ArPetrol: Hidden Asset Sale With Almost A 200% Upside From Closing Price

| About: ARPETROL LTD (RPTZD)

Summary

ArPetrol announced Friday that they plan on selling all of their operational assets.

At the closing on Friday, there is potential for ~198% upside.

On Monday, the price should start to trend upwards towards the deal price. However, given the hidden nature of the company, there should be an arbitrage spread.

If the deal falls through, there is low absolute downside. The company is significantly undervalued and should be able to continue to operate as a going concern.

All numbers will be denoted in CAN going forward. Furthermore, interested investors should buy ArPetrol on the Canadian Venture Exchange at RPT.V due to liquidity.

Individually scanning Sedar filings can be lonely, timely and uneventful. However, sometimes you can run into that hidden gem that makes all the solitary nights worth it. On 3-19-2016, I ended up finding an interesting cash out play.

ArPetrol (OTC:RPTZD) is a Calgary based oil and gas exploration company with all of its assets in Argentina. In Argentina, the company owns and operates a gas processing facility with max capacity of 85 MMcf/day. Since the downturn in the energy market, RPTZD's stock price has fallen from a high of ~$0.30/share to lows of ~$0.14/share.

Investment Thesis

On March 18th, 2016 at market close, RPTZD announced that they plan on selling all of their operations in Argentina. If the deal goes through, this is a 195% premium to market close on the 18th. Furthermore, the company plans on distributing the cash to shareholders at a premium between 181% and 168% premium from market close.

When the market opens on Monday, there should be decent price action, moving closer to deal price. However, due to the absolute size of the market cap, OTC Pink/Venture listing and an almost 'hidden' company, there should still be a decent arbitrage spread to take advantage of.

The Deal

The purchaser of RPTZD's assets isEmpresea Nacional Del Petroleo or more informally known as ENAP. ENAP is the state owned O&G Company of Chile. Moreover, its subsidiary ENAP Sipetrol Argentina will purchase ArPetrol's wholly owned subsidiary that hold all of RPTZD's assets.

A total purchase price of $14.7mm or $0.65/share is expected to take place in May of 2016. If the deal does go through, RPTZD will not have any operational assets and will start the wind down phase. All in all, the company plans on distributing $0.59-0.62/share to shareholders in multiple installments.

In order for the deal to pull through, 2/3rds of investors will need to approve. The company has a NAV of ~$0.61/share and is currently losing a significant amount of money (net income basis). Furthermore, the last time the company traded near $0.65/share was almost three years ago. What I am trying to say is that it would be very irrational for investors to let this deal pass up. It should have a high probability of pulling through.

Concerns

My biggest concern is the deal falling through (for whatever reason). If this happens, the stock price has a high likelihood of falling back pre-buyout prices. However, given the fact that the company has zero long-term debt, is FCF positive and its market cap is made up of 45% cash, a total investment loss shouldn't happen in the near-term. Furthermore, the deal is priced around NAV, which should help protect against total capital loss (if the deal fails).

If the deal does fall through, the company should be able to continue to operate as a going concern for at least another year or two. Additionally, the company has valuable assets and infrastructure in place, with proved and probable reserves between8-375 MMboe at their Faro Virgenes field (34,000 acres: 100% owned). Also, their gas plant can produce 85 MMcf/d and is a steady revenue stream. Finally, they have been actively searching for another merger or sale since at least 1Q15. I would be surprised not to see this asset getting scooped up if the current deal fails.

RPTZD is also a very thinly traded ~$4.95mm dollar nano-cap. It may be easy getting in, but hard getting out. Also, there may be extreme volatility, which may work against your favor. Please do a significant amount of personal due diligence if interested in this idea.

Conclusion

This is not a deal for everyone and the majority of investors either will not or cannot participate. If the deal does happen to pull though, there could be substantial upside from the current price. If the deal does not go through, there should not be much downside given the current undervaluation from book value. As I said before, do you own due diligence and happy investing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here