I wrote earlier about following Monish Pabrai’s investing ideas but not necessarily following him into positions. The article is here:
http://www.gurufocus.com/news.php?id=100097
One of Pabrai’s investment tips is to invest in situations where the results are either “heads I win, or tails I don’t lose much”. Monish had some questionable positions (think Delta Financial, Compucredit) in his portfolio during 2007 when he was pounding on this investment theme at various investing conferences but is doesn’t make the advice any less important.
I have one situation that I have my eye on that fits the “heads I win, tails I don’t lose much” scenario. That company is Corridor Resources which is CDH on the Toronto Stock Exchange.
First I will try and show you how you likely aren’t going to lose much. Here is what you need to know:
1) The company is debt free
2) The company has a 3P PV10 value (as determined by an independent engineering firm) of $450mil as at Dec 31, 2009.
3) The market cap of the company is currently $465mil
So essentially you are currently paying a reasonable price for the present value of the existing proven and probable reserves of the company. This is the tails I don’t lose much. If none what I show you below work out, this is our worst case scenario. You pay full value for the existing booked reserves.
Now the heads I win. In addition to the reserves already on the books you get the following basically for free. And a couple of them are big enough to turn this into a homerun.
1) Corridor owns virtually all of what is known as the Frederick Brook shale formation in eastern Canada. In July of last year independent engineers estimated that the shale gas potential of Corridor’s Frederick Brook resources as being 59.1 trillion cubic feet of gas in place. That is not a typo. How much if this might be commercially recoverable is not known. But it has caught the interest of Apache who is now joined Corridor on a farm-in agreement and is drilling two horizontal wells this year. How big could this be for Corridor ? Well known resource investor Eric Sprott uses as a rule of thumb that 1 trillion cubic feet in the ground should be worth about $1 per mcfe. So if Corridor can prove out just 1 TCF from the 59.1 TCF estimated by the engineers that could be worth $1bil to this company with a $450mil market cap.
2) Corridor has rights to a giant oil prospect in the Gulf of St. Lawrence. This prospect has a billion barrels of reserve potential. Again that is not a typo. Corridor is currently soliciting partner interest in drilling an exploration well in 2011/2012
3) The third large prospect that Corridor has is a light oil prospect on Anticosti Island where the company has 980,000 net acres. They are drilling 4 wells this year on this remote island which could yield something large.
It is obviously very hard at the very least to ignore the Frederick Brook property. The potential of it has been verified by independent professionals, and the fact that Corridor has Apache on board is also interesting.
The key to all of this though is that even if the Frederick Brook shale, the Old Harry prospect and Anticosti Island all don’t pan out, you don’t lose much as the base reserves of Corridor basically support the current share price. If any of these big three hit you are off to the races.
