I Will Definitely Cheat On Storm Resources With Its Natural Gas Weighted Peers

| About: Storm Resources (SRMLF)
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Summary

Storm Resources is a natural gas weighted Canadian producer with non-existent online coverage to-date.

The stock has performed exceptionally well since early 2013.

The company will continue growing its production in 2015.

Everything has a price tag and Storm's current key metrics are overwhelmingly high compared to the peer group.

When it comes to investing in the natural gas weighted companies in North America now, Storm is definitely out of my list.

Introduction

The oil price has dropped more than 35% since July 2014, impacting negatively the performance of the oil-weighted companies whose stocks have returned back to their 2011-2012 levels. In contrast, the natural gas price has remained relatively unchanged since July 2014, as shown below:

Therefore, it does not surprise me the fact that one of the best-performing energy stocks in 2014 is a natural-gas weighted energy producer. I am talking about Storm Resources (OTCPK:SRMLF), whose stock has been largely unscathed since early 2014, as illustrated below:

What is the driving force behind this resilience? And more importantly, where do we go from here? Is there any significant upside left by the end of 2015 for this Toronto-listed (SRX.V) stock?

Is Storm now the best choice for an investor who wants to invest in the natural gas weighted companies now? To find this, follow me into the next paragraphs where I will deepen into Storm's assets, fundamentals, and key ratios.

The Assets

Storm has two resource plays covering 319,000 net acres in British Columbia, as illustrated below:

Storm has accumulated a large land position (100,000 net acres) at Umbach targeting the Montney formation, which will primarily be driving the company's growth over the next 3-5 years. Approximately one third (47.6 net sections) has been delineated by the 25.4 net horizontal wells that have been drilled to date in the Montney formation. Assuming four horizontal wells per section, there is an inventory of 165.0 net horizontal wells that remain to be drilled.

The remaining two-thirds of Storm's lands (94.0 net sections) at Umbach have not yet been tested with horizontal wells, but the company believes that they are highly prospective based on the results from the other operators on offsetting acreage.

Storm has also shallow decline production coming from its acreage in Grande Prairie, along with a significant position in the Horn River Basin that requires higher natural gas prices to be drilled at a profitable rate.

The Fundamentals Are Decent

At first glance, Storm appears to have some decent fundamentals. First, Storm has been consistently profitable since early 2014 and earned C$5.5 million in Q3 2014 with a production of 7,160 boepd (78% natural gas).

Also, Storm has a clean balance sheet without any major debt problems. Specifically, the company's debt plus working capital deficiency totaled approximately US$50 million (1 USD=1.13 CAD) at the end of Q3 2014, which is 1.2 times the EBITDA for 2014. Total debt at the end of 2014 is forecast to be approximately US$52 million, which will keep the Net Debt to EBITDA ratio unchanged.

Storm is a heavily natural gas-weighted company. Although the nat gas price was weak in Q3 2014, the company's operating netback is healthy. The corporate field operating netback, excluding hedging gains or losses, was $20.59/boe in Q3 2014, and the year-over-year improvement is mainly due to an 8% decrease in operating costs which were $9.53/boe.

Thanks also to its Montney-focused drilling program at Umbach during 2015, the company forecasts that its production will continue rising over the next quarters and will reach 14,250 boepd in Q4 2015, as illustrated below:

As a result, Storm forecasts that the existing Umbach facilities will remain full throughout 2015 even after the completion of the expansion of the second facility in March 2015, and will add a third, larger field compression facility with initial capacity of 35 Mmcf per day by Q4 2015. Once this project is completed, the company's field compression capacity will increase to 101 Mmcf/d at the end of 2015, ensuring that there will be enough capacity if horizontal well productivity continues to exceed the 5.0 Bcf raw gas type curve used for the company's budgeting purposes.

The Valuation Is Lofty

In this paragraph, I will compare Storm Resources to the peer group. Storm Resources is a natural gas weighted producer whose assets are in Canada, and receives AECO pricing for its core product (natural gas). Furthermore, Storm's current production is right on the threshold (10,500 boepd) that separates the junior producers from the intermediate ones.

Given also that the pricing differential between AECO in Alberta and the Henry Hub (NYMEX) is negligible, Storm's peer group consists of the following companies, which are junior producers (up to 10,000 boepd) and small intermediate producers (less than 15,000 boepd) with natural gas weighted production and assets located in the US and Canada:

1) Chinook Energy (OTCPK:CNKEF) has producing assets in Canada, as illustrated below:

Some investors might also recall that Chinook Energy was my natural gas weighted pick in December 2013, and I recommended it in a "Top Idea" article when the stock was at C$0.82 per share.

Chinook's stock returned 200% in H1 2015 and is still holding a big part of its gains despite the slump of the energy stocks over the last six months.

2) Quattro Exploration and Production (OTC:QEXXF) has producing assets in Canada, as illustrated below:

"Source: Quattro web site"

3) Gastar Exploration (NYSEMKT:GST) has producing properties in Oklahoma, West Virginia and Pennsylvania, as illustrated below:

"Source: Gastar web site"

and below:

"Source: Gastar web site"

4) Panhandle Oil and Gas (NYSE:PHX) has producing assets in the US, as illustrated below:

and below:

5) Cequence Energy (OTCPK:CEQXF) has producing assets in Canada, as illustrated below:

"Source: Cequence website"

6) Delphi Energy (OTCPK:DPGYF) has producing properties in Alberta, as illustrated below:

"Source: Delphi web site"

7) Artek Exploration (OTCPK:ARKXF) has producing assets in Canada, as illustrated below:

8) Pine Cliff Energy (OTCPK:PIFYF) has producing assets in Canada, as illustrated below:

To calculate each company's Enterprise Value accurately, I took into account the working capital (surplus or deficiency) according to the latest quarterly report and the closing price on Friday 28th November 2014 ($1=C$1.13):

1) Per EV/Production: Here is the table with the first key metric:

Company

EV

($ million)

Q4 2014

Production

(boepd)

EV

---------

Q4 2014

Production

($/boepd)

Gastar Exploration

680 (**)

11,500

(54% natural gas)

59,130

Panhandle Oil and Gas

370

6,400 (*)

(75% natural gas)

57,812

Storm

Resources

540

10,500

(78% natural gas)

51,428

Artek

Exploration

210

5,550

(60% natural gas)

37,837

Delphi

Energy

375

11,500

(71% natural gas)

32,608

Chinook

Energy

255

9,250

(64% natural gas)

27,567

Pine Cliff

Energy

315

12,000

(95% natural gas)

26,250

Cequence

Energy

280

12,000

(83% natural gas)

23,333

Quattro Exploration

& Production

12

1,800

(75% natural gas)

6,667

(*): Q1 FY 2015.

(**): Including the preferred shares (Series A and B).

2) Per EV/1P Reserves: Let's now check out the table below with the second key metric:

Company

EV

($ million)

Proved Reserves

(MMboe)

EV/1P

($/boe)

Storm

Resources

540

20.7

(79% natural gas)

26.09

Chinook

Energy

255

16

(63% natural gas)

15.93

Pine Cliff

Energy

315

27.5

(95% natural gas)

11.45

Panhandle Oil

& Gas

370

34.4

(70% natural gas)

10.75

Delphi

Energy

375

36.1

(72% natural gas)

10.38

Artek

Exploration

210

21.4

(75% natural gas)

9.81

Gastar Exploration

680 (*)

78

(54% natural gas)

8.71

Cequence

Energy

280

55

(83% natural gas)

5.09

Quattro Exploration

& Production

12

4.2

(63% natural gas)

2.85

(*): Including the preferred shares (Series A and B).

3) Per EV/2014 EBITDA: Let's now see the table below with the third key metric:

Company

EV

($ million)

2014 EBITDA (*)

($ million)

EV

---------

2014 EBITDA (*)

Storm

Resources

540

42

12.86

Panhandle Oil and Gas

370

53 (**)

6.98

Gastar Exploration

680 (****)

100

6.8

Artek

Exploration

210

35

6

Pine Cliff

Energy

315

60 (***)

5.25

Delphi

Energy

375

75

5

Chinook

Energy

255

55

4.63

Cequence

Energy

280

73

3.84

Quattro Exploration

& Production

12

8

1.5

(*): Estimate, based on the company's production and guidance.

(**): FY 2014.

(***): Annualized, pro forma the Shallow Gas Assets acquisition.

(****): Including the preferred shares (Series A and B).

My Takeaway

Storm Resources is a growing energy producer whose performance has not been impacted significantly by the recent drop of the oil price, primarily because its production is heavily natural gas weighted.

Nevertheless, Storm Resources does not wow me when I compare it to the peer group given that it carries outrageously high key metrics as shown in the previous paragraph.

Given also that the company is not debt free and does not have a top quartile operating netback compared to its natural gas weighted peers, Storm's staggering valuation at the current price of C$4.95 is not justifiable.

Do I foresee any slippage over the next months? Well, this is very likely because Storm's whopping valuation will have to come more in line with the peers' valuation sooner or later. And there is no question that I don't expect a major up-leg from the current levels of C$4.95 per share over the next months.

After all, Storm Resources is not my cup of tea when it comes to investing in the natural gas sector. My natural gas weighted picks right now are Epsilon Energy (OTCPK:EPSEF), a Toronto-listed (EPS.T) stock that I recommended at C$4.1 in a "Top Idea" article in July 2014, and Quattro Exploration & Production, another Toronto-listed (QXP.V) stock at the current price of C$0.34 per share. Quattro is a new, unknown and ridiculously cheap producer as shown above while being profitable and having a very strong balance sheet. To me, making money from an investment in Quattro now is like shooting a fish in a barrel.

Disclaimer: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

The opinions expressed here are solely my opinion and should not be construed in any way, shape, or form as a formal investment recommendation. Investors are reminded that before making any securities and/or derivatives transaction, you should perform your own due diligence. Investors should also consider consulting with their broker and/or a financial adviser before making any investment decisions.

Disclosure: The author is long EPSEF, QEXXF.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.