I’ve been looking at some energy companies that are clearly quite undervalued by conventional metrics, but carry significant political risk. My thinking is that while I would not ever invest much in a single company like this I might be interested in a basket approach. One multi-bagger winner in a basket like this can create acceptable returns even if you pick a couple of zeros.
My first article was about CalValley Petroleum (CVI.A, Financial) which is based in relaxing Yemen:
http://www.gurufocus.com/news/127368/how-is-your-appetite-for-political-risk-calvalley-petroleum-is-dirt-cheap-pt-1
At the time I wrote the article the stock was trading at $2.50. Today it trades at $2.26. And yes, Yemen still looks pretty scary.
My second article was about Mart Resources (MMT, Financial) which is based in sleepy Nigeria:
http://www.gurufocus.com/news/135751/how-is-your-appetite-for-political-risk-part-two
At the time of this article Mart was trading for $0.60. Today it trades for $0.57.
So where shall I go next? How about Egypt?
The company is called Sea Dragon Energy and trades as CDX in Canada.
Obviously you are aware of what has been going on in Egypt over the past six or so months. During that time the stock price of Sea Dragon has decreased from $0.34 to $0.13 today.
I’ll get to the valuation in just a little bit. What is interesting about Sea Dragon is the management team. Sea Dragon the company was originally set up in 2006 as a pure exploration company that later went public in 2008. Sea Dragon went out and went after some high-potential exploration targets and came up empty.
In September 2009 a new management team took over. This management team brought with them a track record from a company called Centurion Energy International where they took the company from a $1.56 share price in 1997 to an exit at $12.00 in January 2007 when the company was sold to Dana Gas. Over that time period Centurion grew the production in Egypt from zero to 32,000 BOE per day and 100 million BOE of reserves. The key assets for Centurion were gas fields in northern Egypt and a property called the Kom Ombo concession.
Once taking over at Sea Dragon, the management team changed the company focus and acquired two assets, a 10% interest in the N.W. Gemsa field and a 50% interest in the Kom Ombo field that they knew from Centurion. Both fields are in Egypt.
Valuation
When investing in energy companies I like to pay a fair price for existing reserves and production and get exposure to potential for high impact exploration and production growth for free. Of course I generally stick to Canadian or American producers, so for an Egyptian producer I’d be looking for a pretty good discount from even booked reserves and production.
As of the end of March a simple net asset valuation of the company looked like this:
PV10 of Proven and Probable Reserves - $75.6 million
Working Capital - $14.7 million
Debt - $0
Total Net Asset Value - $90.3 million
Diluted shares outstanding – 380 million
Net Asset Value per Share - $0.24
Current Share Price - $0.13
So we have actually got a pretty good upside to just the valuation of 8.2 million barrels proven and probable reserves.
What might the upside be? Management estimates that they have exploration targets with resource potential of 340 million barrels. So against the booked reserves of 8 million barrels it isn’t going to take a great deal of success to materially increase the net asset value of the company.
Insider Transactions
What is more interesting though is some recent insider activity.
Seeing some significant insider buying certainly is encouraging. Would I buy the stock? No, certainly not as a single position. Maybe if I could get a basket of seven or eight of these and make them into one position. And I don’t know the company well enough yet anyway. But that is now three oil producers in unstable countries trading at very attractive valuation metrics with exploration upside. I’ll try and hunt out a few more. I think we are headed for some very high oil prices in 2012 and some of these companies even in scary places might look more appetizing.
My first article was about CalValley Petroleum (CVI.A, Financial) which is based in relaxing Yemen:
http://www.gurufocus.com/news/127368/how-is-your-appetite-for-political-risk-calvalley-petroleum-is-dirt-cheap-pt-1
At the time I wrote the article the stock was trading at $2.50. Today it trades at $2.26. And yes, Yemen still looks pretty scary.
My second article was about Mart Resources (MMT, Financial) which is based in sleepy Nigeria:
http://www.gurufocus.com/news/135751/how-is-your-appetite-for-political-risk-part-two
At the time of this article Mart was trading for $0.60. Today it trades for $0.57.
So where shall I go next? How about Egypt?
The company is called Sea Dragon Energy and trades as CDX in Canada.
Obviously you are aware of what has been going on in Egypt over the past six or so months. During that time the stock price of Sea Dragon has decreased from $0.34 to $0.13 today.
I’ll get to the valuation in just a little bit. What is interesting about Sea Dragon is the management team. Sea Dragon the company was originally set up in 2006 as a pure exploration company that later went public in 2008. Sea Dragon went out and went after some high-potential exploration targets and came up empty.
In September 2009 a new management team took over. This management team brought with them a track record from a company called Centurion Energy International where they took the company from a $1.56 share price in 1997 to an exit at $12.00 in January 2007 when the company was sold to Dana Gas. Over that time period Centurion grew the production in Egypt from zero to 32,000 BOE per day and 100 million BOE of reserves. The key assets for Centurion were gas fields in northern Egypt and a property called the Kom Ombo concession.
Once taking over at Sea Dragon, the management team changed the company focus and acquired two assets, a 10% interest in the N.W. Gemsa field and a 50% interest in the Kom Ombo field that they knew from Centurion. Both fields are in Egypt.
Valuation
When investing in energy companies I like to pay a fair price for existing reserves and production and get exposure to potential for high impact exploration and production growth for free. Of course I generally stick to Canadian or American producers, so for an Egyptian producer I’d be looking for a pretty good discount from even booked reserves and production.
As of the end of March a simple net asset valuation of the company looked like this:
PV10 of Proven and Probable Reserves - $75.6 million
Working Capital - $14.7 million
Debt - $0
Total Net Asset Value - $90.3 million
Diluted shares outstanding – 380 million
Net Asset Value per Share - $0.24
Current Share Price - $0.13
So we have actually got a pretty good upside to just the valuation of 8.2 million barrels proven and probable reserves.
What might the upside be? Management estimates that they have exploration targets with resource potential of 340 million barrels. So against the booked reserves of 8 million barrels it isn’t going to take a great deal of success to materially increase the net asset value of the company.
Insider Transactions
What is more interesting though is some recent insider activity.
Jul 04/11 | Jun 28/11 | Arrata, Said Samaan Youssef | Direct Ownership | Common Shares | 10 - Acquisition in the public market | 1,000,000 | $0.130 |
Jun 28/11 | Jun 24/11 | Serra, Olivier | Direct Ownership | Common Shares | 10 - Acquisition in the public market | 80,000 | $0.130 |
Jun 28/11 | Jun 23/11 | Serra, Olivier | Direct Ownership | Common Shares | 10 - Acquisition in the public market | 70,000 | $0.135 |
Jun 06/11 | Jun 02/11 | Anton, Anton Danial | Direct Ownership | Common Shares | 10 - Acquisition in the public market | 125,000 | $0.180 |
Jun 06/11 | Jun 02/11 | Anton, Anton Danial | Direct Ownership | Common Shares | 10 - Acquisition in the public market | 25,000 | $0.180 |
Jun 06/11 | Jun 02/11 | Anton, Anton Danial | Direct Ownership | Common Shares | 10 - Acquisition in the public market | 350,000 | $0.175 |
Seeing some significant insider buying certainly is encouraging. Would I buy the stock? No, certainly not as a single position. Maybe if I could get a basket of seven or eight of these and make them into one position. And I don’t know the company well enough yet anyway. But that is now three oil producers in unstable countries trading at very attractive valuation metrics with exploration upside. I’ll try and hunt out a few more. I think we are headed for some very high oil prices in 2012 and some of these companies even in scary places might look more appetizing.
