trapeze investment letter from november 16 2012
Manitok Energy
’s share price has run up to all-time highs, though our estimate of underlying value also keeps rising from the growth in the company’s production, reserves and net asset value. It is now producing over 3,500 boe/d and should be at a run rate of over $50 million of annualized cash flow by year end, on nearly 4,000 boe/d of production. Value then should be about $4 per share, rising much further in the next 12 to 18 months as the production and cash flow over that period is forecast to double.
Manitok is gaining in popularity. Daily volume has increased manifold. Several brokerage firms now recommend the shares. The company is now coming onto investors’ radar screens and the larger it gets, the more screens it will appear on.
So far Manitok’s experienced team and prolific properties have contributed to 100% drilling success. And some of the wells have been beyond expectations. In fact, 2 of the wells drilled have been amongst the best drilled in Alberta in 25 years. Most have free flowed oil to surface (i.e., without fracing), a testament to the quality of the reservoir.
But Manitok still remains mispriced. If it decided not to grow but merely drill 3 wells a year to subsist, Manitok’s free cash flow (assuming $85 oil) would be about $35 million annually today. With an equity market cap of about $175 million, that’s a 20% hypothetical free cash flow yield. Hypothetical, because we expect the company to use its cash to drill at least one well per month for the next few years which should continue to add materially to the underlying value. In just 3 years’ time, Manitok should have annual cash flow (assuming $85 oil) in excess of $1.80 per share. And at 4-6x that cash flow (where its peers typically trade) we believe the share price should then be 3-4 times today's level.
The main risk for Manitok is oil prices. However, as is our opinion for gold, we forecast higher prices over the next few years. Low real interest rates, higher costs of production, and rising global demand are expected to keep both commodities strong.