InPlay Oil Corp T.IPO

Zuk's Nuk's - Great read here

[Capitulation]

 InPlay Oil; IPO-T; not covered; no rating
 
We Shall Fight on the Beaches is a book comprising of a compendium of rousing speeches made throughout history; one such stands out in the context of encountering unexpected strength. In June of 1917, David Lloyd George, then British PM, was prompted to explain to an audience the island’s involvement in WWI: “If you invade Belgium we shall have no alternative but to defend it. […] It is not quite the story of the wolf and the lamb. I will tell you why - because Germany expected to find a lamb and found a lion.”
 
And so I continue to think, through serendipity or great planning, InPlay has captured a lion by the tail with its recent Pembina oil acquisition.
 
Thus merits an update on the name, which has been one of the best performing energy stocks of late, all the while oil contemplates another step up. The company put out an operations update which featured extended production rates for wells drilled on the acquired Pembina lands, cited below; but importantly, these wells are still not on pump jacks, which illustrates how much unexpected strength lies 2,000 meters downhole (again, just $1.9mm purchase cost).
 

 
Independent data, compiled by the fine people at RBC, show IPO’s wells in three of the top four spots on monthly production (June data is likely to be similar). Capital cost-adjusted (i.e. just $2.75mm D/C/C), me-thinks these wells would be 2- or 3-standard deviation events relative to the industry wells being drilled now – and the company has 30+ ERH wells in inventory. InPlay’s three new offset wells have been spud and will be on-stream by the end of the month, which is another catalyst for the name.
 

 
Custom dictates one not be too glib, but IPO has been up 71% since my last note on the company. Despite the run-up, IPO still trades at 4.3x EV/EBITDA, versus the peer group at 5.1x, which implies there is still upside to the mean.

 
I’ve also added FCF Yield + 2-year PPS growth to my comp sheet. This metric is a work in progress, but the thinking is as follows: 1) companies that are actually growing and providing material FCF (versus simply harvesting CF in blowdown) ought to trade at a premium to the latter; 2) a production bounce off the bottom – namely 2020 lows – isn’t really that impressive, but recovering to pre-pandemic levels with some semblance of balance sheet strength and future upside, again, should attract more attention. As seen below, InPlay is a leader in both regards. (Of note: Razor also screens well on that metric.) *My 2021 estimates are using $60/bbl WTI; obviously, we are above that now and I still think 2022 is anybody’s guess, which has me reticent to make a “call” on future years’ CF/capex/debt etc. But suffice to say, rising tides lift all boats and names like IPO retain ~70% oil and NGLs leverage w/ peer-leading growth option value.*
 
Athena Comp Sheet

 
 
WTI Oil Days Inventory
 
US Days inventory has dropped 2%/week for the last two weeks, which trails the massive 3%/week draws in the prior month, but my modelling still has us under 25 days supply by end of July. I’ve inversed Days inventory relative to WTI to visually show the correlation more strongly; my hope is readers see that at <25 days, the case for $90-100/bbl WTI becomes ineluctable.

 
As always, open to questions and/or comments.
 
-- 
Michael A. Zuk
Managing Partner
Athena Capital Markets

[phone]
www.athenacapitalmarkets.com
 
 
The information contained in this message and any attachments is not to be construed as investment advice or an offer to sell or buy securities or fund interests. The contents of this email, all related responses and any files and/or attachments transmitted with it, are CONFIDENTIAL and may contain legally privileged or proprietary information. If you are not the intended recipient, you are hereby notified that any review, use, disclosure, dissemination, distribution or copying of this communication or any part thereof is strictly prohibited and may be unlawful. If you have received this email in error, please notify the sender immediately by return email and destroy this communication and all copies thereof, including all attachments, from your system. Email transmissions cannot be guaranteed to be secure or error-free and are susceptible to change. We do not represent that the integrity of this communication has been maintained nor that this information is complete or accurate and it should not be relied upon as such. All information is subject to change without notice. We shall not be liable for the improper or incomplete transmission of the information contained in this communication nor for any delay in its receipt or damage to your system.
 
All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only. Day trading does involve risk, so caution must always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk of any trading you choose to undertake. You are solely responsible for making your own investment decisions. Owners of this newsletter, its representatives, its principals, its moderators, and its members, are NOT registered as securities broker-dealers or investment advisors either with the U.S. Securities and Exchange Commission or with any securities regulatory authority. We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting from your investments are your sole responsibility. Reading and using this newsletter or using our content on the web/server, you are indicating your consent and agreement to our disclaimer.
 
 
 
 
From: Michael Zuk <[e-mail]>
Date: Friday, June 4, 2021 at 9:14 AM
To: Michael Zuk <[e-mail]>
Subject: Zuk’s Nukes – Blue Horseshoe loves….InPlay; Athena Deal Flow: Oil/Cannabis Mezz/Term Debt; RNG Cleantech
 
Zuk’s Nukes – Blue Horseshoe loves….InPlay
 
InPlay Oil; IPO-T; not covered; no rating
 
Requisite viewing for any young and upcoming financier is surely Wall Street, Boiler Room, and Bonfire of the Vanities, to name just a few. Gordon Gecko taught us “greed is good,” buttressed by the power of Adam Smith’s invisible hand. Bud Fox learnt that information – and lot of hustle – is what the game is really about. The symbiosis of those two spun quite a tale; recall, Blue Horseshoe putting a stock “in play” by purchasing shares in various accounts, only to drive the price up, creating a FOMO fervor, which was subsequently all unwound shortly thereafter. Ahh, the 80s…
 
Far be it for this missive to be speculating on IPO’s takeover rumours, but when value and GARP show up on your screen 30-40% cheaper than the peer group, then suspenders ought to be tightening and brick phones vibrating.
 
I had a detailed technical review of the InPlay story and wanted to pass along some of the key insights the street may be missing:

• Buy Low, Grow Bigger – IPO purchased 240 boepd and several sections of land on the south western flank of the Pembina trend which is turning out to be quite auspicious. $1.9mm was spent on the deal relative to an $18.6mm PDP NPV (using just $48/bbl WTI); NPV is assuredly higher than that using $65/bbl. The company then added 80 boepd through clean-outs and pump changes for de minimis capital. IPO subsequently drilled and press-released three new ERH wells which produced 890 boepd IP30. For reference, the best well in the entire western trend produced 25 mbbls in 60 days, or 385 mbbls/well (red circle below); one of IPO’s wells is a nudge ahead of that pace after 60 days. Payouts are being modelled at less than six months on these wells. Remember, just $1.9mm – that’s it for this gem of a property.

• Yeah, but How Much Running Room? IPO estimates 30 ERH wells could be drilled on the acquired land. Six wells per section elicits at least 2+ years of drilling, due in part to the thicker pay and strong VRR (voidage replacement ratio) from waterfloods by the prior operator. The wells are strong enough that PDP cumulative production is exceeding Sproule’s 2P curves of 165 mbbls/well and could ultimately imply $100mm in 2P NPV (again, just $1.9mm from the seller!) IPO has started another three-well program on the land and is even contemplating pulling planned capital from Willesden Green to Pembina. (cough…production beat in 2H21…cough)
• Value and GARP, You Say? Peruse the comp sheet below, and IPO screens in the top three at 32% PPS growth yoy; further, finding costs in the year most oilmen (oilpeople?) want to forget were also top tier (1.1x 2020 PDP recycle ratio vs peers -0.3x). IPO is also the only junior, apart from BNE, to recoup production levels higher than pre-COVID or 2019; most are in decline (to reduce debt etc) or have done material acquisitions. All this is to suggest: a growing business with manageable debt/ARO and stout fundamentals ought not trade at a 40% discount to the mean.

• Hedges Be Gone! Like most producers, June 30^th cannot come fast enough for the marketing group at IPO. Annualized CF moves to something in order of $50mm or just 2.7x EV/EBITDA (recall IPO’s market cap is just $55mm), relative to the $40mm I am currently modelling. The peer group trades at a mixed bag, averaging at 4.9x, whilst IPO’s Cardium brother from a different mother (YGR) trades at 4.1x EV/EBITDA. Spun another way: a move to the mean or even just 4.0x, gets IPO to $1.25/sh…a 50% bump to yesterday’s close.
• Get Liquid – Liquidity tends to be the pushback I hear most on value-driven juniors like InPlay. 150,000 ADV makes it tough for some institutions on this distr list to play, but JOG Capital owns ~30% and has given no indication of moving off the position, so that means the float gets skinnier as oil prices improve. This is a name worth chipping away at.
• Technically Speaking – Illiquid or not, IPO has formed a tidy 45-degree channel trend off the 2020 lows, staying ahead of the 50-day MA and providing a nice buying opportunity on weakness. It’s not hard to envisage $1-handle on the stock if oil prices get to $70/bbl WTI this summer.

 
 
“If you need a friend, get a dog”…but if you want to make money, buy a quality junior like IPO.
 
Athena will be doing a virtual marketing tour with IPO; please let me know if you have interest in hearing the story one-on-one.
 
 
Athena Deal Flow: Oil/Cannabis Mezz/Term Debt; RNG Cleantech
 
We are live on several interesting investment opportunities:

1. Mezz/term debt opportunities:
   1. one in energy for USD$30mm (pro forma ~1.2x D/CF, 0.3x D/PDP NPV);
   2. a Canadian cannabis company with no pre-existing debt looking to borrow against a newly purchased facility with appraisal value of $12mm.
2. Athena is looking for expressions of interest on a Canadian-based RNG story with 20-year PPA agreements, and deal priced at a 30% discount to its peers.

 
Please let me know if you have interest in any of the above.
 
 
-- 
Michael A. Zuk
Managing Partner
Athena Capital Markets

[phone]
www.athenacapitalmarkets.com
 
 
The information contained in this message and any attachments is not to be construed as investment advice or an offer to sell or buy securities or fund interests. The contents of this email, all related responses and any files and/or attachments transmitted with it, are CONFIDENTIAL and may contain legally privileged or proprietary information. If you are not the intended recipient, you are hereby notified that any review, use, disclosure, dissemination, distribution or copying of this communication or any part thereof is strictly prohibited and may be unlawful. If you have received this email in error, please notify the sender immediately by return email and destroy this communication and all copies thereof, including all attachments, from your system. Email transmissions cannot be guaranteed to be secure or error-free and are susceptible to change. We do not represent that the integrity of this communication has been maintained nor that this information is complete or accurate and it should not be relied upon as such. All information is subject to change without notice. We shall not be liable for the improper or incomplete transmission of the information contained in this communication nor for any delay in its receipt or damage to your system.
 
All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only. Day trading does involve risk, so caution must always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk of any trading you choose to undertake. You are solely responsible for making your own investment decisions. Owners of this newsletter, its representatives, its principals, its moderators, and its members, are NOT registered as securities broker-dealers or investment advisors either with the U.S. Securities and Exchange Commission or with any securities regulatory authority. We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting from your investments are your sole responsibility. Reading and using this newsletter or using our content on the web/server, you are indicating your consent and agreement to our disclaimer.