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Alan Brochstein, CFA
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Alan Brochstein, CFA has worked in the securities industry since 1986, primarily with the responsibility for managing investments in institutional environments until he founded AB Analytical Services in 2007 in order to provide independent research and consulting to registered investment... More
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  • Dancing the conTANGO 0 comments
    May 10, 2009 10:23 AM | about stocks: MCF

    I like Energy a lot right now as a sector despite my concerns that stocks are likely to retrace some of this recent rally.  I confess that despite spending the first 18 and most recent 15 years of my life in Houston, I am pretty ignorant about the oil & gas industry.  While I have a much easier time investing in technology or service companies in the sector, I recently added Contango (NYSEMKT:MCF) after one of my clients suggested that I look at it.  I also added it to my Top 20 Model Portfolio

    Here is the quick and skinny:  We are investing in Ken Peak, who founded the company in 1999 and runs it with 5 other employees.  He pays himself a salary of just $150K and owns 20% of the company.  He has never sold a share and is in his mid-60s (apparently looking for an exit).  The company is now a pure play Gulf of Mexico E&P company like no other - almost purely virtual through joint ventures.  Kudos to Peak for divesting Fayetville Shale properties at the peak last year to XTO and Petrohawk as well as divesting Freeport LNG.

    The stock has no research coverage despite its $700mm market cap.  It is important to know that its largest outside shareholder was Sellers Capital, a hedge fund that was liquidated and that distributed in late March remaining shares of MCF to its owners (which has no doubt put selling pressure this year on the stock).  What do you get for $700mm and no debt?   Tangible book value of $361mm, which includes cash of $77mm and predominantly proven reserves.  The company repurchased stock in 2008 and January just below $47 ($34mm) and described it at the time in their 10-Q as the equivalent of buying proven reserves $2.23 Mcf.

    While obviously the company is subject to continued falling natural gas prices, perhaps they have bottomed.  MCF is a low-cost producer.  Having no debt, it has more flexibility in others in terms of shutting in at low prices or perhaps even acquiring properties from others not in as fortunate financial position.  Peak has already adjusted down CapEx spending this year.

    I started buying just below 40, expect to see 50 soon and hope to sell at 58 within a year.  The company had engaged investment bankers last year and apparently had secured a bid, but the capital markets freeze killed the deal.  With so much reliance upon a single person, though, I wonder if the exit strategy of selling out will pan out.  In any event, I view the company as a potentially low-risk way to play a bounce in natural gas prices as it recovers from forced selling (Sellers liquidation). 

    Themes: Energy Stocks: MCF
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