Avila Energy: A Special Situation Investment with Potential for a 1450% Return
Penny Queen pick 05.29.2023
TL:DR Avila is a profitable oil and gas company in Canada with preferred, North American rights to the Ener-Twin consumer power plants. This clean technology is projected to generate gross sales of up to $25 million in 2024. Avila has entered into a business combination agreement to uplist to the Nasdaq through the $INAQ SPAC. I place the value of Avila around 30 cents US without the SPAC. Completion of the SPAC could put the share value at 85 cents US.
Because I see the company as being undervalued, and because Avila would also have to pay a penalty to break the agreement, I see this special situation as less risky at this price point. As a reminder, the PQTF peak gains on the prior three special situation stocks have been 146%, 889% and 1370%, but had major issues that if played incorrectly, could have cost people a lot of money. As always, prior performance is not indicative of future performance. I do have a position and intend to do more purchasing and will continue to re-evaluate. As always trading is risky, this is not advice and I am not a financial advisor.
I have done my best to represent the facts as I know them, if you find any errors, please let me know: Penny@8digitspeedrun.com I have also created a subreddit and will have a channel available in the Penny Queen Discord. XO, PQ
Avila Energy (CA: VIK, OTC: PTRVF), an established Canadian oil and gas producer, is on the verge of a potentially transformative merger that could bring immense rewards for its shareholders. The company has agreed to combine with Special Purpose Acquisition Company (SPAC) Insight Acquisition (NYSE: INAQ).
The proposed transaction, as detailed at the link below, will allow for Avila to up-list onto the Nasdaq, enhance its ongoing carbon-neutral business strategy, and further strengthen the capitalization of the company with an expected combined entity market cap of over $190 Million.
This article will discuss the specifics of the deal, Avila's potential to diversify its revenue stream, and how it presents a rare special situation investment opportunity that could potentially lead to a total return of 1450%.
A Breakdown of the Deal
The Avila and Insight Acquisition merger is a complex one, but is potentially extremely lucrative for existing Avila shareholders. Under the agreement, Insight will continue from the State of Delaware to the Province of Alberta and acquire Avila in an amalgamation pursuant to a court-approved plan of arrangement under Alberta law.
According to the agreement, the fully diluted common shares of Avila, currently numbering 150,540,414, will be exchanged for 12,580,000 common shares of Insight Acquisition. This exchange ratio translates to about 11.97 shares of Avila for each share of Insight Acquisition.
Avila shareholders will own the following interest in the post-closing combined company:
100% Redemption (Proceeds retained from trust of US$ 1,250,000) 67.2% by Avila's shareholders;
50% Redemption (Proceeds retained from trust of US$15,781,215) 62.4% by Avila's shareholders;
0% Redemption (Proceeds retained from trust of US$29,062,430) 57.9% by Avila's shareholders.
At present, Avila shares trade at USD $0.0588 (5.88 cents), while Insight Acquisition shares trade at USD $10.23. However, given the merger and based on the exchange ratio, the post-merger price for each Avila share is projected to rise to around $0.855. This implies a staggering potential increase of up to 1450% for Avila shareholders, and forms the basis of the arbitrage opportunity that Avila presents as a special situation investment.
Avila Energy and Its Future
Looking beyond the merger, Avila Energy presents an interesting opportunity as a stand-alone company
Avila's strategic growth plan is divided into three phases:
1. Upstream, where it plans to invest towards becoming a low-cost, carbon-neutral energy producer.
2. Downstream, diversifying its revenue stream through the development of direct-to-consumer sales, aiming to boost demand, margins, and profitability.
3. Providing customers with the option to convert to Avila’s developing hydrogen-fueled solutions, expected to be commercially available in 2027, as part of its Corporate Vision.
The company has a diversified and growing portfolio of 100%-owned and operated wells, three oil and natural gas processing facilities, 150,000 acres of leased exploration rights, and over 300 kms of gathering and sales pipelines.
The P&L displays robust numbers with $3.08 M in net revenue, more than 50% margins, with the majority of the revenue attributable to clean burning natural gas.
Avila currently has a 2P valuation of CAD $30.7 Million and a 1P valuation of CAD $7.8 Million with a current market cap of CAD $8.9 Million. As of year-end 2022, the company also had CAD $6.5 Million of cash, CAD $2.067 Million of Debt, and a positive shareholder equity of CAD $53.17 Million. These third-party audited reserves, as presented below from Deloitte, are a vast value relative to the company’s current market cap.
Reserves Highlights
Avila Energy’s reserves on a Proven + Probable basis (2P) for the Company is 5,256,100 BOE valued at CAD$30.734 million based on a net present value discounted 10% before income taxes (NPV10% BT).
The CAD $30.734 million is an estimate of future cash flows and do not necessarily represent fair market value and is supported by a sustainable capital program of CAD $10.432 million for proved reserves and CAD $17.517 million for proved plus probable reserves.
The Company’s Reserves Evaluation before income tax at NPV10 by region is as follows:
East Central Central Alberta (Donalda)
| Category | Oil (bbl) | Nat Gas (Mcf) | Liquids (bbl) | Total (BOE) | Before Tax Cash Flow |
| Proven Developed Producing (PDP) | - | 3,802,800 | 2,700 | 638,500 | $ 3,462,100 |
| Proven Developed (DP) | - | 6,974,600 | 4,900 | 1,167,300 | $ 7,832,500 |
| Total Proven (TP) | - | 9,179,500 | 6,400 | 1,536,400 | $ 9,019,100 |
| Total Proven + Probable (2P) | - | 11,609,600 | 8,100 | 1,943,100 | $ 11,007,100 |
West Central Alberta (Ferrybank)
| Category | Oil (bbl) | Nat Gas (MCF) | Liquids (bbl) | Total (BOE) | Before Tax Cash Flow |
| Proven Developed Producing (PDP) | 31,900 | 3,337,200 | 39,200 | 627,300 | $ 4,382,900 |
| Proven Developed (DP) | 39,400 | 5,919,800 | 90,500 | 1,116,500 | $ 8,143,300 |
| Total Proven (TP) | 154,800 | 11,190,600 | 206,700 | 2,226,600 | $ 14,853,300 |
| Total Proven + Probable (2P) | 416,100 | 15,578,700 | 283,100 | 3,295,700 | $ 19,700,000 |
| Minor - Property (2P) | 14,200 | - | - | 14,200 | $ 30,800 |
| Company Total Proven + Probable(2P) | 430,300 | 27,188,300 | 291,200 | 5,256,100 | $ 30,734,100 |
Financials
Below are the financials of the company for the previous four quarters presented below in Canadian currency and in accordance with the International Financial Reporting Standards (“IFRS”).
| Reporting Period | Q4– 2022 December 31 | Q3– 2022 September 30 | Q2– 2022 June 30 | Q1– 2022 March 31 |
| Total assets | 68,871,879 | 59,823,671 | 10,603,851 | 4,613,850 |
| Property and equipment | 43,522,045 | 33,083,752 | 3,694,901 | 1,196,482 |
| Exploration and evaluation assets | 12,154,901 | 14,709,550 | 1,616,201 | 1,616,201 |
| Working capital surplus/(deficit) | 3,876,247 | 1,902,424 | 5,269,084 | 1,467,571 |
| Equity | 53,168,454 | 34,814,953 | 4,052,330 | 2,736,226 |
| Gross revenues (1) | 1,217,299 | 923,268 | 752,428 | 513,110 |
| Net revenues | 1,088,904 | 841,204 | 706,107 | 445,316 |
| Gross REV ($/bbl) | 38.84 | 42.87 | 58.86 | 38.16 |
| NET REV ($/bbl) | 34.49 | 39.06 | 53.51 | 33.07 |
| OPEX ($/bbl) | 26.76 | 10.47 | 14.81 | 19.04 |
| NOI ($/bbl) | 7.73 | 28.59 | 38.71 | 14.03 |
| Total BOE for the Quarter | 34,275 | 21,535 | 13,195 | 13,466 |
| Heavy Crude Oil (bbl/d) | 36.31 | 53.1 | 36.5 | 19.56 |
| Conventional Natural Gas (mcf/d) | 2,002.9 | 1,070.3 | 581.3 | 743.9 |
| Natural Gas Liquids (bbl/d) | 0.97 | 2.39 | 24.22 | 16.17 |
| Operating Costs | 1,022,614 | 225,495 | 195,384 | 256,452 |
| Total other items | (1,219,994) | 2,363,790 | 32,003 | - |
| Total Expenses | 1,198,132 | 562,745 | 188,788 | 130,385 |
| Income (loss) before income taxes | (2,351,836) | 2,416,753 | 353,938 | 58,479 |
| Basic income (loss) per share | (0.05) | 0.06 | 0.01 | 0.00 |
| Diluted income (loss) per share | (0.03) | 0.04 | 0.01 | 0.00 |
Clean Energy Future
Moreover, beyond being a traditional oil company, Avila is set to launch its “Vertically Integrated Energy Business, through its partnership with MTT. Supported by over a decade of R&D, including Avila's equity investment in Micro Turbine Technology (MTT), this venture promises to leverage innovative cleantech. Avila is aiming to deliver its first direct-to-consumer energy sales in North America in 2023. It also is targeting net-zero tier 3 (scope 3) CO2 emission energy for consumers by 2027.
The EnerTwin is a small, environmentally friendly power plant that simultaneously produces heat and electricity using the smallest gas turbine in the world. It runs on natural gas, LPG, biomethane, and hydrogen mixes, and thereby facilitates the energy transition to a low-carbon future in buildings.
Avila Energy says it has purchased a license for the manufacturing and marketing of the EnerTwin in the North American market. Beginning in 2026, Avila plans to sell 50,000 EnerTwin systems in North America as part of an integrated offering that also includes the provision of energy to their end customers.
To achieve this goal, the company has laid out the following timeline:
1) 2nd quarter of 2023 the preparation and filing of the application for the Canadian Standards Association (“CSA”) and Underwriter Laboratories (“UL”) Certifications for the EnerTwin in North America, based on past applications for CSA approval of KIWA certified equipment. The Company has estimated that this process is anticipated to 10-12 months in duration. 1st half of 2023 the commencement of pre-sales and servicing of the EnerTwin that are conditional on the Company attaining CSA and UL approval. In the event that the CSA and UL approval is not attained, the sales would be refunded to customers.
2) The development of the Company’s manufacturing of the EnerTwin, including the assembly or 3rd part manufactured subassemblies and the final testing prior to shipping to the customer. The ramp up of this manufacturing facility is to be completed in parallel to the CSA approval, with the first 100 installations being demonstration installations to be replace by CSA approved equipment within targeted markets in North America utilizing the EnerTwin as KIWA Certified equipment.
3) Initial contracts are anticipated to be executed 3 months after receiving CSA Certification.
The Company’s Vertically Integrated Energy Business is based on the following assumptions:
a) Power, Heat, Cooling and Daily Transportation in one invoice;
b) Reduce Consumers Carbon footprint by 40% and save the consumer money;
c) Mitigates concern for brownouts and protection from increasing transmission fees;
d) Fixed Contract plus only an annual inflation adjustment; and
e) Capacity to transition to Hydrogen in the future.
The Company’s long-term goal is to allocate a portion of its natural gas production to its newly acquired customers as a source of fuel with the cost of energy being billed to the customer at a fixed price plus an annual inflation rate adjustment. The Company’s strategy is to include the delivery of fuel and the maintenance, under long-term contracts that offers price stability. The Company plans to continue to still sell their current suite of customers in addition to the newly acquired customers from the Vertically Integrated Business.
The Company assumes early market development will qualify for government subsidies both in Canada and the United States as an efficient upgrade and or substitute for current heating and cooling. For example, the Company anticipates that the EnerTwin will qualify under the existing Canadian Greener Homes Program which will offer rebates on eligible home retrofits.
Conclusion: A Rare Opportunity
Special situation investments like Avila's proposed SPAC up listing do not come often. They offer a chance for significant potential returns but are also complex and require a deep understanding of the specifics of the deal. For Avila shareholders, the potential upside of 1450% presents a remarkable opportunity. However, potential investors should conduct their own research and due diligence or consult with a financial advisor before making any decisions. With Avila's strong business foundation, ambitious future plans, and the exciting prospect of itsup listing through the merger with Insight Acquisition, the future indeed looks bright.