Warren Buffet would not buy Kicking HorseWOW, what an amazing statement. How does that have any relevance to Kicking Horse, you may ask. Well this statement is not made because Kicking Horse is a tiny little company or that it has heavy debt load or because its market capitalization is potential completely disconnected to reality based on current oil prices. Why is this statement pertinent?
Warren Buffet's company Berkshire Hathaway just purchased Precision Castparts Corp. What is that and why is that have any relevance to the Horse. Warren Buffet has made a history of investing in the future. Anyone remember when he purchased a small railway company and then another company that built railcars to transport oil? When did he do these transactions? Approximately five years ago. So back to Precision, whats this company up to? The company builds parts for Airplanes.
What is the big deal about Warren buying a parts manufacturer for Airplanes? Warren is giving the world is view on oil for the longterm. If oil stays low, more planes will be built. Simple cost to demand analysis. Low cost oil, airlines will be more profitable, and even prices for flights may fall marginally to build greater demand. Think of it this way, we will get more people out of Greyhound buses and onto airplanes. Well actually that is pretty much happening already. Maybe we will be pulling the hitchhikers off the roads into the planes.
All joking aside. The forecast is for lower oil prices and not for the short term. Who survives and who does not. Well that is why I have focused on Kicking Horse, because I think they are one of these groups and you can figure out which.
My major thesis with the Horse is that they have already heavily booked their reserves and the ability to create new stock momentum from making a new discovery is significantly diminished. If there is no new excitement on the exploration side, why own and exploration company.
The next thing to ask is how do you the investor make money in this stock. One angle would be that they are going to become a dividend paying stock. UMMMMM NO. That is very very unlikely to happen. Next!!
They are going to continue to drill huge wells that will build there bank account so they can begin to takeover other assets. UMMMMM NO. They just tried that with Questerre and how did that work out. To the best of my understanding ( correct me if I am wrong) Canaccord went out to raise them $120,000,000 to fund operations post the Donnycreek acquisition and also to acquire Questerre. Well no deal with Questerre ( who owns 25% of a portion of the critical Kakwa Play) happened and yes the raise failed to achieve the amount desired. You may say well tough market to raise in. No, this happened last year when oil had a bid. So the likelihood of Steve and Ray pulling off a major transaction unlikely but who knows.
Well if they are not going to be paying dividends, they are not going to become the next CNRL of Canada what do investors hope to happen. Yup the ever enjoyable takeover bid. Now, I have touched on this topic a few times. Please allow me to review the companies that are around the jewel of the Kicking Horse.
Paramount (POU) Yes I am a fan of this company and full disclosure I have an interest in this company. Recently purchased. I do not run down Kicking Horse so investors can migrate to this stock. I like the management, I like that this company has numerous ways to relieve its leverage challenges and the company has staying power. If anyone takes the time to review the company's bonds they trade at a premium. By the way, I indirectly own the bonds as well. So why would Paramount not buy Kicking Horse?
Simple answer: Value is not there.
Kicking Horse looks to have overbooked reserves;
Acreage has near term expiries;
The valuation on the company is not aligned to the current market conditions;
The ownership of the Kakwa play is fractured, being 25%/75%;
There is a GOR on the properties;
The East Coast assets are worth what?;
Why buy now, in a falling market?
Last and not least the market would likely not appreciate the transaction occuring as it does not apprear to be accretive.
What about Seventh Generation. Ray has a good relationship with his former company, so there must be a way to get them to come in and buy the Horse. All the reasons above and further, the CEO of Seventh Generation has actually stated that they have approximately 2,000 drilling locations and thus no need to acquire further lands. Only reason to acquire the company would be to assist in meeting their commitments on production. The latest quarter for Seventh Generation indicates the company is well on its way to meeting is commitments. There are challenges ahead for meeting the commitments and that in itself forms a barrier to purchasing Kicking Horse.
Maybe Shell and Maybe Tourmaline. I would lean towards Mike Rose in a minute. Yes I am a shareholder and a big believer in low cost producer models. In this market place, the lowest cost producers will survive and Tourmaline is head and shoulders above the crowd. Once Mike sells this company and gently goes into retirement, he should make a right turn into the Premiers office and lead Alberta out of this recession.
Cannot comment really on Shell, because only Shell knows what Shell will do. But they like big plays and if they make a move it is more associated with becoming one of the largest players in the Montney and Duvernay. Maybe Shell acquires Tourmaline, as they have the balance sheet to do the transaction.
WOW, what a long winded post you may be saying.
Here is the question you should be asking your advisor/broker: Should I sell Kicking Horse and invest in a company like Tourmaline or Paramount. You may want to ask whether you should diversify into Whitecap. The base question has to be, in this current low energy market, if I am going to stay invested in the sector, what should I own. Should I go defensive, being buying best of class to protect downside or should I go High Risk? Investors ask the questions. We are in a major down cycle.
As they say in Africa: if you put your head in the sand, at least you will not see what is going to happen to you.
By the way, a horse that is kicking is saying it is not happy. Horses that are happy do not kick. Whoever picked the name, nice try.
As I always say, speak to your adviser/Broker. If they are managing your monies, ask the tough questions. They charge you commissions, and thus need to do their own due diligence.