Longview Oil Corp LGVWF

Longview vs. Cardinal Energy

[Nawaralsaadi]

I have chosen to compare Longview (LNV) to Cardinal energy (CJ) due to the striking similarity between the two companies in terms of production size, type and composition.

Production (based on latest available numbers):
CJ: 6150 barrels (90% oil, 10% NG) – Mostly legacy conventional
LNV: 6000 Barrels (71% Oil, 9% NGLs, 20% NG) – Mostly legacy conventional
 
Operating Netback:
CJ: $35 per BOE
LNV: $32.8 per BOE
 
Decline rate:
CJ: 15%
LNV: 19%
 
Reserves:
CJ: 17.75m (total value $343m at 10% discount)
LNV: 37.87m (total value $609.5m at 10% discount)
 
PDP Reserves:
CJ: 12.6m ($243.5m at 10% discount)
LNV: 14.37m ($280m at 10% discount)
 
Debt:
CJ: $4m
LNV: $125m
 
Debt to Cash flow
CJ: 0.1
LNV: 2.0
 
Payout ratio:
CJ: 60%
LNV: 105%
 
Expected 2014 cash flow:
 
CJ: $70.3m (Feb. 2014 presentation)
LNV: $77mm (December 2013 guidance)
It is clear from the above CJ debt and sustainability ratios are vastly superior to LNV, however LNV has a much larger reserve base. Production profile and netbacks are very similar. Yet, the valuation the market is attributing to both companies is vastly different
 
Enterprise value:
 
CJ: $487m
LNV: $333m
 
Per flowing barrel:
 
CJ: $79K
LNV: $55K
 
Per barrel in reserves:
 
CJ: $27.51
LNV: $8.79
 
Per PDP barrel:
 
CJ: $38.6
LNV: $23.17
 
Yield:
 
CJ: 5%
LNV: 10.8%
 
EV/CF (non debt adjusted):
 
CJ: 6.92
LNV: 4.32
 
As can be seen from the above, CJ is trading at a substantial premium to LNV on all metrics, it is understandable that a company with virtually no debt and a very low payout ratio would deserve some premium, but it is unclear why this premium deserves to be an order of magnitude larger than LNV’s. It is worth noting that both companies are targeting single digits growth in production going forward and both are focusing on low decline assets.
 
LNV has $121m more in debt than CJ, however LNV has potentially $266m more in probable reserves, which if valued at 50% of their 10% discounted rate they would still be worth $133m. In essence LNV’s additional reserves fully cancel CJ’s debt advantage. An analyst can debt the potential value of reserves, but when it comes to cash flow LNV is projected to generate 9.5% more in cash flow in 2014 vs. CJ yet CJ trades at a cash flow multiple that is 60% higher.
 
We can quibble on what cash flow multiple to apply, but it is very difficult to justify LNV trading at 60% discount to CJ in light of all available information. At 20% discount LNV would trade at 5.53 EV/CF multiple or $6.41 per share; at par valuation it would trade at $8.77 per share.
 
Considering that the AAV overhang is gone, there is no other reason for LNV to trade at such a large discount to its peers (peers average EV/DACF is 7.7) or to such a large discount to CJ. Should the discount persist, then LNV either has an execution problem, management credibility problem or a strategy problem or potentially a more serious asset performance problem.
 
2014 will prove to be a vital for this company, if the asset base is as potentially productive as expected and a management team that is solely focused on LNV is able to execute, we could see a major re-rating in the value of the shares, there is one advantage to a company with leverage is that when the re-rating of cash flow multiple take place, the adjustment takes place exclusively at the equity portion of that enterprise value, this is why a 25% rise in the multiple from 4.3 to 5.4 translates into 40% rise in the share price to $6.2.
 
The combination of a 10%+ dividend and a strong potential for re-rating in the trading multiple could easily lead to a 50% gain in the share price over the next 12 months ($6.2 per share + 48c in dividends).   
 
Regards,
Nawar

[Nawaralsaadi]

sorry for the couple of typos, here is the same write up with slidght edits:  I have chosen to compare Longview (LNV) to Cardinal energy (CJ) due to the striking similarity between the two companies in terms of production size, type and composition.   Production (based on latest available numbers):   CJ: 6150 barrels (90% oil, 10% NG) – Mostly legacy conventional

[JohnDD]

Newar looks like another company agrees with the crux of your analysis - that this company is undervalued. Funny that this "new" offer would come at this late stage. You would think that this unknown company would have engaged Advantage some time ago, before Advantage proceeded with the course of action they took? John

[Nawaralsaadi]

John, I am glad to see this offer and glad to see the market agrees that LNV is undervalued. I am not surprised that the offer came in now, AAV wanted to be paid in cash, the buyer is offering shares. I will commit my 3.4% of the outstanding shares to a deal that would offer us a price in the $6 range, and if the suitor is a viable company. Regards, Nawar

[JohnDD]

Newar, good point - that makes sense that AAV wanted cash.. As a relatively new shareholder to LNV  last week..$6 works for me. 3.4% of the outsanding shares - Wow, this is very good news for you... John

[Nawaralsaadi]

John, That's better news than the secondary last week :). Works both ways. By the way in the summer LNV traded as high as $6.75, this could be where a deal will be done at eventually. Regards, Nawar

[Nawaralsaadi]

correction, it was not the summer, it was as recently as September. Regards, Nawar

[sherbrooke1]

This post has been removed in accordance with Community Policy

[Nawaralsaadi]

Sherbrooke, this is a wide spectrum of questions. I am not clear about your operational questions, feel free to email if you want to discuss those further. But as a general comment LNV does not break its operating cost by sub-category, so I may not have the answers to your questions. As for your question about the secondary, it is a bought deal, thus it is up to those brokers to allocate the

[JohnDD]

Newar said: Usually brokers are not in the business of holding shares for long, thus I expect all those shares to be indeed moved to their clients Do these shares simply get transferred to client accounts or are they required by securities regulations to change hands via an exchange like the TSX or equivalent?

[Nawaralsaadi]

John, they don't have to be sold/exchanged on an exchange they can be moved to client accounts directly. Regards, Nawar