There is a reason that exploration and production companies often end up with assets in some of the more interesting places in the world. It is because oil is getting hard to find.
We have been through North America with a fine-toothed comb and most of the conventional oil reserves are spoken for. The new domestic game is unlocking unconventional resources with technology.
CalValley Petroleum (CVI.A) is a Canadian company that elected to take the adventurous route and conduct operations far from home. And by any valuation metric the stock is cheap. Here is a very simple net asset based valuation:
After Tax PV10 Value of Proven and Probable—$395 million
Net working capital—$70 million
Total Net Asset Value—$465 million
Fully diluted shares outstanding—100 million
NAV per share—$4.65
Current share price—$2.50
Insiders and directors own 25% of the company and are therefore motivated to realize value for shareholders. And the balance sheet is obviously excellent given the strong net cash position.
The stock appears cheap, the balance sheet is strong and insiders are aligned. But there is one more additional kicker in that the company also has some very large exploration upside. On their currently producing block there are 46 identified prospects that create “multi-billion” barrel potential. I won’t get too scientific on you, but you can figure out that even a small amount of success on targets that big would be mammoth for a company with an enterprise value of a few hundred million.
And I won’t even discuss the huge 11 million acre exploration position that CalValley has in another country on highly prospective land.
So just on existing reserves there appears to be almost 100% upside to the stock price and on top of that potential for huge reserve growth. But I’ve neglected one thing. Location of the reserves.
On Jan 13, 2011 CalValley shares hit $5.99. Today just over two months later they are at $2.50. The entire drop was not company specific. It was country specific.
All of CalValley’s production and reserves are located in Yemen. Never a destination location, but now clearly a country in turmoil. The main concern seems to be that should the existing president be forced out there is potential for extremists to gain more power in the country. Current president Saleh has long been viewed as a strongman who has helped prevent Al Qaeda from securing more of a toehold in the country.
In other words the discount being applied to the value of CalValley’s reserves is there for good reason. How can you get comfortable that Western interests won’t at some point be forced out of the country?
What I am seeing though is a bunch of these smaller exploration and production companies in different countries in this region of the world selling at steep discounts to the value of oil in the ground. What might be a sensible approach is to purchase a basket of them across a few countries. I think in doing so you are bound to hit on a couple of multi-baggers and still protect yourself should a worst case scenario arise in one of the countries.
I’ll try and bring forth a few more ideas. Send me an e-mail if you have one of your own ([email protected]).
We have been through North America with a fine-toothed comb and most of the conventional oil reserves are spoken for. The new domestic game is unlocking unconventional resources with technology.
CalValley Petroleum (CVI.A) is a Canadian company that elected to take the adventurous route and conduct operations far from home. And by any valuation metric the stock is cheap. Here is a very simple net asset based valuation:
After Tax PV10 Value of Proven and Probable—$395 million
Net working capital—$70 million
Total Net Asset Value—$465 million
Fully diluted shares outstanding—100 million
NAV per share—$4.65
Current share price—$2.50
Insiders and directors own 25% of the company and are therefore motivated to realize value for shareholders. And the balance sheet is obviously excellent given the strong net cash position.
The stock appears cheap, the balance sheet is strong and insiders are aligned. But there is one more additional kicker in that the company also has some very large exploration upside. On their currently producing block there are 46 identified prospects that create “multi-billion” barrel potential. I won’t get too scientific on you, but you can figure out that even a small amount of success on targets that big would be mammoth for a company with an enterprise value of a few hundred million.
And I won’t even discuss the huge 11 million acre exploration position that CalValley has in another country on highly prospective land.
So just on existing reserves there appears to be almost 100% upside to the stock price and on top of that potential for huge reserve growth. But I’ve neglected one thing. Location of the reserves.
On Jan 13, 2011 CalValley shares hit $5.99. Today just over two months later they are at $2.50. The entire drop was not company specific. It was country specific.
All of CalValley’s production and reserves are located in Yemen. Never a destination location, but now clearly a country in turmoil. The main concern seems to be that should the existing president be forced out there is potential for extremists to gain more power in the country. Current president Saleh has long been viewed as a strongman who has helped prevent Al Qaeda from securing more of a toehold in the country.
In other words the discount being applied to the value of CalValley’s reserves is there for good reason. How can you get comfortable that Western interests won’t at some point be forced out of the country?
What I am seeing though is a bunch of these smaller exploration and production companies in different countries in this region of the world selling at steep discounts to the value of oil in the ground. What might be a sensible approach is to purchase a basket of them across a few countries. I think in doing so you are bound to hit on a couple of multi-baggers and still protect yourself should a worst case scenario arise in one of the countries.
I’ll try and bring forth a few more ideas. Send me an e-mail if you have one of your own ([email protected]).
