Veren Inc T.VRN

Market Efficiencies, CAD O&G and CPG

[CashHungry]

This posting is specifically relevant to CPG... but you need to read through to the end - if you get that far.

What is a stock worth? Is it undervalued, overvalued or priced correctly.  And what does 'priced correctly' even mean?  Well through the mechanism of price discovery,  the market price for a stock is arrived through a balance of supply and demand.  In an efficient market the price of a stock will always be priced correctly in that it reflects the prospects of future gains relative to the risk of achieving those gains.  Therefore a stock with high potential gains may not be underprice if the stock is also risky.  A lottery ticket is an extreme example - you would think an investment that could reward you with a $10 million dollar return should be fairly expensive, however as far as investments go there is nothing riskier and therefore tickets are only a few dollars.

The vast majority of markets are efficient - meaning stocks are accurately priced - and that is why virtually zero investment managers can beat their relative index over the longterm and most investors would typically be better off purchasing an ETF.  In the old days, markets were much less efficient and many investors could frequently beat the market through either market research or recieving material informatin in advance of a public announcement (very naughty now and people go to prison for doing this).  Today, however things are much different and unless you are in congress it is very difficult to trade on advance info.  Also, you might do a lot of research, but so are many other smart investors, and really is getting difficult to beat the market through fundamental research - hence the increased popularity of technical traders.

However, there are exceptions, or at least one exception to the thesis that all markets are efficient in today's market, and that is with Oil stocks, especially CAD oil stocks and there are two reasons for the risk/reward price point of stocks being skewed down that has nothing to with the intrinsic value of the actual stock:

1) There are too few buyers (the demand side), not because O&G companies are not great investments, but because large instutional investment vehicles such as mutial funds, pensions, endowments, etc have in a large part been discouraged or forebidden from investing in oil stocks.  Therefore, with fewer buyers to balance sellers stocks will naturally trend down in price despite potentially favorable prospects.

2) Dominance of the retail investor and low information investment decision.  An efficient and fair market requires that material information about a stock is available to all market participants at the same time and those market participants make rational decisions on that information.  However, a large number of retail investors will make very low information decisions when investing.  I suspect there might be people reading this who buy a stock because of a favourable stockhouse posting without actually looking at the company's investor presentation never mind their financial statements.  Now all markets have low information retail investors, however, they are typically very well balanced by a predominance of investors who do their due dilligence and therefore most of the time stocks are accurately priced.  However, the CAD oil market is an exception as it is dominated by low information investors and therefore many stocks are priced irrationally - too low or too high relative to other investments in that same market.

In general all O&G companies are priced too low because of point number 1.  However, within the CAD O&G sector, some stocks are moderately under priced while others are drastically under priced because of point number 2

So how does this relate to CPG's market price?  Well simply because it's a CAD O&G stock it is likely to be under priced.  However, does it offer better value than comparable companies in the same sector - i.e. is the prospects for return more favorable relative to its risk to another CAD O&G stock? 

The answer to that question I believe is a clear yes because of low information investment decisions by retail investors keeping the price down.  What are most investors making their investment decisions based on in this sector?  Well frequent readers of this board would know that many investors will jump on a stock as soon as a dividend is significantly increased or introduced or the company announces its intention to do so in the near term.  Is this bad information to act on? absolutely not, but it should not be the only information that an investor should consider and CPG is a case-in-point.  Their last earnings report was great with guidance pointing to significantly improved cashflows for 22 and beyond (using extremely conservative forecasting).  Based on this information alone the stock should have jumped to over $7, particularly in the context of high oil prices.  But that did not happen, why? Because there was no sexy dividend announcement to motivate the retail investor.

Is this a bad thing?  No it is a fantastic thing, because CPG is clearly now mispriced because of low information decisions keeping the price low.  I am using this window of opportunity to significantly up my stake and I feel extremely confident I will be well rewarded.

Although CPG did not announce a framework for increased shareholder returns, one only needs to connect the dots with easily found information in their November presentation and 3rd quarter earnings report.  Once they pay near term debt maturities and meet their debt targets, which will occur late in H1, they will have a chest full of cash to return to the shareholders.

At $6 CPG is ridicously cheap and when this stock is trading at $10, $15 or even higher many investors will wonder why they didn't back the truck up.

[CdnOilObserver]

I suspect that once Shell is done selling it's 50,000,000 shares - and once CPG completes as much debt pay down as they feel they need, and once CPG management actually insitutes a NCIB and dividend increase, then Yes - I CPG will see it's share value rise...  that being assumed that oil is still trading about WTI$70 by the time they do these things.

[Moemoney42]

I tend to agree with a lot of your thesis Cash but there's one thing I'd like to add, which I've commented on(as well as others) that, CPG stands out as being underpriced and rangebound because of the overhang of Shell's liquidation of their holdings.  This is an overhang that many, if not most, companies don't have, and IHMO is the reason for treading water lately

[barneyj44]

Moemoney42 I hold both Cpg and Wcp and both are not keeping pace with other O and G companies . Cpg has Shell lightning up and Wcp have the Cpp that so far has sold close to 10 million shares from being overweight with the Torc acquisition. Frustrating when were in a bull market and there seems like an endless supply of shares for sale.

[Moemoney42]

IMHO this too shall pass... and when it does we could see CPG and WCP both rally hard to catch up.. ;-)

[CashHungry]

I also hold WCP as well as 8 other names.  I love it when stocks rise at different times as it provides a great opportunity to rebalance giving an added boost to my portfolio.  With WCP I am a little more patient as I look at its risk profile as being very good and I believe its CO2 sequestration will be monetized in ways that will be very favorable in 22.

[Moemoney42]

I wouldn't be surprised if CPG introduced a CO2 sequestration element to their Flat Lake play.. its just a short distance from WCP's Weyburn unit and that P/L from N. Dakota runs very near or possibly though CPG's holdings at Flat Lake.. just a thought.. and my opinion only.. but it would be a game changer long term for that play, as they have done in their Viewfield play with H20

[Moemoney42]

On second thought it appears they will be using water flood in Flat Lake as well.. as they've already had success with it in the Ratcliffe zone..  so disregard the previous post.. for now.. LOL..

[CashHungry]

Yes, definitely the selling pressure of Shell is a factor.  But look what happened with CVE when they announced an aggressive NCIB to mop on the Conoco Philips divesture, the stock has rallied huge.  The same thing will absolutely happen with CPG in 22 and today offers an amazing entry price point.

[Moemoney42]

Agreed..!

[ChickenLittle13]

Ok great initial write up by the way, but I think the other factor to consider is that CPG may be gearing up for another acquisition. That's how I'm beginning to read the Q3 report and investor materials. They don't commit to any major shareholder returns , no $ spent on NCIB when stock is in the gutter, so focused on debt, way too much hedging in 2022(maybe a stipulation for further

[BigJoe778]

Oh no.....they wouldn't possibly do that would they? Do you really think it's possible they'd take on more debt or further dilute their shares? What about the shareholders? I couldn't imagine LMAO!!!!!!

[CdnOilObserver]

Using this same CVE example, I would argue that this is a great time for CPG management to mop up the shares being sold by Shell.  At $80 WTI and a share price that struggles to maintain $6.00, this is the time to be aggressive with a NCIB. Paying off debt is good, we all know this, but not at the risk of eroding the value of equity.  Equity - the share price - is the "currency

[geezer21]

"Paying off debt is good, we all know this, but not at the risk of eroding the value of equity" Paying off debt increases equity. Asset - Liabilities equal Equity