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Why This Oil Producer Is Going Private

Yes Virginia there is a Santa Claus. Private equity fund Edge Natural Resources LLC is taking Canamax Energy private--at 67 cents, or a hair shy of a double over Thursday's share price.

It has been my largest position for a junior for two years, and gives me--and the subscribers who bought it at the same time-just over a double of my 30 cent cost.

The price works out to 2x PDP (Produced, Developing Properties) or about 10x 2016 cash flow on strip pricing (which is obviously really low right now.)

So it's wonderful news for retail shareholders who get a big payday right before Christmas.

But to me, here's the news on this deal-management had to take the company private because they couldn't get any M&A work done with such a low valuation in the public markets. They had previously done 5 deals in 2 years.

Part of that very low valuation is that Canamax is very small-about 1500 boe/d. But they have very little debt (about $1-1.5 million) and their latest well results showed-according to brokerage firm Richardson GMP-that their new horizontals would pay out in only 7 months at US$50 WTI.

That's amazing; that is the best payout on well costs I see anywhere in North America, including the Permian.

I spoke to CEO Brad Gabel Friday morning after the Edge buyout of Canamax was announced. He said they couldn't even get a single meeting in Toronto or Montreal with those amazing results. So it was clear their low valuation wasn't going to change.

Gabel had told me previously that there were some great micro-cap sized deals to be done in Western Canada--but with a 38-40 cent stock, they had no currency to do any transactions. Nothing was accretive unless the stock was a lot higher.

Enter private equity firm Edge. Principal Roy Aneed was Canadian head of NGP-Natural Gas Partners, another PE firm. He was well known to Canamax Chairman Kevin Adair, being a shareholder at Adair's Spry Energy that was sold to Whitecap Resources (WCP-TSX).

It's a case of smart PE money doing what they're supposed to-buy good assets and good teams at the bottom of the Market. Retail investors-including me-are so giddy about getting the liquidity; they're just happy to be out at a decent profit in a bad market. That tells me this deal will do well for the PE team.

I had an email from one of my institutional subscribers complaining this deal is a "take-under" vs. a take-over. He's right--if and when oil goes back to US$60WTI.

Canamax has a talented technical and M&A team with very low cost production and almost no debt-that stock would soar to more than twice what it's being bought for now. But nobody knows what's going to happen.

I know some other large shareholders who would have waited. Canamax was in the Top Tier of Juniors that would have run up hard and fast…whenever oil turns around. But management wanted to sell into this bid so they could go do more deals and grow the company. The banks are starting to get a bit more mean right now with producers. And retail was happy to take the money and run.

So the intent in going private is to be able to use technical talents of the very gifted VP Operations Jeremy Krukowski in the field to grow organically, and use the crafty team of Gabel and Harry Knutsen to complete more "steals" like they did with the Flood asset in Alberta. They bought the Flood asset for $500,000 net, after it had more than $20 million spent on it by previous operators.

Now they are going to have the chance to go to work, with a big PE fund behind them and no public shareholders (we can be such a pain sometimes!).

I'm happy for the CAC management team, and happy for the OGIB subscribers who are making some money here. This was my biggest ground floor position in late 2013, and many subscribers jumped on the stock with me at 30-50 cents (back then it was 5-10 cents, pre rollback).

I hope most got their cost out at higher prices-the stock was as high as $1.94; a six-bagger in one year. Much to my wife's chagrin, I did not-I was a believer here.

Earlier this year, Canamax purchased Powder Mountain Energy, who had minor production but $21 million in cash. At this price the Powder Mountain shareholders are making money (essentially a 58 cent buyout), and the fact that the main backer of that company, a fund called 32 Degrees, stayed with Canamax--that would have been a big deal making sure nobody got lowballed with an offer.

It's a bit ironic that Canamax Chairman Kevin Adair is now involved in TWO very out-of- the-box transactions. Kevin's main job for the last 3-4 years has been Petrus Resources, and he's actually taking that public right now--the IPO funding was just announced a few days ago.

Who goes public into an energy tape like this? But he has taken the same integrity and character and discipline into Petrus--they will be one of the lowest cost producers in Canada--as he has at Canamax.

Kevin was the #1 reason I bought Canamax when it was a shell and had less than half a section in Alberta's Belly River play (made famous by DeeThree/Boulder Energy). Kevin was actually paid by minority shareholders to remove their liability and the first well hit over 200 bopd. So my bet was proven right very quickly. And then came Flood.

Being as I have few capital gains this year, I sold the stock Friday at 64 as opposed to waiting into January for the deal to close. I will give the arbitrage funds their 3 cents, or 5%. Because of a few losses I've already taken, this transaction is close to tax free for me.

With 64 cents, that puts the 2015 OGIB portfolio at a loss of just $48,000 as of Friday morning, or 1.8% for the year. If I add in my $38,000 in dividends this year, I'm only down $10,000 on a $2.4 million portfolio. FLAT.

That's a minor miracle for an energy focused portfolio in this market.

So Santa Claus came early to me and Canamax shareholders. But if oil prices have an unexpected sharp turn up in January (a pause in the US dollar after the rate hike?) it could feel more like the Grinch Who Stole Christmas.