TriOil Resources Ltd TRIAF

RCM comments

[AIGswap]

As I alluded to in my previous post, Toronto-based hedge fund RCM established a position in TOL and discussed it in their latest investor letter (see below). 

Trioil Resources is a junior
oil and gas producer focused on the Cardium zone in the
Lochend area of Alberta. The Company has seen their per
share equity value decrease approximately 40% YTD as
a result of variability in recent well results and concerns
about viability of the Cardium trend at Lochend, the
negative impact of which have been exacerbated by the
flight to liquidity over May and June. In short, the Company
has very little market support and is priced for disaster
notwithstanding success by other operators surrounding
them at Lochend and the fact that TOL maintains the largest
net land position in the. Having spent a material amount
of time with the management team, engaged a third party
consulting group to work through the viability of the play
and rigorously mapped out our downside we believe that
TOL represents a very asymmetric risk return opportunity
and among our favorite situations. We believe there is
reserve value and ‘unbooked oil resource’ potential equating
to ~$6.00 /share. Most Western Canadian E&Ps have not
been in the field for the last 2 months (through the end of
June) given annual ‘break-up’ yet the stock has still sold off
~30% in June to the point where we believe we are now
creating our investment at 4.5x run-rate cash flow, $45k /
flowing (vs. comparables at 6.5x and ~$75k / flowing) and
less than $4.50 / recoverable boe (on an un-risked basis). Our
substantial amount of work understanding the asset base,
optimal completion techniques, etc. provide us with the
comfort to be among the largest institutional shareholders
of the Company. Given the magnitude of the recent sell-off,
the Company’s 2nd half capital spending equates to ~50%
of its enterprise value. While the ‘chart’ does not look that
appealing, we believe we are getting paid to incur interim
volatility and have been adding to the position as we feel
we have events and catalysts that will provide our return as
opposed to the market becoming more ‘rational’. We look
forward to updating you on the status of this investment in
the near future.