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TNRH Weekly Rambling: 2/17 - 2/23/2018, Brought To You By Laurentian Research


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Oil & Gas

It's again the earnings reporting season, with so many companies reporting. As we know it, only are perhaps 2% of the companies in the market deserve a consideration to be included in your portfolio. But so far, none of the CEOs have said his/her company is not worthy of investing. Still, a few of them stand out.

GeoPark (GPRK) is the king of Latin American independent E&P companies. CEO James Park revealed during the Enercom Dallas Conference more details about how amazing an E&P company he and his partner Chairman Gerald O'Shaughnessy have built in 15 years. GeoPark has 159.2 MMboe of 2P reserves which are at the low F&D costs of $4.80/boe (FDC of $4.0/boe plus the 70% success-rate-adjusted book value per boe of 2P reserves because of the successful efforts accounting) and Opex of $7.0/boe, which is anticipated to further decrease as a pipeline in Colombia is built this year and the lowest-cost Llanos 34 assets continue to expand and account for a larger proportion of its consolidated assets.

Let's do a simple back-of-envelope calculation:

  • To reproduce those 2P reserves, some 159.2 X (4.8 + 7.0) = $1,879 million will be needed. Add the widely-coveted 3.5 million acres of contract landholding to that, you'll get the reproduction value of the company.
  • That reproduction value is more or less in line with the recently-announced $2,291 million NPV-10 value.
  • The company currently has a net debt around $426 million, net of which the net asset value comes to the neighborhood of $1,453-1,865 million.
  • But the market only priced the company at $593.42 million as of the market close of today, i.e., at 68% discount.

What I particularly like about this company is that it is a value-creation machine, fine-tuned to every detail, from corporation set-up and operating strategy, via asset portfolio and field operation, to finance (see here). For example, it only paid $30 million for the 45% working interest in the Llanos 34 block; however, in 6 years, it created a NPV-10 of $1,393 million out of that $30 million initial investment. This is quintessential value creation through drillbit.

In these few years, Latin America is probably the most attractive petroleum province for E&P companies, with numerous incredible opportunities for small independent companies to pick.

Granted a top-notch execution is absolutely required to reach the level of GeoPark, but in a favorable operating environment like Latin America, even a mediocre company can attain great success by doing just one or two things right. Take Canacol (OTCQX:CNNEF).

Canacol almost has the entire supply-deficient Caribbean Coast gas market to itself, barring the declining fields of Chevron (CVX) and Frontera (OTC:FECCF), with gas sale prices averaging at the hefty level of $4.75/Mcf. To get to enjoy such a comfortable position, the company made one brilliant decision six years ago: to specialize in natural gas E&P in the Lower Magdalena Valley Basin in Colombia. The company is great at doing one thing, i.e., exploration, with gas exploration success rate of 83%.

But look at it now; the company ended up to have a F&D cost at $0.44/Mcf (or $2.59/boe), Opex at $1.09/Mcf and operating netback at $3.66/Mcf or $21.23/boe.

Such incredible economics covers a lot of undesirable things. To start with, the company still maintains a full office in Calgary, although all of its operations are in Colombia and most of the top honchos are now based in Bogotá. The company is known among long-time observers as laid back in operation. One would assume the company had plenty of time to deliver its stated goal of raising gas sales volume to 130 MMcf/d by December 1, 2017 (see here). However, for unexplained reasons, the installation of the 82km-long Sabanas gas flowline wasn't completed until December 4, 2017, and didn't start to transport gas until the next day, which was only at half of the previously announced capacity. On December 5, 2017, Canacol did not even put out a press release to confirm Sabanas was actually on stream. The company promised "Upon completion of the second gas compression station scheduled for mid‐January, 2018, the Sabanas flowline will reach its full transportation capacity of 40 MMscfpd" (see here). However, the company could not pull it off by mid-January, 2018. To the frustration of all the shareholders who anxiously awaited for a press release in mid-January 2018 concerning announcing the supposedly major stock price-moving catalyst, the company did not say a word about the pipeline; instead, it touted the results of an appraisal well (see here). As it turned out, the company did not complete installing the second compression station at La Union until February 15, 2018, and the Sabanas flowline thus did not start transporting 40 MMscf/d until February 21, 2018 (see here). After these being left in darkness, the poor loyal investors only got a nonchalant statement saying "The Corporation will provide regular updates as they become available" (see here), without even attempting to explain why the pipeline start-up was delayed by more than 2 1/2 months.

It is this kind of miscommunication that has helped condition the investors to be un-anticipatory and to invest based on delivered accomplishments in the rear-view mirror.

Although this could have been a beautiful story well told, I have to say that, as compared with the superb fundamentals, the subpar execution is just a fly in the ointment. Some would even go as far as saying there is a silver lining in the un-anticipatory nature of the stock: you can deploy your capital elsewhere for some extra profit and swing back to Canacol only after a major catalytic news has been announced and confirmed. I suspect such laxiness in operation may set the company up for being acquired by some smoothly-run peers, such as Chevron.

Mineral Resources

Orocobre (OTCPK:OROCF) announced on February 22, 2018, its results for the first half of FY2018 ended December 31, 2017 (see here). The company made $8.2 million by producing 6,072 tons of LCE, with a gross operating margin of 62%. But the market seems to be unimpressed at all initially, selling off the stock during much of the next day, only reversing the sentiment until the last hour of the day.

  • Perhaps the investors were underwhelmed by the reality that, for all the noisy pizzazz about the world-changing lithium metal, only a poultry $8.2 million was made.
  • To be fair, the good news is the profit generated by the Olaroz JV increased 35% yoy, which was dampened by the bad news that the Borax unit lost money.
  • TNRH covers Orocobre in a series of articles (see here, here and here).

Ardea Resources (OTCPK:ARRRF) diligently informed the investors about the progress of its Pre-Feasibility Study on the Goongarrie Nickel Cobalt Project and infill drilling which "confirms continuity of mineralization in optimized pit
footprint areas" (see here).

  • TNRH covers Ardea in this article (see here).

Clean TeQ (OTCQX:CTEQF) announced updated resources, which includes a 30% increase in cobalt grades compared to the resource estimation completed in
2016. The M&I nickel and cobalt resources in the Sunrise Project are 558,000 and 116,000 tons, respectively, and the inferred nickel and cobalt resources are 35,000 and 16,000 tons, respectively (see here). For the fiscal half-year ended December 31, 2017, the company lost A$7.8 million.

  • TNRH covers Clean TeQ in these articles (see here and here).

Nornickel (OTCPK:NILSY) announced that it has been informed that on February 16, 2018 a hearing on an application for an injunction was adjourned to a later date, which was brought by the shareholder, UC Rusal Plc in the High Court in London against fellow shareholders Crispian Investments Limited and Whiteleave Holdings Limited in connection with the sale of the company shares from Crispian to Whiteleave and Rusal. Nornickel said that it is not a party to these proceedings and its day-to-day operations are not affected and that, however, the court directed that Rusal should compensate all losses that the company may suffer because of the relevant court order (see here).

This dispute between two major shareholders - Deripaska and Potanin - concerns the potential sale of Roman Abramovich’s stake after the end of the lockup period. This new development was read by most investors as a reminder of risk in Nornickel. However, it is the fight that keeps the checks and balances in place, so this may not be a news as bad as people thought. Furthermore, it is more likely that a new truce will be found in some way (see here).

Separately, Deripaska reportedly is going to step down from his corporate positions at EN+ and Rusal (see here).

  • TNRH covers Nornickel in these articles (see here, here, and here).

RNC Minerals, aka Royal Nickel Corporation, (RNX.TSX)(OTCQX:RNKLF) is a micro-cap mining company focused primarily on the exploration and development of base and precious metals. Small as it is, the company holds one of the largest nickel and cobalt mines in the world. That is the Dumont Nickel Project, an undeveloped, permitted and shovel-ready nickel sulfide deposit, located in the established Abitibi mining camp in Quebec, Canada.

  • TNRH covers RNC in this article (see here).

What I bought in the week & how does it perform?

I alert the TNRH members on buy and sell trades in two ways. I tell the members of the trade orders I am about to enter or just entered on the fly in the Chat Room; I also summarize the trades executed or unfilled during the day in the Daily Buy/Sell Alert, which goes out to members through email upon market close.

Interesting readings

For this week, I recommend the following readings:

  • The 4Q2017 conference call transcript of Continental Resources (CLR) contains colorful comments by Harold G. Hamm. I think it's a good read for those who are interested in the STACK-SCOOP play in particular or the oil industry in general (see here).
  • To understand the oil situation of Venezuela, there is no better wisdom than what is offered by Francisco Monaldi (see here).
  • To understand the quagmire the Canadian E&P companies are in, see how Peter Howard explain it in a four-part series (see here, here, here, and here).
  • Listen to Mine Yücel, Senior Vice President and Research Advisor at Federal Reserve Bank of Dallas, talks about the U.S. energy outlook in 2018 at the Enercom Dallas Conference (see here and here).

TNRH Infrastructure

The TNRH Chat Room is major attraction now in the TNRH community. With more experts from diverse fields joining the TNRH Chat Room, more insights, ideas, and enlightenment can be experienced there. According to a number of community members, even by reading the comments after the discussions, many could feel the excitement in idea exchange, and some found them to be exceptionally educational. Therefore, I strongly encourage your participation.

I updated the "Videos Galore" (see here) by adding quite a few excellent talks presented at the Enercom Dallas Conference by the CEOs. Among them, I recommend the presentation given by GeoPark CEO James Park; you wouldn't be disappointed.

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Disclosure: I am/we are long the TNRH model portfolios.

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