | Likes Like |Link to Comment
  • Cano: A Closer Look at Valuation [View article]
    As far as I can tell, based on talks with management, it seems like they have a pretty good relationship going with their lenders, Union Bank. (Same bank that's doing the post-merger financing.) They're out of compliance with their leverage and interest coverage ratios, which has a 30 day cure period before it counts as an Event of Default. I think it's likely that they can get a waiver from their lender. (They've already received waivers for the last 2 quarters.) The lenders have been very involved in the merger process, so it looks like they believe they can make a much better play trying to get a deal done (Resaca or other) than merely seizing the collateral.

    Even assuming that the collateral is seized, I don't believe that anyone would be able to steal the assets for a ridiculously cheap price in the courts. The secured credit agreement is governed in Texas, which like most states, has to comply with certain UCC-type restrictions on asset disposition. They would have to dispose of the assets in a commercially reasonable process, likely an auction. The Texas courts have struck down various auction processes that were too closed or were not populated with enough bidders as being unfair.

    I've never really understood the assumption that bankruptcy necessitates a fire sale. Generally, that might be true in a Chapter 11 bankruptcy, where you're looking to get out as soon as possible so that you can continue your operations out from under the thumb of a bankruptcy court. However, if there's a bankruptcy proceeding here, it's likely that it will be a Chapter 7 bankruptcy, which is a liquidation and wind down.

    Also, it's my understanding that you can pick up assets for the cheap on the basis of two variables. (1) There's not enough demand for the assets at any given time, so you're forced to sell at a temporarily depressed price. Unlikely in this situation given that their biggest assets are in the favorable (and popular) Permian Basin and Panhandle areas. (2) The assets themselves are selling for a depressed price on the market (temporarily or intrinsically), like MBS in the last two years (intrinsically borked). I don't think onshore crude reserves are intrinsically borked, so it's a question of where crude prices might be during the liquidation process.

    I don't think either of these factors really apply in this case, so while there might be a slight discount from asset disposition in bankruptcy, I don't believe the discount is nearly as large as the current trading price of the stock suggests.
    Jul 8, 2010. 11:43 AM | Likes Like |Link to Comment
  • Resaca-Cano Merger: Three Possible Outcomes [View article]
    I believe the stock is oversold. It looks like all the arbitrageurs ran for the doors on the announcement of the postponement for the equity raise. I wouldn't be surprised if the merger was called off, but in my book, that's not actually a bad thing. As I stated in the writeup, I'd actually prefer a liquidation over the merger, and it's possible that this recent turn of events might result in an asset sale and/or a liquidation process.
    Jun 30, 2010. 12:25 PM | Likes Like |Link to Comment