Chinook Energy Inc. Common CNKEF

RE:Looking forward to resolution - some ideas

[bouquets]

Any interesting idea, Peter. 
While I could see the attraction of such a deal for Chinook shareholders (except, as you say, perhaps management), I'm not sure I see this as especially attractive to Peyto. Yes, this adds production and therefore cash-flow, but at least part of that extra money would be used paying dividends on the expanded share-base. It would also require that Peyto acquire or develop expertise in Montney wells, which is (as I understand it) somewhat differentthan deep-basin, which is Peyto's forte. Thirdly, it would require that Peyto learn to do business in a different jurisdiction (BC, rather than Alberta).

If there's a merger, I think it's likelier to come in some kind of merger between Chinook and its neighbours Storm, Saguaro, or Black Swan.  But I doubt if that would be very attractive to anyone.

PeterM1 wrote:

 

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.