Corridor Resources (OTC:CDDRF) is a junior oil & gas exploration company focused in Eastern Canada. The company produces natural gas in New Brunswick, and has two other major unproductive assets in the Anticosti Island and the Old Harry prospects.
The company is listed on the TSX as CDH.
I will first focus on the moratorium in New Brunswick, then on the McCully field, where the company has active production, and then on the balance sheet of the company. Finally, I will explore the other two major prospects of the company, Old Harry in the St Lawrence Channel, and the Anticosti Island.
New Brunswick fracking moratorium
Corridor Resources has a great headwind in its only productive natural gas field as of late. Indeed, after the election win, the Liberals of New Brunswick made good on their promise to impose a moratorium on any new fracking done in the province.
Fracking for oil & gas will resume only when the following 5 conditions are met:
- A social license for hydraulic fracturing is established.
- Information is gathered on the impacts of hydraulic fracturing.
- A waste water management plan is formulated.
- A plan to consult with First Nations is developed.
- A proper royalty regime is developed.
These conditions are currently being reviewed by a special panel with a mandate to report, within 12 months, on whether the 5 conditions can be met.
Of course, it is impossible to predict the final recommendations of the panel, especially what the social license will actually be. This could possibly halt the company's ability to develop its oil & gas properties in New Brunswick.
However, the wells that are already fracked will continue producing. In the case of Corridor, these natural gas operations are proving to be very profitable due to the sale of natural gas to a transportation hub in the Boston region.
New Brunswick natural gas operations
The Boston hub has a huge premium compared to other natural gas hubs throughout North America. The average realized price in the 2014-2015 winter was $13.85 per thousand cubic feet for a first-quarter netback of $73.73 per boe. This is a huge netback.
This premium is expected to persist until 2018 or 2019, after the completion of several pipelines in the Appalachian gas fields. Nonetheless, the company expects a premium of around $3/Mbtu in the future for New Brunswick gas to account for tolls on newly built pipelines.
Furthermore, Corridor has inked a contract for this year's winter of $9.25/Mbtu for 2500Mbtu/d, should the winter be mild.
The company plans to shut-in some of its producing wells in 2015. On the other hand, the wells jointly owned with Potash Corporation of Saskatchewan (NYSE:POT) will continue operating. This move will bring the average 2015 production to 4.1Mcfpd.
Let's take a look at my expected net income for the year 2015.
As you can see, I expect Corridor to make a profit of a little over $3M this year and EBITDA of about $9M.
The company benefits from being the owner of multiple pipelines and a gas processing unit in New Brunswick. The midstream revenues contribute to over a third of its profits.
In summary, Corridor is trading at about 4X the 2015 projected EBITDA and 12X the projected 2015 net income of its New Brunswick operations.
The enterprise value (market cap as of May 25 plus debt minus cash) is taken as $58.5M minus $23.5M in cash and no debt, for a total enterprise value of $35M.
These are fair multiples, as there won't be any growth in the following years, considering the recent moratorium. Indeed, the company doesn't plan to spend any money in New Brunswick before 2017.
Pristine balance sheet
The company has over $23.5M in cash and equivalents, $3M of receivables and $167M in assets, mainly $100M in property, plant and equipments.
The current liabilities are accounts payable of $1M. The long-term liabilities are decommissioning liabilities of $9M. Its total liabilities amount to about $10M.
The company has a quick ratio of over 29, which indicates absolutely no financial pressure in the short term.
The overall excellent quality of the balance sheet of the company is very beneficial to shareholders of Corridor. Indeed, it may be interesting for an oil major to benefit from the Anticosti Island and the Old Harry prospects in joining the company in its exploration efforts or simply in buying the entire company.
Old Harry prospect
The Old Harry prospect is an offshore oil & gas formation in the St. Lawrence Channel. The acreage is split between the province of Newfoundland and the province of Quebec. In total, the company holds license for 200,000 net acres.
(Source: 2015 AGM Presentation)
Regulators published the Environmental Assessment in May 2014, and concluded that exploration and development can be safely undertaken.
Corridor will spend $1.8M in 2015 to perform an electro-magnetic survey at the bottom of the ocean. This survey will confirm the presence - or the lack of it - of hydrocarbons in the area. Consequently, the company will be looking for a partner for a joint venture to drill an exploratory well. Drilling costs are estimated at $55M.
Anticosti Island prospect
The Anticosti Island prospect has over 30.7 billion undiscovered barrels of oil equivalent. The license covers 1.5 million acres, in which Corridor has a 21.67% working interest. Indeed, the 3 private companies each own 21.67% of the Anticosti Hydrocarbon LP, and the Quebec government owns the rest (35%). The government has agreed to explore the island with its own money in exchange for a significant working interest in the matter.
As such, Corridor has no additional cost in the future for the exploration program. Ten core holes are planned in 2015, followed by three horizontal wells in 2016. That will conclude the exploration program.
A recent presentation was made by the government for the residents of the island (found here, in French - it isn't available in English). We know from this presentation that the government plans two scenarios. The first, and best-case, scenario plans a production span of 75 years and 712 platforms of 5-10 wells. There are no more than 385 active platforms simultaneously.
The blue line represents the total active platforms (left axis), the red line represents the platforms built per year (right axis) and the green line represents the platforms restored (right axis). Indeed, the wells are active for 25 years.
The second, and worst-case, scenario plans a production span of 56 years and 445 platforms of 5-10 wells. There are no more than 385 active platforms simultaneously.
Again, the blue line represents the total active platforms (left axis), the red line represents the platforms built per year (right axis) and the green line represents the platforms restored (right axis).
As is evident, the Anticosti Island development is very serious: the government has a stake in the project, and the project is accepted by the general population of Quebec. Indeed, 71% of Quebecers approve the exploration program, and 66% of Quebecers approve oil exploitation in Quebec.
As you now know, the market has priced the New Brunswick operations at fair multiples. On the contrary, this valuation completely ignores the Anticosti Island project. In my opinion, this should be a crucial part of the value of the stock of Corridor. Indeed, the exploration is paid for, is already proceeding and will be completed in 2016.
In summary, I think the market is clearly focusing too much on the negative perspective in New Brunswick, when the major future projects of the company are elsewhere.
Indeed, the Anticosti Island project will produce from 6500 to 3900 oil & gas wells, depending on the scenario. The project has strong support from the population.
Let's sum up all of this information in one piece.
The operations in New Brunswick are trading at a fair price, considering the moratorium in that province, and therefore, the lack of growth. As of May 25, the ratios are 4X 2015 EBITDA and 12X 2015 Net Income.
On the other hand, the market completely ignores the prospects and the overall strength of the company.
Indeed, the company has $23.5M in cash and no debt. It has liabilities of $10M and assets totaling $167M. This kind of robustness spells, in my opinion, a careful and excellent management team. The company is actually looking for acquisitions or other ways to benefit from its balance sheet strength.
Second, the Old Harry prospect is an hidden value. Indeed, the company will spend only $1.8M to confirm the presence of hydrocarbons in the formation. In the event of successful results, it will be actively looking for a partner to drill the first, with costs estimated at $55M.
Last but not least, the Anticosti Island is Corridor's most valuable hidden asset. In a presentation last week, the government of Quebec, a major partner (35%) of the joint venture, is expecting to drill 3900 oil & gas wells (in its worst-case scenario) on the island. Plus, the project has strong support from the population of the province.
Opportunities of this size are very rare, especially in this market.
Corridor has only one very dark cloud over its head that the market is focusing on: the fracking moratorium in New Brunswick. Nonetheless, its operations there will continue to be profitable because of the premium price realized by the company.
This investment has the feeling of being contrarian, since I think some investors won't buy the stock until the moratorium is lifted. This is a good feeling for me, as it could signal a very big bargain. And there is. The options on this stock, the Old Harry and Anticosti Island, are basically free at this point. As such, I think Corridor is a very good investment bet to make.
Furthermore, don't be fooled by the low share price, the low market cap and the moratorium in New Brunswick. I have the opportunity to invest in a company operating in my home country, with its major prospects in my home province. This is not a company operating abroad or without a proven track record. Plus, we can tell from the balance sheet that the company is well managed.
By investing in Corridor today, you get a piece of a company trading at reasonable levels for the money it currently makes, a pristine balance sheet, lots of cash (a third of the May 25 market cap) and two great catalysts - the Old Harry and Anticosti Island prospects - for free. I believe it is still too soon to put an actual price on these prospects. However, I am still willing to buy this stock, because the market is giving away these prospects for free.
In the short term, the moratorium in New Brunswick will still put some pressure on the stock. However, with increased investor awareness, I believe this stock will go up.
Finally, with a stock of this kind, you need to accept a certain level of higher volatility. If you are buying for the long run, like me, this won't matter.
For all of these reasons, I am initiating a long position on Corridor Resources.
Disclosure: The author is long CDDRF.
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.
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