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Steven Salz
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  • Legacy Oil + Gas (LEG.TO) - Small Cap Value Play


    LEG has solid downside protection on a valuation basis, trading at a forward EV/DACF of 4.9x vs. 8.2x for the Junior/Intermediate E&P energy space.LEG trades at less than 50% NAV, and well below its historical forward EV/EBITDA average of 9.5x, at 4.6x right now. Insider buying is substantial, and management has proven its ability to execute, generating double digit CFPS, production/share, and FFO growth on a yoy basis (2011,2012, and 2010,2011). They have done so in a declining CAPEX environment, displaying organic growth that is some of the best in the sector. LEG met its 2012 CAPEX guidance, uncommon in the space. The company has a robust 2.0x recycle ratio and $44.42/boe netback. Operating costs declined 7% yoy. The company is majorly weighted toward light oil and was roughly tracking the commodity but has massively diverged since the beginning of the year.

    The issue is debt. The company has 2012, D/CF 1.94x, Debt 462M, CF238m. This is still reasonable in the space which averages 2.0x, however, given lower debt stories are around, I believe investors are looking elsewhere for price appreciation. Further, the company issued $200m unsecured, five year, 7.5% notes with a pension plan late 2012, a decision not prudent given the debt overhang on the stock, but one which they intend to use as a means to reduce borrowings under theircurrent syndicated bank credit facility to further liquidity and flexibility which will overtime help to reduce D/CF, especially if the company can maintain its average 17% CFPS annual growth. Further, management has proven that despite debt they can still produce for shareholders, and have done so consistently since inception without pushing D/CF over 2.0x which is the max in their optimal band (aiming for 1.5x), and again, still well within the average in the sector, but few names with similar debt can attest to the same consistent growth.

    A further upside is the company's waterflood efforts which has proven a major lift to the company's reserve life at low cost and a new trend that is attracting interest, and could help the stock as the company continues to refine its efforts.

    I expect internal pressure and/or pressure from investors for share value to reflect asset value would lead to prudent management decisions to do so, more specifically ensuring they execute on the reason they brought on 200m in 5yr notes in the first place, which was to reduce their bank facility (LEG has only tapped 54% of the borrowing base, another positive sign for organic growth).

    The stock looks bottomed out right now with great value upside to begin chipping away at.


    (click to enlarge)

    Apr 02 9:43 PM | Link | Comment!
  • Strength In The Yen Following Cyprus

    Given recent action in Cyprus the Yen has strengthened against all major currencies and the USDJPY trade I discussed last week is notably weaker. European investors view the Yen as a safe haven asset despite weakness in the Japanese economy. I believe investors today are doing a trade reversal that is purely fear driven, where they had recently been shorting the Yen and long the Euro, they are now long Yen and short Euro. This will be short lived. Cyprus accounts for only around 0.2% of the economic output of the 17 European Union countries. One should not view this single day reversal as any fundamental change in the veracity of the trade. Underlying fundamentals that supported the trade still remain in place and affirmatively so. All Japanese ministers on Friday required to substantiate the trade were elected into position. I believe the USDJPY will weather the storm and bounce back shortly. I would use this event driven weakness as an opportunity to buy into the trade. Long USD, short Yen.

    Tags: FX, USDJPY, JPY, USD, Cyprus
    Mar 18 10:42 AM | Link | Comment!
  • Short The Yen Ahead Of Tomorrow's BOJ Elections

    Tomorrow the official vote will take place for Governor of the BOJ and Deputy Governors of the BOJ. Japanese PM Shinzo Abe's nominations are Haruhiko Kuroda and Kikuo Iwata + Hiroshi Nakaso respectively. Shinzo Abe has been pushing a manifestly pro-inflationary stance on Japan's economy since the election and used it as platform to catapult himself into the winner seat. His three nominees are of the same mindset, and given Shinzo Abe's incredible popularity among the Japanese (the highest in two decades), it is likely his three nominees will be elected and their economic measures welcomed. Shinzo Abe controls the lower house; however, he does not hold a majority in the upper. Unless something politically catastrophic happens within the next 24hrs, it is unlikely the upper house will prevent the election of Kuroda, Iwata, and Nakaso. The three will further accelerate Shinzo Abe's aggressive agenda on monetary and fiscal policy, ramping up the money printing machines and effectively ensuring the further de-valuation of the Yen. Newswires in the past 24hrs continue to express that all three nominees will likely be elected. Nakaso is viewed as a man of the 'old guard,' unlikely to be so outspoken on aggressive monetary policy, however, he has made recent bearish comments which are obviously coming as a surprise to some observers. I feel this only re-assures the trade.

    Technically: The USD/JPY is at a near breakout point ahead of the election, although further upside would exist if you didn't get into the trade right now, I believe today presents the best opportunity to get in at a good point of consolidation following its recent run up. The USD/JPY still remains above its previous ceiling with it likely now acting as a new floor. RSI, MACD look solid. (chart 1). Short the Yen.

    JPY/USD futures - note the clear downtrend in futures prices -

    (click to enlarge)

    Long gold in Yen terms is another trade that flows logically with this. As the currency rapidly de-values gold will become a safe-haven asset and a preferred 'currency.' At home gold is moving out of favor; however, in Yen terms it is only increasing in value (chart 2). If gold becomes attractive at home again it will not de-value it in Yen terms. The trade remains secure despite possible future volatility and demand for gold in times ahead in the U.S. (see chart 3 for an overlay of the USD/JPY, GOLD/JPY (yellow), and GOLD/USD (green))

    (click to enlarge)

    (click to enlarge)


    Mar 13 10:46 AM | Link | Comment!
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