Eric Nuttall discuses Gear Energyhttps://www.bnnbloomberg.ca/video/eric-nuttall-discusses-gear-energy~2211450
We have an email from Kevin. Kevin is asking about GEAR Energy, GXE.
Yes. So early in the year when oil was in the 50s, I felt pretty confident we'd be seeing $60 by June. I am asked strategic positions of in companies where we thought the stocks were just woefully mispriced. Gear is one of those companies we own 9.9 % of the stock. It's run by a really shrewd, experienced team that have had to deal with one heck of a challenging environment. They've amassed what they think is a 20 year drilling inventory, so 20 years of adequate inventory to keep production flat. At the same time, though, I'm going to be referencing $70 because frankly, that's what I think the base call is for next year and that may prove to be conservative. One of our primary consultants, Energy Aspects, is calling for $80 oil throughout next year. Let's run with 70 %. We'll consider that to be conservative. Gea is trading a 2.2 times cash flow and a 28 % free cash flow yield, meaning if they're correct in terms of their inventory, they could keep production flat for 20 years and pay me a 28 % dividend. And so, yes, the market cap is small. Yes, it's not quite on in the mainstream and it's not on everyone's radar screens.
That's why it's trading at 2.2 times cash flow. I would assign on this name, I'm using a 4 to 6 band for target multiples, 6 for the large caps, 4 for the small caps, and at 4 times at $70 oil, it would imply a dollar 29 cent share price, which would be 85 % from here. So the key theme is free cash flow. What are you going to do with it? This is a company that despite the small market cap, I could see them implementing a share buyback in the coming quarters. They just increased their their drilling cap X just a little. But this is a company where, despite the market cap, you could see a pretty juicy dividend. You could see share buybacks. And it's one of many opportunities in Canadian small caps where, if I'm correct, that we're in a multi year bull market where the oil price has a meaningfully higher upside than where we are today, it's a potential multibagger along with a long list of smaller midcap energy stocks.
Okay, so that one appealing to you right now.