Looking forward to resolution - some ideas
Long term CKE has great potential as a comparatively low risk investment in the natural gas play. However in the intermediate term there are some potential problems impacting on the realization of this potential.
(1) Lack of share market liquidity. WSJ estimates the current public float at about 46% and it could be less with some of the latest accumulation. Average daily share volume is about 65,000 which amounts to roughly $20,000 in trades a day. With these metrics it is difficult for even an intermediate, let alone a fund investor, to easily get in or out of the stock. Add to this, a day trader can whack the price by 4% just by dropping just 500 shares ($150) on the market at close. This can and does play havoc with portfolio values.
(2) Pipeline Capacity. It seems every man and his dog in Montney is planning on increasing production in 2018. Problem is that the pipelines to feed this to the markets are already at full capacity and new pipelines, substantially increasing capacity, are still at least 2 years away. Some producers are already scaling back on their Montney production plans for 2018. Unless CKE has secured firm transportation commitments for all its 2018 / 19 expected production, it might be forced to scale back too.
What possible solutions are out there? One would be to merge with another listed company with more share liquidity and more geographical diversity. One company that may be a candidate is Peyto Exploration - PEY-CA.
Here is a summary of their profiles ( As usual all the following numbers are mine and you should check them for yourselves )
| Market Cap | YTD Change % | BOED end 2017 Production | Land Acres Net | Market Cap / Net acre | Market Cap / BOED end 2017 |
| | | | | | |
Peyto | 3,300,000,000 | -40.11 | 120,000 | 450,000 | 7,333 | 27,500 |
Chinook | 62,000,000 | -38.46 | 6,300 | 43,804 | 1,415 | 9,841 |
It be within the metrics of both companies for a merger on the basis of 33 CKE shares for 1 PEY share. This would value CKE at about 60c per share. Here is how the merger could look.
| Market Cap | BOED end 2017 Production | Land Acres Net | Market Cap / Net acre | Market Cap / BOED end 2017 |
| | | | | |
Peyto | 3,300,000,000 | 120,000 | 450,000 | 7,333 | 27,500 |
Chinook | 124,000,000 | 6,300 | 43,804 | 2,831 | 19,683 |
Merged | 3,424,000,000 | 126,300 | 493,804 | 6,934 | 27,110 |
The advantages of this merger would be:
CKE shareholders would :
- Get the liquidity needed to sell or they could choose retain their investment in a company with a very similar profile.
- Receive a dividend on their investment which at current prices would yield about 6.64%
- Add some geographic diversity to lower their exposure to possible Montney infrastructure problems
PEY shareholders would:
- Receive approximately $50 million a year in free cash flow if the CKE wells planned for 2018 are put on hold. At the moment PEY is borrowing to cover its dividend and this cash could contribute to reducing debt exposure..
- Improve the metrics of both PEY share value per BOED and share value per net acre.
- Possibly benefit from some of CKE tax losses carried forward.
- Improve PEY equity debt / ratio because CKE is debt free
- Add about 10% to land reserves for about 4% share dilution.
All round this deal would make sense for all except possibly CKE management - who are rewarded by incentives based on share price - not by liquidity - not by risk reduction. Bottom line - if anything like this were to come about it would have to be motivated by shareholders. AIM ? Bison? - maybe time to step up to the plate.