TriOil Resources Ltd TRIAF

Market misunderstands TOL

[AIGswap]

The market price for TOL is completely irrational and far, far below intrinsic value.

At the current price of $3.38, and $5.5mm of working capital with nodebt, the company has an EV of $100mm.  It is trading at $80,000 / boe/d(current), $42,000 / boe/d (exit), $12.00 / P+P boe and under 4x 2011Ecash flow (unlevered).  Comparable oil-weighted, high growth juniors inthe cardium have valuations of ~$140,000 / boe/d and >8x 2011E CF.TOL is currently trading at half of the mutliple of its comps.  Arational investor can expect TOL to trade in-line with its comps(especially once more Lochend results come out), resulting in a 100%gain in the stock.

If we look at an asset level sum of the parts, we can see the at an EVof $100mm, the market is attributing zero value to Lochend, thecompany's main asset.  Looking at Magnum Hunter's acquisition of NuLoch,they paid >$3,000 per acre for the Tableland assets (remember TOL isNuLoch's minority partner in the play).  If we apply a conservativemultiple of $2,500 per acre for the company's 30.9 net sections, we get avalue of $50mm for TOL's Tableland assets.  TOL paid $64mm for itsSweeney / Pouce Coupe assets.  Let's assume they overpaid by $10mm(which is conservative given oil prices are up >50% since they boughtthem in early 2010).  They also sold 300 boe/d of these assets for$6mm.  This gets us to $50mm for Sweeney / Pouce Coupe. 

$50mm for Tableland + $50mm for Sweeney / Pouce Coupe = $100mm.  With acurrent EV of $100mm, the market is saying that Lochend is worth zero.If we look at TVE, SPE or other cardium focused producers, thesecompanies imply a far higher value for cardium assets than zero.  TVEhas a much smaller footprint in Lochend but is worth >$60mm.  Thisdoesn't make any sense to the rational investor.

I believe the recent sell-off was someone who got well results beforethe rest of the market (remember TOL was completing a few wells inFeb).  You're naive to think that insider trading isn't rampant incanadian markets (i see it all the time especially in mining M&A).

Given its current valuation, I'm sticking with TOL, and will most likelyadd to the position at these low levels.  My thesis is soundlysupported by private market value, asset-level sum of the partsanalysis.  It's up to the management to execute and if they meet theirguidance of 2,300 - 2,500 boe/d exit production, and if they do, thenthe stock will be north of $8.00.

If I was Russ Tripp, I would seriously consider selling the Tablelandassets to Magnum Hunter.  I believe Magnum Hunter would be willing topay up to $50mm ($2,500 per acre).  Monetizing this non-operated assetat half of the current EV would encourage the street to get behind thestock.

[redphoenix]

All that data you provide although well and true doesn't matter. The market is not behind this company. It wants results and is tired of waiting. I believe the run up in share price to 6.00 was directly related to a belief that they are going to be bought out. Never happened, they did a PP and share price dropped. Something happened..... we'll never know. I have been with this damn company

[redphoenix]

To add.... I hope they do well. Investors who have had the patience deserve it. 

[aagold]

AIGswap: Sorry if this question is unrelated to TOL, but you seem to be knowledgeable in this space.  What do you think of SPI (Canadian Spirit Resources)?  There was a good writeup on Value Investors Club.  Thanks.

[AIGswap]

Sorry but I've heard of the company but haven't followed it too closely, so I don't have an opinion.  I do read VIC pretty regularly so I will check out the write-up on there.Thanks for the idea.

[aagold]

Please let us know what you think of the VIC analysis after you check it out (either in this thread or a post on the SPI board).  Thanks.

[aagold]

AIGswap:I'm very new to this space, and what you wrote about TOL sounds very interesting, but I need to become more knowledgeable before making an investment.  I've got some questions for you:1) This is a really basic question, but do you have any recommended links/reading material someone can use to get up to speed on this whole space?  For instance, I'm not even

[AIGswap]

1) Read as many annual reports and investor presentations as you can.  I haven't found a book that'll teach this stuff...2)  Yes juniors and intermediates are always issuing equity.  Dilution is not a problem if the proceeds of the financing are utilized in a way that provides for a return on capital greater than the cost of capital.  This business is very capital

[aagold]

But therein lies the problem.  The cost of equity capital is completely dependent upon the market's confidence in a company's prospects.  So when it comes time for the company to raise new equity capital, an existing investor (who is unable or unwilling to pony up new money to buy additional shares in the offering)  may be forced to sell a portion of

[AIGswap]

The AAOI analysis underestimated the capital required to develop these assets.  The oil & gas business is highly capital intensive, especially for a junior looking to rapidly grow production and reserves.  There should be no discussion of free cash flow, because all of it and more go back into the ground.  Why do you think EQU just did a convert financing (their second issue

[aagold]

You make some interesting points.  Hard to believe EQU needs to spend $60M just to keep production flat - I'll check into that.  As far as the 2012 converts go, AAOI already included that dilution in his analysis.1)  Where did your "consensus" cashflow estimate for TOL come from?  I know where to find consensus analyst estimates for large US-based companies -

[cookster9]

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