The case for Benton Oil (BNO)BNO is a US company based in Houston but currently does all of its business in Venezuela and Russia. This company had been a darling of the 'Street in the mid-late 90's, due mostly to the success they enjoyed in Venezuela. But things started to unravel when they finished drilling all the easy targets there and actually had to pay attention to the geology a little bit in order to find & produce oil.
Also, the founder, Alex Benton, who is of Russian descent, started getting into a bunch of new ventures, including 2 in Russia. He also had the company borrow a ton of $$$, and eventually was kicked out of his own company due to fears that the whole thing would go under.
The new group of managers are very cautious and very shrewd. They believe in studying the hell out of a field before drilling. They have met with great success.
One of the hair-brained deals that Alex B. got the company into in Russia (Artic Gas Co.) happened to strike the mother lode of both oil & gas. It took $50 - 60 million of BNO's cash to get to this point, but they just agreed to sell out for $190 million. They could have tried to develop it out themselves and gotten about 5 times that amount over the next decade, but they wisely decided against that. They really didn't have much choice since they had a bond issue for $108 million coming due in about a year.
So now the company will be able to just cut a check and pay off all of the '03 bonds. They will even have some cash left over to pay off their '07 bonds, but with the interest rate being so low (only 9.375%) I would hope that they actually keep the money and put it to use in other projects. There are plenty of low-risk development projects just waiting to be exploited in Russia. Another company I own a ton of stock in, Teton Petroleum (TTPT) could use the help of a deep-pocketed partner such as BNO, and would likely offer excellent terms on a farm-out.
The company now has an 80% interest in a very successful Venezuelan oilfield, which produced oil at about 27,000 bopd for 3Q and is expected to be back up to around 30,000 bopd now. They also have a 34% interest in another Russian play (Geoilbent) which is currently producing over 20,000 bopd and is not only self-sufficient but is generating gobs of free cash flow.
BNO as a company generated cash flow of $.19/share for 3Q and I predict that with current oil pricing they can easily get to $1.20/share of annualized cash flow on a pro-forma basis after accounting for the Artic Gas deal.
So right now I believe the stock is selling at < 3 x proforma cash flow. We will get a better picture when the company announces its 4Q numbers on Wednesday, at which time it should also put out some guidance for '02.
I estimate the book value of the company will exceed $4/share the day the Artic Gas deal closes. So the company is selling for a 25% discount off of its book value. This is absurd for a profitable, growing company.
The buyer in the Artic Gas deal is a massive Russian company called Yukos, which apparently has about $4 billion of cash on its balance sheet. The deal is subject to approval by the Russian Ministry for AntiMonopoly Policy. With the other big Russian oil companies that are out there (Lukoil, etc.), I don't think we have much to worry about here. Also, I don't think Yukos would have gotten to where they are if they haven't figured out how to deal with Russian corruption and bureaucracy.
No analysts other than Joe Anancona at Burns Gustus follow BNO at this time. I believe a lot of analysts are closely following BNO at this point, and are waiting only for the deal to close successfully before initiating coverage with a "Strong Buy" rating. With oil prices going up, and natgas prices looking like they are headed down, a lot of energy analysts are going to be looking in earnest for companies that are pure plays in oil. Most US E&P companies produce more gas than oil.
I started buying BNO in late September (see the SI BNO board). I bought a fair amount of it before Thursday but since them, in dollar terms, I have just about tripled my position. In my opinion this stock was absurdly undervalued before the Artic Gas announcement, but is even more absurdly undervalued now. The key is that before the Artic Gas announcement, there was substantial uncertainty as to whether this company would even be around in a year. Buying the stock at that time amounted to not much more than getting a lottery ticket.
Now, however, virtually all that uncertainty has been removed. Now the stock is moving from the gamblers to the investors. The gamblers are happily taking their "double" and moving on for the next big score. The investors are moving in, content to put the big bucks down on the table for a reasonably low-risk shot at getting at least a 33% return in the near term and who knows what else from there if the company gets analyst coverage.
I guess I'm somewhat unusual in that my investing style has an element of both gambling and investing. That is why I started buying before the news, but have only put the serious money on the table after the good news has come out and the downside risk is significantly lower. Its kind of like "doubling down" in Blackjack. I like to play Blackjack once in a while and count cards. The BNO situation at this time is akin to a situation when the deck is rich in 10's & face cards (a situation that favors the players vs. the house), so its time to increase your bet and see what happens.
I say my minimum return is 33% but I believe it could end up to be much greater than that. It would not be unreasonable for this stock to trade at 4 x cash flow, or $4.80/share. Of course this ignores the value of its Geoilbent holding, which is obviously quite large given they are doing 20,000 bopd.
I believe the institutions are very interested in this stock at this time. Many started buying Thursday but no doubt held back until the conference call (which was held after the market closed on Thursday) to make sure the story held up after the grilling of the Q&A session. On Friday, we saw the telltale signs of large block orders going through, and at several points in the morning I saw some poor slob bidding for 50,000 shares at $2.85. Not sure if he ever got any stock. How many stocks do you see skyrocket 50% in one day, and then not give up a goddam PENNY of that gain the next day? Not even intraday? There obviously was a lot of short-covering on Thursday (I believe there were about 600,000 shares short as of the most recent report), so one would think that the stock would pull back a little after that short-covering concluded.
So now we have the final confirmation of a good story stock -- institutions are buying the story. Its kinda like that old Life Cereal ad, where a bunch of kids are at breakfast waiting to see whether "Mikey" likes this new (Life) cereal or not. Mikey likes it, so the other kids know its gotta be good and have some too. Well, our "Mikey", the institutions, have very definitively told us that they like BNO.
It would not surprise me if we see two more days of huge volume on this stock, as institutions scramble to build up their positions before the 4Q earnings (and more importantly, the company estimates of pro-forma '02 earnings) come out on Wednesday. Will there still be more stock coming out on the market to meet this demand and keep the stock price from skyrocketing again? Not sure, but it'll sure be interesting to follow in any event!