Petro One Energy (TSX-V: POP): My Valuation Methodology and Analysis of Market Action

A blog reader asked me earlier to explain the difference between my valuation methodology and what’s found in Petro One’s corporate presentation, so I thought my explanation might make a great blog update. I believe my numbers are quite conservative, while at the same time, presenting an extremely robust investment case for Petro One at its current price point. 

Petro One’s corporate presentation follows a hyper-conservative approach which indicates a fundamental value of $1.08 / share, on a fully diluted basis. 

However, their $16,900,000 USD value for the 1M BBL is so conservative it is almost silly. They have applied an 84% discount to the current price of WTI Oil. 

Additionally, this figure ENTIRELY EXCLUDES the recent oil find, and prospectivity, for both the Oil and Gold assets etc. 

Petro One’s super-conservative methodology mandates a massive discount to the value of their oil assets. In one sense, this is very good because it shows they are straight shooters. It seems they are trying to wow people with even the most minute aspects of the company, for example—even in terms of how conservative they are when they represent their numbers. 

My calculations are more standard and give the oil a realistic value. I don’t count the hot new J5 discovery either, so my numbers, although dated, are still quite conservative. 

I take 1M BBL and apply an average $90 BBL price (which is still nearly a $10 dollars discount to market) to arrive at a gross figure of $84M gross value. Next, I simply minus the highest average cost of production on per barrel basis, which is $15/BBL. 

This gives me a net value for the oil assets of about $71M, at $90/BBL—without considering the new J5 Discovery. 

When it comes to how I break down the Yukon numbers vs. how Petro One does it, I suppose they can be sliced and diced either way. I value them at what the current cash and GSR stock in the treasury is at current prices. Petro One’s corporate presentation includes the value of the whole Yukon deal over its lifespan. Either method is acceptable. 

Petro One is seriously undervalued and they want the market to know it. When a company wants to show it is undervalued, it uses the most conservative possible methods. This way, sophisticated investors are truly impressed with the discount. When they first crafted these numbers, POP was trading in to 50-60 cent range, so it showed just how beyond undervalued the company was at that time. I expect they will soon revise their presentation to have much more robust numbers (!) 

My numbers a few weeks ago suggested a FAIR market cap for the company was $86M dollars. At that time, POP had a $27M market cap, which was a 70% discount to my conservative valuation. 

Now simply take my conservative $86M valuation and divide it by current shares and you get:

$86M / 47M shares out = $1.83 a share at my most reasonable, conservative valuation – weeks before this new J5 discovery (!)


If you want to keep it simple, the best way to look at it is like this: 

Petro One’s numbers constitute a “beyond-rock-bottom” valuation for the stock that ENTIRELY excludes the new oil discovery, wipes away 84% of the value of their existing oil assets, and simply builds an investment case around the cash and shares it will have in the treasury from another company, GSR. The $1.08 figure they use is essentially break-up value and should be seen as nothing more than a worst-case scenario floor for the stock price. 

My method gives them credit for the oil, cash and shares they have before the whiz-bang J5 Discovery. I apply conservative market prices, minus the highest average costs of production. My $86M valuation with a $1.83 share price is the conservative but fair value price. 

Even by my conservative standards the stock should be bare-minimum $1.83, and if I were to give a good solid guess as to the impact of J5, I expect a fair value would range from $2.50 - $5 in the near term. 

Realize it is in the nature of the nature of every good growing company to fight a see-saw stock price battle through the process of market recognition. I don’t know what the numbers will look like coming out of J5, but I expect they will be even better than first reported, which is why big industry players are weighing in. With this in mind, expect the stock to keep gapping up each morning as more sophisticated and institutional investors digest the hard data and go through the presentation and press releases.

Right now institutions and retail investors are slugging it out for a very small existing float. Consider the facts:
 

  • Insiders own about 60% of the company and are NOT selling.
  • The market has burned through nearly 10M shares in 3 days.
  • 60% of 47M shares = 28M shares locked up with insiders.
    28M + 10M shares = 38M shares in new strong hands at higher prices or locked up with management.
  • All warrants are in the money—loose shares have been and are being used to cover them. That’s where the selling came from, end of story.
  • 47M – 38M = only 9 million shares loose in the market (!)

THE INSTITUTIONS AND PROS THAT WANT THIS DEAL KNOW THAT IN A FEW MORE DAYS THE MARKET WILL RUN OUT OF SHARES AND THEN THEY WILL BE OUT OF LUCK AND FORCED TO PAY MUCH HIGHER PRICES.


Institutions are smart and have significant resources at their disposal. Their traders will deliberately test the retail market to see if it will cough up inexpensive shares under pressure. Don’t let them herd you into selling cheap and triggering stop losses only to eat your shares later.

Think about it people: For every seller, there is a buyer. Do you really think the retail market is eating up 10+ million shares in a significant, multi-month correction, in the summer doldrums, while mom and pop are away on vacation? Get real! See the Anonymous and Jitney buying, or buying coming through large, bank-owned firms? These are institutions, hard at work. 

These institutions devour stock (and untrained investors) and MUST have large positions to make any money in their portfolios. Here’s a heads-up: The bid will usually be strong in the morning, but they’ll let it drift or even deliberately soften the market during midday to test for weakness, and see if retail investors get spooked and bail out, or if stop losses kick in. Failing that, they will just sit and wait and see if retail jumps in the pool first.

When they see an opening, usually mid-market they will come in, in full force, like they did on the 12th and 13th. Then POP will run all the way to the end of the market as they soak up stock. These guys aren’t stupid, this is how they make money. 

If you want to make money here, get the institutions buying behind you—not in front of you. They want to accumulate inexpensively and once it’s in their portfolio, you’ll see the manager on TV talking about POP in his portfolio. He’ll take your calls and make a case for you to own it in the market. Why? To bid up the value of his position and give him the liquidity he needs to get off some or all of his paper at a profit. He’ll get paid a hefty performance bonus on the alpha in his portfolio, and maybe even win an award. Why else do you think they all want to blab about their favorite picks? They need you, hungry retail buyers as their aftermarket.


Have you seen the markets? Not much is working right now for institutional, long-only resource fund managers. POP’s discovery is a dream come true for them and they need the paper if they want to look like heroes and have any chance of beating the market in Q3 and beyond. 

Notice all the newsletter writers covering bunk deals that are going nowhere or down? You can bet they’re knocking on POP’s door right now trying to get the scoop and claim to be the first person to cover it and know it inside out. Do you want to be in front of the institutional investors and the newsletter marketing machine? Or would you prefer to buy it after they all get positioned, run the stock up to $5, and then they tell you what a great deal it is? 

Retail folks, I hope you know that for a very limited time you are in the driver’s seat with this stock. Realize this is what is going on, and fearlessly buy. There will be fortunes made here for those who can get in on POP quickly, accumulate with audacity, and hang on tenaciously. 

You all better quit footing around and get on that paper as quick and hard as you can, hold on tight, and force these two groups to come in behind you. The warrants are about washed through right now and there’s around 9 million shares left. Once we’re through that, any good news will jam the stock price higher—and shockingly so. The eyes of the professional resource investment community are on POP right now, and managers are hungry for any real deal that is working in this market. 

My favorite quote is “Fortune favors the bold” so you know where I stand, and you can be damn sure I buying, going all in, am going all-in, all the way. 

James Hudson, AlphaFlight Portfolios Inc.