Is This Oil-Weighted Energy Producer Overvalued After The Recent Price Surge?

| About: Surge Energy, (ZPTAF)
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John Paulson, the popular manager who is the founder of Paulson & Co., one of the world's largest hedge funds shorted the Greek debt in 2012. I disagree with him and his biggest bets, including his gold stocks. This is why I wrote recently two articles discussing the financial "resurrection" of Greece and the opportunities this country currently offers to the investors.

Several readers asked me through emails to my personal account or through the comments' section, how they can play Greece from the bullish side and which companies I recommend. I recommended them to diversify their cash to Alpha Bank (OTCPK:ALBKY), National Bank (NBG), Piraeus Bank and Global X FTSE Greece (NYSEARCA:GREK), an ETF associated with the index of the Greek stock exchange. However, those who do not have direct access to the Greek stock exchange, they cannot buy Piraeus Bank because it is not traded in the US markets currently.

Believe it or not, Alpha Bank, National Bank and the aforementioned ETF have yielded 90%, 80% and 20% respectively, since the date I recommended them. My articles are here and here.

My followers know well that I am not getting bullish easily for a stock or a market, and I have very stringent buying criteria. This is why, I have written several bearish articles which have rewarded handsomely those who agreed with me and shorted the respective stocks. To name a few, my top bearish calls are the bankrupt GMX Resources that went from $7 to $0.21, Africa Oil (OTCPK:AOIFF) from $10.5 to $6, Halcon Resources from $8 to $6, James River Coal (JRCC) from $3.5 to $2, Uranium Energy (NYSEMKT:UEC) from $2.4 to $1.5, Forest Oil (NYSE:FST) from $7 to $4, BPZ Resources (NYSE:BPZ) from $2.7 to $2, and Eagle Rock Energy Partners (NASDAQ:EROC) from $10.3 to $8.5. A small sample of my bearish articles are here, here and here.

Apart from Paulson, I also disagreed with some analysts who were bearish about Surge Energy (OTCPK:ZPTAF) when it dropped at ~$3.6. That was when I made my first buy in late January 2013. Since then, I have been bullish on Surge, and my second bullish article was written when Surge dropped at ~$2.75 where I added to average down as disclosed. After all, my average was at $3. These articles are here and here.

I take pride in saying that I have been the only contributor who has discovered and has written bullish articles about Surge Energy thus far. The company's headlines at Yahoo finance prove it.

The Surge

Surge's stock closed at almost $4.8 last Friday from $2.8 in late April 2013. This is a yield higher than 50% for me, and I sold gradually last week three fourth of my position to lock this profit. I took the cash and switched to another stock from the energy sector which is as grossly undervalued as Surge Energy was at $2.7 few days ago. However, I still hold one fourth of my initial position to see how things will evolve with Surge.

Surge's stock was fundamentally dirty cheap at $2.7, and actually this rise did not surprise me. I do not know whether the market has discovered it finally or Surge is an acquisition target. The latter will not surprise me, because the dirty cheap stocks often attract the suitors.

By the time we know what is going on, let's check out two things. The first one is the recent changes that have taken place in Surge Energy, and the second one is its current valuation in comparison to its peers.

The latest changes are:

1) Surge appointed new CEO with a proven track record, replacing Mr. Dan O'Neil. In accordance with his appointment as President and CEO, Mr. Colborne subscribed for up to $2.5 million of Surge Units at a price per Unit representing the maximum allowable discount to the market price of the common shares of Surge.

On top of that, Mr. Colborne will not be taking a salary with respect to his employment as President and CEO of Surge, but shall participate in short-term and long-term incentive plans.

2) The Board and management is considering a strategic conversion to a moderate growth / dividend business model.

3) Surge executed a formal purchase and sale agreement with a Canadian oil and gas producer to sell its non-core, primarily non-operated assets in North Dakota for a purchase price of approximately US$42.75 million. The non-core assets being sold comprise production of ~650 bbl/d and 2P reserves of 2.2 MMboe. The sale of Surge's assets in North Dakota is the first step in implementing changes in the company's new sustainable business plan.

After all, the management will focus primarily in three elite, operated, crude oil properties at Valhalla, Nipisi and Silver areas of Alberta where Surge has discovered significant light oil pools whose estimated DPIIP (Discovered Petroleum Initially-In-Place) range from 30 million barrels to more than 150 million barrels.

The Peers

According to the recent Q1 2013 report, Surge produces more than 10,000 boepd currently (~73% oil and liquids), and holds 2P reserves of 28.1 MMboe (69% oil and liquids).

Let's check out now the second question: Is Surge still cheap after the recent tremendous rise? To find this, I had to dig first into all the Q1 2013 reports to get updated information about Surge's peers in North America. Let's have a look at the following table:




Proved Reserves





LT Debt /

Cash Flow




(73% oil/liquids)








(87% oil/liquids)








(~80% oil/liquids)








(~80% oil/liquids)








(87% oil/liquids)






LT: Long Term

All the companies above are oil-weighted and operate in the same areas. Actually, they are neighbors in several cases. For instance, Surge Energy has producing assets in North Dakota where Whiting Petroleum (NYSE:WLL), Continental Resources (NYSE:CLR) and Halcon Resources (NYSE:HK) also operate. Apart from Kodiak Oil (NYSE:KOG) which is an one Basin play, all the other companies have a diversified oil-weighted portfolio.

Even after the recent surge, the key metrics above show that Surge Energy is an undervalued producer, while Halcon remains the most overvalued one which also carries a significant debt overhang. After all, it will not surprise me if some shareholders of the four aforementioned peers sell and switch to Surge Energy next week. On the contrary, such move will be highly understandable.


I have no idea how things will evolve with Surge Energy. It may become an acquisition target, but I do not count on it because this is utterly speculative. I have been a fundamentalist investor for almost 25 years now. Based on its fundamentals, Surge is not expensive currently. However, the rise of the stock from the current levels also depends on several other factors like the execution of the business plan, the spread between WTI and Edmonton, the operational hiccups, the dividend, etc.

Disclosure: I am long OTCPK:ZPTAF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.