RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:Production falls?I have made the mistake of falling in love with this stock, and it has been a costly mistake so far but if anything, I have bought more at these levels. In my mind, the "poor management discount" and "high debt discount" are already baked in at this point in time. I have talked to management repeatedly towards the end of the year and it is my impression that they finally got the sense of emergency to "Wright this ship"!
Management change would have been the radical step the markets wanted to see but we know that is simply not going to happen. The board is completely captured by the CEO and short of a takeover, the management will stay in place to see through a turnaround. Management did load up at the low levels seen in November. I know somewhat appaling to bring a firm to the market at $30 and then load up on it at $5. But if Petrominerales is a repeat, exit at $12 (double from current prices).
That being said, I understand if you stay away until they confirm the turnaround and significant reduction in debt. The stock might be a couple of dollars higher by then but the proposition might be a safer one.
The fundamentals are sound. The netbacks are high. The decline rates are falling, and debt is finally being tackled. At this point, I am assuming the market will continue to value the entire firm (EV) at a discount relative to its peers. I expect two levers for share price appreciation: 1. A higher proportion of equity relative to debt in EV (keeping EV constant) as they reduce debt over time and 2. A small and gradual (bar any takeover) increase in EV...in particular, I believe that any asset sales realized is a direct boost to EV. For example, the gassy fields sold for more than $100M this quarter cannot have been priced by the market. As they continue to sell "non-core" assets, this will in time increase EV, or again, decrease debt while maintaining EV, hence boosting equity value.
Management has burned their bridges with the market. There is now a classic "wait and see" attitude from the market. I view the drop like yesterday as buying opportunities for those willing to take the risk.
Now that being said, I do agree that there are other opportunities out there. At the end of the year, I wanted to get exposure to other undervalued Canadian plays. Given my exposure to Lighstream I wanted to avoid high debt firms (I passed on Renegade for example, which has since been taken over at a nice premium from December prices). Instead, I loaded up on Painted Pony, Crew, Delphi, Advantage, and long term calls on Encana. Except for Advantage, they have all gained nicely since the beginning of the year. I bought more of Painted Pony yesterday and will probably buy more today. It is trading at a significant discount to NAV and does not have the debt issue. Operationally, they are weaker than their peers but this one was "built to sell" as they say. I believe Encana will have a tremendous turnaround in the coming years; the land they own is quite formidable. Operationally, the firm has fundamentally changed in the past year. Furthermore, all of these stocks are poised to gain from regulatory approval of pipelines. The patient investor will be rewarded. Good luck to you all!