Corridor Resources: My Price Target

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About: Corridor Resources Inc. (CDDRF), Includes: JNEXF
by: Laurent Cadotte
Summary

Corridor has low leverage in negotiations, except in a few key points.

Total working capital estimated at C$0.79 per share after a possible settlement.

Junex owns over 233,000 net acres on the island yet its stock isn't moving yet.

Note: All figures are in USD unless otherwise stated. Corridor Resources trades primarily on the Toronto Stock Exchange as CDH. If you like this article, please follow me using the link next to my name on top of the page.

It seems investors are increasingly aware of the existence of Corridor (OTC:CDDRF), although not for the reason I highlighted earlier this year. The stock is up because Corridor will be compensated for the termination of the Anticosti project.

Context

Corridor owns shale assets in New Brunswick. The company isn't deploying new capital in these assets because of a fracking moratorium in place since 2014.

The company shuts its production in the summer months. This extends the life of each wells, plus the company benefits from very high Algonquin benchmark prices of $8+ per MMBtu in the winter.

The company banks its excess free cash flow. The 2016-2017 winter made about C$4M in free cash flow. Free cash flow will decline about 10% per year because of well depletion. The company has currently C$33M in working capital, or C$0.37 per share.

The company owns two other prospects: Old Harry, an offshore oil structure off the coast of Newfoundland and the Anticosti JV, on the island of the same name in the Province of Quebec.

Both the Government of Quebec and the Anticosti JV partners acknowledged that negotiations are taking place to terminate the project.

How Much?

Corridor currently has minimal leverage because of low oil prices. Indeed, the Strategic Environmental Study, completed in May 2016, stated:

"It is premature to conclude that the project will be profitable in its entirety."

The exploitation plan was to last 75 years in total. Between C$13B to C$17B of roads, pipelines, and other critical infrastructures would need to be built. The Canadian Energy Research Institute evaluates total operating costs at C$95 per barrel. It is safe to say the Anticosti project is unprofitable at today's prices.

At the beginning of the JV, in early 2014, Corridor received C$15M for selling 7.6% of its interest to other partners in the project. Using this figure, Corridor's 21.67% stake is worth C$43M, or C$0.49 per share.

However, it isn't in the same market than in early 2014. Massive exploration projects are shelved. It isn't realistic to use the same valuation now. Therefore, Corridor and Petrolia are wrong in claiming the permits are worth the same as in 2014 considering current energy prices. Let's speculate the government gives them 50 cents on the dollar, or C$0.25 per share.

The Quebec government will save over C$30M of expenses required under the agreement. Let's say these savings could be passed to the partners in the JV, namely Corridor and Petrolia.

The possible settlement would be C$0.42 to C$0.66 per share using these assumptions.

I believe Corridor and Petrolia could see an additional amount given for damages done to investors and for compensation for the tarnished investment reputation. The sudden change of mind about the Anticosti project could worry some industry, notably in mining, in which Quebec has an excellent reputation.

Conclusion

Minimal total value per share on a working capital valuation would amount to C$0.79 per share. This means there is more upside for the stock.

The summer recess in the National Assembly in Quebec is due mid-June traditionally. If the Minister of Finance is still on schedule, it means the deal would be announced in the next 4 weeks.

This schedule could slip: We have seen dramatic floods here in Quebec for the past 6 weeks. Government attention was definitely somewhere else. There would be downside if the deal would not be announced before the summer recess.

As such, I won't be adding more for now. I am still waiting for my most important catalyst: the move West.

I added shares of Junex (OTC:JNEXF). Not all of Anticosti land holders have bought into the Anticosti JV. Junex has a massive land position of 233,000 net acres on the island and needs to be compensated just like the JV partners. In comparison, Corridor holds 332,000 net acres.

Most importantly, Junex's stock didn't move, despite being in the same process than Corridor and Petrolia. But be careful about Junex: Its balance sheet isn't as rock solid as Corridor's. I allocated a lot less capital to that play.

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Disclosure: I am/we are long CDDRF, JNEXF. 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.