Livermore Favours BKX & JSE
VW: One small cap you like is Jadestone Energy Inc. What do you like about this business in particular?
DN: When we first took a position in Jadestone, we saw an opportunity to transform the company by replacing the management and board and using the business to acquire depressed operating assets others must sell to de-lever their balance sheets and focus on core basins. Producing assets (not exploration) with real cash flows and deep value. We feel that we’ve made excellent progress on this. New management has been brought in, and the company has been transformed. New Jadestone is built on an “acquire and exploit” strategy not unfamiliar to some domestic E&P companies, whereby bringing operating capability and new capital to under-invested assets (or assets in the hands of super-majors for whom materiality in future activity is a concern to them), can add significant incremental value. The difference with New Jadestone, compared to North American plays is that the company is focused on Asia Pacific opportunity where the returns are on average two or three times better than North America (IHS Herold annual performance reports), where the competition is very limited and therefore purchase price is very modest (often assets are sold on bilateral deals – no competition), and finally where opportunity options are on the increase.
These characteristics make the thesis almost unique (compared with North America for example where the competitive bidding is intense. What’s more, product pricing is favorable in Asia. Oil is usually sold at premiums to Brent and domestic gas is contracted in the range $7.50 – $8.50/mcf)
VW: The company just completed a refinancing to acquire assets from Stag Oilfield, what’s your view on this acquisition and the financing deal?
DN: Jadestone secured $68 million of new financing, by way of a (nonbrokered) placing for C$53 million (c$40 million) at C$0.40/sh and a $28 million convertible debt facility from Tyrus Capital to contribute towards further acquisition opportunities. The convertible facility has a tenor of three years and carries a 7.5% coupon. The conversion price is C$0.50/sh. This additional financing will allow Jadestone to conclude the (previously announced) Stag asset acquisition, provide a LoC in respect of the Stag FSO and provide the capital to drill additional appraisal wells. The Stag asset adds production of 3,750bopd and will generate cash that could be deployed elsewhere for the development of the portfolio. There are some additional acquisitions also in the pipeline. As described above, New Jadestone is built around an acquire and exploit strategy. There is a growing number of M&A opportunities emerging with limited competition. Opportunities are increasingly being sold at distressed prices. The fundamental value proposition, however, is the reinvestment that follows M&A. We look for almost an order of magnitude of reinvestment potential compared to acquisition price which drives 3-6 times MOIC. As the portfolio builds the ratio of organic capital increases giving optionality, diversity, and control. After the completion of Stag, Jadestone is now aiming to complete the purchase of two appraised gas fields in Blocks 05-1b and 05-1c offshore Vietnam in the Nam Con Son basin in the next two months and bring them on stream in 2019, as well as further development of its existing assets in Vietnam’s Malay Basin with the Nam Du and U Minh gas fields.
VW: If everything goes to plan how much do you think the company could be worth? Do you have a bear and bull valuation?
DN: We feel Jadestone can be worth $2.00+ a share. Perhaps much more over time as the company continues to roll-up assets. Timing is tough to determine, but today even with our capital raise, the shares are very cheap. Trading at only $15,000 a flowing barrel and a discounted 0.30 net asset value per share with no debt, $20 million of cash on the balance sheet and plenty of development opportunities in the pipeline this is a very compelling opportunity where we believe the downside is limited. Catalysts to further upside will be closing the two current acquisitions, adding two or three new acquisitions currently being targeted, delivering production and cash flow stability for the company for the first time since inception. Also, recognition in the market that the strategy of new management is working and the value is being delivered, re-listing the stock on a more appropriate exchange, further delivered growth longer term.
VW: What do you think of the new management?
They’re very skilled and experienced. Each of the team has 15 to 30 years experience operating in the industry within the Asia Pacific region. The new team also has a longstanding relationship with the principal stakeholders and deep insight to many M&A opportunities. They’re credited with already creating one of the most successful independent E&P business in Asia Pacific, Talisman Energy, and we hope they can replicate this success at Jadestone.
VW: Are there any issues that could derail this thesis? Is the company highly sensitive to oil prices or is this a play on rising oil prices?
As Jadestone’s shares are already trading at a deep discount to the value of the company’s assets, we believe there’s a wide margin of safety here. The stock is not a direct play on oil but a play on management’s ability to buy distressed assets at attractive prices. Of course, as with all investments, there are risks; execution of the new management team, available opportunities, and of course financing risks but today the company has plenty of opportunities available to it and is fully funded. So, we see much more upside as long as the current environment holds. On the topic of energy prices, I should point out that as part of the Asia Pacific upstream strategy, approx. 50% to 70% of the reserves and production will be domestic gas the majority of which the majority is sold at long-term fixed prices with escalation clauses. This makes the business a natural hedge in a volatile price environment and takes away significant upstream investment risk.
As well as Jadestone, David likes BNK Petroleum Inc. another international oil and gas exploration and production company focused on finding and exploiting large, predominately unconventional oil and gas resource plays. The company owns and operates shale oil and gas properties and concessions in the United States, utilizing its technical and operational expertise to identify and acquire additional unconventional projects.
At the beginning of November, David was appointed to BNK’s board of directors with the sole goal of instigating change at the small-cap producer. Soon after Mr. Neuhauser’s appointment, BNK announced that its lenders had reaffirmed their commitment amount under the company’s credit facility at US$24.4 million pursuant to the semiannual review and redetermination of the borrowing base. The company only has $20.5 million outstanding of the $100 million facility giving David and his team plenty of firepower to grow the business.