All Good Things Come To Those Who Wait!
If you believe in the company and its assets, then this axiam is for you. There is a lot of impatience in the market these days that has been brought on by the governments and regulators catering to the wall street banks and hedge funds who are allowed to freely highly manipulate the equity markets. The result has been huge volatility and acentuated swings in share prices as a bank, investment banker or hedge fund zero in on a sector or individual stock that currently has some negative sentiment. Thus was the case when this stock was $1.37 cents? I do.....I was way under water. Did I capitulate and sell as a loss? No I doubled my position because despite the hiccups with the brown field old wells and the way management was handling the issue at the time (issue 30% production growth guidance at the time these problems were manifesting themselves), the resource and reserves were huge and really not much different from other heavy oil resources in Canada or elsewhere (it takes time for the technical team to catch on to the most economical extraction and solve specific field issues).
In my opinion, now that the base production technique has been confirmed as able to very economically deplete the reserves at a 15-20% CAGR and the fact that the RLI of the 2P reserves at $100 Brent is ~35 years based on Current production, now the task is to increase recoverability of the existing 2P (by expediting the secondary and tertiary recovery methodologies) and also converting more of the resource to proved and probable reserves. There is a huge contingent reserves base of over half a billion bbls that if the tertiary recovey proves economical at a base crude cost which is sustainable then the 2P NAV would triple to over $22 dollars (with still over 4 billion bbls of resource left to play with. Also, if the company farms out a portion of the resource to a strategic partner for a handsome reveune sharing agreement then then this woudl also likely double the existing NAV by itself.
I said all that to say this. There is massive upside to the share price from here if and when the contingent reserves are able to be booked as 2P coupled with the steady 15-20% CAGR in production continues and the secondary methods prove to be economically able to increase recoverability.
The only major risk to the thesis is the price of Brent. I know there are others but this is the major one in my opinion. If Brent stays above $100 or even in the $95 to $100 range, the company is golden and will generate free cash flow or be in a position to continue to ramp up production drilling by adding rigs. I believe they should generate over $50 million in FCF next year based on this years CAPEX so if this is applied to ramping up production they could see 20-30% sustained increases in production which will just improve the financial performance on an upward spiral.
The story is so good because of the massive resource and booked reserves. This company realizes a much better price than Canadian heavy oil sweetheart Baytex and has just about the same 2P reserves but trades at a fraction of the valuation.
So yes the share price has been on a tear....rightly so as it has been extremely undervalued. Now the company should be hunting for that premium valuation it had in 2011 where is was trading above is 2P and ~7 times cash flow becuase of the huge RLI and resource base. IF the stock got this premium back, it would be trading at $9.50 right now......1.2 times 2P NAV and 7 times the 2014 cash flow per share of $1.35 (based on $105 Brent).
Bankers is a great story but do not be fooled either a portion of the gain the stock has experienced is as a result of the sentiment shift of late to oil E&Ps. Thats OK....I'll take that to!