Post by
Valueinvestor9 on Aug 15, 2015 10:55pm
Warren Buffet would not buy Kicking Horse
Warren Buffet would not buy Kicking Horse
WOW, what an amazing statement. How does that have any relevance to Kicking Horse, you may ask? Well this statement is not made because Kicking Horse is a tiny little company or that it has a heavy debt load or because its market capitalization is potentially or completely disconnected to reality based on current oil prices. Why is this statement pertinent?
Warren Buffet's company Berkshire Hathaway just purchased Precision Castparts Corp. What is that and why does that have any relevance to the Horse. Warren Buffet has made a history of investing in the future. Anyone remember when he purchased a small railway company and then another company that built railcars to transport oil? How did that work out for him. Well Burlington Northern is moving a great deal of oil through his rail cars, and yes Berkshire owns Burlington Northern. When did he do these transactions? Approximately five years ago. So back to Precision, whats this company up to? The company builds parts for Airplanes. This transaction is a hedge against oil going lower. WHY?
What is the big deal about Warren buying a parts manufacturer for Airplanes? Warren is giving the world his view on oil for the long term. If oil stays low, more planes will be built. This is simple economics, lower commodity greater the demand. This is classic consumption theory. The cheaper it gets the more I want. Low cost oil, airlines will be more profitable, and even prices for flights may fall marginally to build greater demand. Think of it this way, we will get more people out of Greyhound buses and onto airplanes. Based on what I am seeing, quite a few have already made the move. Maybe we will be pulling the hitchhikers off the roads into the planes.
All joking aside. The forecast is for lower oil prices and not for the short term. Who survives, who thrives, who stumbles and falls? Well that is why I have focused on Kicking Horse, because I think they are one of two categories. You as an investor with your broker can decide which group they fall into.
My major thesis with the Horse is that they have already heavily booked their reserves and the challenge will be how do they recapture the momentum? How do they turn their stock chart around in this negative market. What is the probability that they can go out and make a new discovery, show that it is economic, solve the infrastructure challenges and get the market interested in the story. Oh and yes, demonstrate at the current commodity prices that the new play is economic. Now that is a tough hill to climb.
The next thing to ask is simple: How do you investors make money in this stock?
What are the ways you as an investor could make money from this point forward?
One angle would be that they Kicking Horse decides to begin to pay a dividend. Could they sustain a dividend? From my calculations nope. The energy sector dividend stocks have not fared that well with reducing commodity prices. (Whitecap being an exception. Grant is one of the sharpest CEO’s out there. Hope he stays healthy for a long time.) OK say the horse is not going to likely be a dividend paying stock. Next!!
Maybe they will just drill their way through this downturn. That sounds like a great idea. Well let’s look at how many wells they have drilled 20 right. What are they producing now: approximately 4,000 boepd. Maybe it will be more in the next Quarter reported but will the wells be more economic with lower commodity prices. This does not really add up for me but maybe my math is poor.
Is management going to sell us on this idea: They are going to continue to drill huge wells that will build their bank account so they can begin to takeover other assets. UMMMMM NO. They just tried that with Questerre and how did that work out. To the best of my understanding (correct me if I am wrong) Canaccord went out to raise them $120,000,000 to fund operations post the Donnycreek acquisition and also to acquire Questerre. They were not able to raise the monies. Even worse was that Clayton Riddle voted by selling out his stock.
When the deal with Questerre (who owns 25% of a portion of the critical Kakwa Play) did not occur that is a clear indication from the institutions and investors that they did not believe in the asset. You may say well tough market to raise in, oil is at $42 and no wonder they could not raise. No, this happened last year when oil had a bid. Please note that when a financing is not completed, the institutions are saying something. So what is the likelihood of Steve and Ray pulling off a major transaction in this environment with oil lower, and all the challenges facing the oil sector. My gut is saying unlikely but who knows.
Well if Kicking Horse is not going to turn into a dividend paying company and the company is not going to turn into the next CNRL of Canada what do investors hope to happen. Yup the ever enjoyable takeover bid. Is a takeover bid likely in this current market, especially when the stock is on the downtrend. Now, I have touched on this topic a few times. Please allow me to review the companies that are around the jewel of the Kicking Horse.
Paramount (POU) Yes, I am a fan of this company and full disclosure I have an interest in this company. Recently purchased. I am not focusing on Kicking Horse so investors can migrate to Paramount. Paramount can stand on their own two feet without having shareholders from the Horse showing up. I like the management of Paramount and I like that the company has numerous options to relieve its leverage challenges and most important Paramount has staying power. If anyone takes the time to review the company's bonds they trade at a premium. If the company was at any risk of defaulting the bonds would reflect the risk.
By the way, I indirectly own the bonds as well. So why would Paramount not buy Kicking Horse?
Simple answer: Value is likely not there.
Kicking Horse looks to have overbooked reserves based on current commodity prices;
Acreage has near term expiries;
The valuation on the company is not aligned to the current market conditions;
The ownership of the Kakwa play is fractured, being 25%/75%;
There is a GOR on the properties. Companies do not like GOR’s on unproven plays. It is like an extra tax on the assets;
The East Coast assets are worth what?;
Why buy now, in a falling market?
Last and not least the market would likely not appreciate the transaction occurring as it does not appear to be accretive.
What about Seventh Generation. Ray has a good relationship with his former company, so there must be a way to get them to come in and buy the Horse. All the reasons above and further, the CEO of Seventh Generation has actually stated that they have approximately 2,000 drilling locations and thus no need to acquire further lands. Only reason to acquire the company would be to assist in Seventh Generation meeting their commitments on production. The latest quarter for Seventh Generation indicates the company is well on its way to meeting their commitments. There are challenges ahead for meeting the commitments and that in itself forms a barrier to purchasing Kicking Horse.
Both the companies named previously have seen their share prices decline. That in itself forms an impediment to a deal. A company usually wants to use its shares as the currency to acquire a target. When a company’s shares are considerably down it becomes difficult to sell existing shareholders to accept further dilution through the issuance of shares for a transaction.
Who else may look at the Horse?
Maybe Shell and Maybe Tourmaline. I would lean towards Mike Rose in a minute. Yes I am a shareholder and a big believer in the low cost producer’s business model. In this market place, the lowest cost producers will survive and Tourmaline is head and shoulders above the crowd. Tourmaline could graduate to becoming the next major in North America. 250,000 boepd and another 100,000 boepd behind pipe. WOW that is a company to own. Only a true major is likely to acquire Tourmaline at this time. This would be like Exxon acquiring Celtic.
Once Mike sells his company, if he ever does, and gently walks towards retirement, he should make a right turn into the Premiers office and lead Alberta out of this recession. Alberta needs strong leadership at this time.
Cannot comment really on Shell, because only Shell knows what Shell will do. But they are a major and thus prefer big plays. If Shell were to make it is more associated with becoming one of the largest players in the Montney and Duvernay. Logic tells me Shell more likely acquires Tourmaline and or Apache’s Montney Project in Gold Creek. Shell has the balance sheet to do a major transaction. From past history they are unlikely to acquire a small player in the Montney.
WOW, what a long winded post you may be saying.
Here is the question you as an Investor should be asking. And I mean if you are an individual or a fund/institution:
Should I sell Kicking Horse and invest in a company like Tourmaline or Paramount?
If the downturn is going to be for an extended period, where should I be invested. Should I invest in best in class for the energy sector?
If I am going to be invested an exploration play should I look for a company with greater exploration upside?
If I were to be invested, is debt a major concern? What is the risk that the credit line the company has be renegotiated down. As was the case with Delphi.
Does the company have a path to production on their exploration lands? If a new play where to be drilled (if they had the monies) what would be the infrastructure costs.
How close are the expiries on the exploration land?
Can the company sustain the production, and what is the risk that the production cannot be sustained in this current downturn?
Does the company have production behind pipe? Like Tourmaline. The production behind pipe can sustain the production?
Is the company hedged, or are they exposed to the current commodity downturn?
The base question has to be, in this current low energy market, if I am going to stay invested in the sector, what should I own? Should I go defensive, by buying best of class to protect downside or should I go Higher Risk? There are smaller companies out there that offer high potential returns in this environment. That is up to your adviser to locate for you.
Investors ask the questions. We are in a major down cycle.
As they say in Africa: if you put your head in the sand, at least you will not see what is going to happen to you.
By the way, a horse that is kicking is saying it is not happy. Horses that are happy do not kick. Whoever picked the name, nice try.
As I always say, speak to your adviser/Broker. If they are managing your monies, ask the tough questions. They charge you commissions, and thus need to do their own due diligence.