Is this REALLY the best way forward? We shall see...!It's been a while since i posted any comments on this board, there was no reason really to do so in the past month or so. The stock has been lackluster for several weeks to say the least & nothing of consquence has happened within the company itself to deserve any conversations. Personally, i've reduced my position here by 3/4 since purchasing over a month ago, for several reasons which i will discuss below. It's REALLY not what i expected from this investment, but hey, sometimes we don't get the situation absolutely right.
So why did i partially sellout? Well, to answer this we have to go back to the REASONING or OBJECTIVE of this investment in the first place. When looking for a viable and potentially lucrative investment in a beaten up & beaten down sector like the energy sector has been, you have to tread carefully and make sure you've done your homework thoroughly. Like ANYTHING else, some research, some pragmatic thought and some reasonable assessments with a BIT of luck should almost always bear some fruit. Sometimes the rewards are quick and well earned but in some instances on occassion it may take a little longer and would require a little more work & patience than expected. Which i believe is truly the case here.
When i first purchased stock in Kelt, being out of the O&G sector for quite sometime but knowing the company well enough & in the direction it was headed, i was quite confident of the investment going forward. Remember folks, i haven't touched this sector for at least 10 years and my only other forray into here were modest invesmtents in two juniors, Crew & Tainted Pony. To be honest, the energy sector wasn't exactly the best place to be during that time period and almost anyone who invested here probably took big financial losses, so my intuition to avoid it all for those 10 years until now has served me well. Like that ole saying goes "being at the right place at the right time is key to success" and it's no different now.
So coming back to Kelt and my reasoning for reducing my position, this is my stance on this investment. Even though i've sold part of my holdings, 3/4 to be exact, i STILL haven't given up on this company and it's ability to produce results in the coming months or year. As i don't believe my original premise with regards to the company's future was incorrect or misguided, i do believe my timing MIGHT have been a little premature. In this instance i think i might have miscalculated somewhat the "grande scheme" of Kelt's mgmt plans for the company but i don't believe i was too way off the path. Let me explain my logic here. When Kelt "surprised" everyone and decided to "divest" itself of Inga/Firewweed, i was almost sure this was a sign of an exit strategy for company mgmt. Imo, i thought at that time that the odds were pretty good that was the case. I mean why would the company let go of their crown jewel, with all the work & money put into it just eliminate debt? They DID have other less drastic options to pursue to deal with the debt issue, imo going to an extreme like this had to have another motive, right? The story continues.....
Well, yah....it does have a certain logic behind it but i didn't see it UNTIL now. So if selling Inga/Fireweed wasn't just an opportunistic financial happenstance, then what's really goin on here? Like i stated above, even though what i believed was true has not come to fruiton, it does not mean i was compelely off. It just means that even though i was at the right place my timing was not.....for now. You see, sometimes it's not that simple to forecast or anticipate the EXACT actions of folks or a group of people when under extreme levels of financial duress. VERY difficult to do under even the best of circumstances. In Kelt's case, it seems the divestature of Inga was not REALLY the end at that moment in time but infact just the beginging towards an end. Some might find no real differences in those two similar but distinct fates but trust me when i tell you there is a difference. So even though i would have "preferred" that Kelt sold out after the Inga sale, it seems the company & it's mgmt have OTHER more ambitious plans. How or why have i come to those conclusions, you ask? Well, let's just say there's a whole bunch of factors i prefer not to get into and would require more than time than i have to dedicate to this message board. Let's say this and a wealth of experience tells me so.
So what's the path forward here? If Kelt isn't selling and therefore have decided they will be hanging around for just a bit longer than expected, then they would have to turn themselves from a potential target into a potential acquirer. No two ways about it. The risks of staying in current form too long from not only a financial standpoint but a presentable one as well are just too great. The energy markets, the sector and the world have changed so drastically in just a few years that the "status quo" just doesn't cut it anymore. So either Canadian ep's adjust to the new paradigm and move in unison with the world or they disappear. So what is this brand new world, you ask? For Canadian ep's, it would be a very slim, cost efficient operations with a focus on natural gas & big production. In the next 2 or 3 years, any O&G operation with less than 100k/boe and still heavily indebted will not be around the live on. That's the reality of the situation in Canada, not only to deal with the inhospital landscape & twisted politics but also to adjust to the financial realities being trust on them. So ops like Kelt imo have no choice but to supersize in order to move forward, and i believe mgmt is fully aware of this reality if they wish to "stick around".
Options? Taking the above premise into account, how can Kelt get bigger while maintain financial integrity? Simple enough, as the banks & usual lenders have pretty much turn their backs and abanadoned this space, companies like Kelt are pretty much left to their own devices. With venture capital drying up compeletly and creditors clammping down on loans including severely restricting current ones, there is NO CHOICE but to use the company's shares as leverage AND finely pick your targets to increase your size.......strategically. For Kelt's situation, what would be an accreative target for the company? One thing is certain here, with the disposal of Inga/Fireweed, i highly doubt ANY asset in BC would be foremost in the minds of Kelt mgmt, i think the sale of Inga has sealed any further investment there permanently. Some here might disagree but that's YOUR prerogative to do so. This in turn, means the end for the Oak/Flatrock asset as well, whether this will be done soon or later down the line remains to be seen. So with any BC property "out of the question", this would leave us with potential accreative, synergestic assets with Kelt's own properties in Central Alberta. In other words, something that would be favorable to Kelt's reamaining assets in Progress/Charlie Lake & Wembley/Pipestone.
So if one continues on this train of thought, what possibilties could there be? Personally, i see three potential targets that would not only be immsenly accreative for Kelt and limit financial risk but would go a long way for Kelt being a 100k survivor in a year or two from now. With the Paramount possibility being reomved as they focus on others such as Nuvista, i have the following three scenarios which COULD be realities IF i have calculated the intent properly. Please note that i'm working on the premise of limited borrowing power & limited financial impact on the balance sheet. I'll start by the least likely & least accreative. The first one being Nuvista, with them being in sort of a pickle right now, they might be vunerable and "motivated" enough to let go of one of their assets at intrguing valuations, specifically Pipestone. If Kelt are able to pull of an acquisition of this magnitude, it would not only be a coup of an excellent asset but immensely accreative in the long run with their own lands in that area. In not going to get into the specific details of the property, but let's just say it would make Kelt a major operator in a very prolific area. Dowside with this option? As i doubt Nuvista would be 'willing" to accept shares for this asset and they urgently need cash, it would have to be funded through somesort of placement and/or dilution with a lender willing to deal in reasonable terms. So though VERY lucrative metrics, synergestic and accreative in the long haul for Kelt, it creates short-term uncertainty & adjustment.
Secondly, a merger with Advantage O&G with Kelt or AAV being the survivng entity. Out of all the possible merger candidates, i believe Advantage would be the best suited for Kelt in this endeavor. A decent ~45K/boe producer being 80% gassy and with about $360m in debt. Now before anyone hammers me with colorful comments like "Kelt doesn't want debt" or "they have debt so no good", please note that there's a difference in being a ~40k producer indebted to the tune of ~$400M that Kelt was before Inga sale or being tranformed into a microcap with no debt & an abysmal production of 17k overnight. Compared to the POSSIBILTY of being a 75K producer with ~$350m a debt load post merger. Debt ISNT always bad when it's used properly & tactically, it's only bad in the wrong hands. Downside? Almost none. As this would be ALL funded with a share swap, there's no need for additional borrowing or dilution, so limited effects for the balance sheet. For the skeptics, yes you do addon that extra AAV debt but you also add those tremondous assets to balance it out.
Lastly and my personal favorite, an outright buyout of a peer. Why do i like this option so much? Aahh well......because of the said target ofcourse! Now in this scenario, Kelt would be limited on how much of a bite they can take and how much leverage they can use with the company's shares. As it's nice to use your company like a credit card, mgmt would have to mindfull of overleveraging themselves to the point of financial distress. I don't think they want to go down that road again. So who do i think would make the most sense for Kelt if they want to not only get bigger but also stronger including tranforming the company into a possible target themsleves in the future? Pipestone Energy, that's who. So what makes me believe that the Pipestone assets are the best option for Kelt going forward? Well, think about this. With Pipestone just recently having been able to attract a $70M financing in an envronment like this with not one BUT TWO lenders is quite amamzing. Amazing in the sense that venture capital would be willing to lend you this much money in a difficult & unfavorable environment like this. So this imo, speaks volumes of not only Pipestone mgmt's capabilities but the assets as well. With these additional funds, it would bring Pipestone debt down from ~$185M to ~$130M and they would be a ~17k producer heavy on condys & Natural gas. Now folks add 2&2 and youll see it gives a clear 4. A combination of these two companies & their assets would give you a company with a production rate of ~35k/boe with only $130M in debt. In addition, with Kelt having "behind the pipe" addon production capacity of about 8k AND Pipestone being able to ramp up to about 34k in the short to mid term with limited investment, you're talking about a 60K/boe producer with not that much extra investment needed to reach there. And if Kelt decides to use that extra ~60M in cash they have towards the debt, then debt load would be a reduced further to a measely $70M or in other words......more or less DEBT FREE. So if there was ever a perfect case for a combination to be made..... this is it folks.
This above assessment and predictions are of course dependent on several general upcoming economic & political events becoming fulfilled by year end. These assumptions being Mr. Trump regains his throne in November and the CoronaVirus epidemic dying out by 2021 which in turn when both of these events are achieved, it will put into motion the third & final event, which is in the very least a mild but nimble recovery in energy prices. Maybe even a robust boom in natural gas demand & pricing. Failure for any one of those events or god forbid, BOTH, then my friends ALL BETS ARE OFF and may whatever god you believe in save us all. My rec'd in that case would be to exit the market completely and get on your knees & pray that a miracle happens. So by Kelt "sticking around" and getting bigger does have its risks if those two triggers fail, it does also bring great potential in the long run if those events turn out ok. So as i may have preffered a complete sale over an acquisition, i'm not the one in control of this ship and if i see another iceberg in the distance, it will be time for me to dispose of the remainder of my 1/4 shares here. Well, that's about all i have to say people. I know this was a lonnnng read but i rather post once in a blue moon with relevant info & thought than continuously spam the board with useless jargon & cliched platitudes. Besides, aren't these boards meant to be an informative & shared resource for those investors who are inquisitive and crave differing opinions/views compared to their own to help them achieve a successfull investment? I hope so.
Good luck to all