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Event: We have just been made aware that the Alberta Securities Commission (ASC) has alleged insider trading against Calvalley Petroleum and some Senior staff.
Impact: These are allegations only and at this time have not been proven; however, this news is not positive.
Conclusion & Investment Thesis
At this point in time, only allegations have been made and a hearing is scheduled for May 12, 2011. Although the allegations are serious, the potential impact to both the Company and staff members named won't be known until after the hearing. Calvalley has informed us that they believe the allegations are unfounded and have referred the matter to legal council. Calvalley also pointed out that one of the staff members named in the allegation no longer works for the company. We will continue to monitor the situation as events unfold.
Despite this unfortunate news, we continue to like Calvalley's assets and believe that considerable upside potential exists. The stock price has been beaten up as a result of the political turmoil in the Middle East and specifically in Yemen, but operations remain largely unaffected. Progress continues to be made on the truck-offloading facility which, when operational, is expected to double the Company's net production to 5,000 bbls/d.
From a valuation perspective, Calvalley trades below our core NAVPS which reflects the value of the 2P reserves as evaluated by McDaniel and Associates Consultants Ltd. This is the lowest valuation in our peer group of companies, many of which trade at more than 1.5 times core NAVPS. For the value investor with a longer time horizon and a higher risk tolerance, Calvalley remains an interesting investment opportunity. We are maintaining our Buy recommendation on the Company and $6.00 target price which is based on a equal weighting between a 5.0 times multiple of our 2012 EV/DACF forecast and a 1.0 times multiple of our $6.40 risked upside after-tax NAVPS estimate.
Details from the ASC Website
The Alberta Securities Commission (ASC) has issued a Notice of Hearing against Calvalley Petroleum Inc., Memet Kont and Kevin Dougald MacArthur alleging that they engaged in illegal insider trading of Calvalley Petroleum shares in early 2009.
ASC staff allege that Kont, as chief operating officer, and MacArthur, as senior reservoir engineer, were in a special relationship with the Calgary-based Calvalley Petroleum and were in possession of material information not publicly disclosed at the time when they purchased Calvalley Petroleum shares in February 2009. ASC staff also allege that Calvalley Petroleum was in possession of material information not publicly disclosed when it repurchased its own shares via a normal course issuer bid in January, February and March 2009.
An appearance to set a date for hearing in Calgary will be held on May 12, 2011 at 9:30 a.m. in the ASC Hearing Room, 5th floor, 250 – 5th Street SW, Calgary, Alberta.
A copy of the Notice of Hearing is available on the ASC website at www.albertasecurities.com.
The ASC is the regulatory agency responsible for administering the province's securities laws. It is entrusted to foster a fair and efficient capital market in Alberta and to protect investors. As a member of the Canadian Securities Administrators, the ASC works to improve, coordinate and harmonize the regulation of Canada's capital markets.
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