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Money for Nothing - Japan Petroleum Exploration Co Ltd

December 06, 2009 | About:
Japan Petroleum Exploration Co Ltd. (JAPEX) is a company engaged in the exploration and production of oil and natural gas. It has operations in Japan, Canada, Indonesia and Libya. In the seventies, JAPEX was the E&P division of the former Japan Petroleum Development Corporation (JPDC).

Price

With 57 million shares outstanding, and trading at about $45, the company’s market cap is $2.5B

Value

JAPEX has ¥250B ($2.7B) of Long term investments on the balance sheet. Among these is an 11% stake in INPEX Corporation. The market cap of INPEX is ¥1.6 T meaning this stake alone is worth ¥190 B ($2B) in the market today. INPEX is well capitalised, is growing and trades at about 1.2 x book value.

What remains is an established, well capitalised, diversified and consistenty profitable E&P company earning ¥12B ($130m) in a recession.

Thesis

The long term investments are not critical to the operations of JAPEX.

One way of looking at it is to say the operations of JAPEX are trading at a negative P/E. In this case, it is not earnings that are negative but the price.

Another way of looking at it is to realise the investor is being paid $200m to own a company earning $130m in a recession.

Jet another way is to value JAPEX at 10x depressed earnings ($1.3B) and add back $2.7B for it's stake in INPEX et al. This will get you a value of $4B for a company with a market cap of $ 2.5B.

Any and all questions welcome as usual.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 2.3/5 (3 votes)

Comments

vinsandhu
Vinsandhu premium member - 4 years ago
Thanks for the idea.

However, my review of the latest balance sheet for Japan Petroleum indicates a deferred tax liability of¥67B ($750M) related to unrealized cap gain for held securities. Would suggest that the value of the INPEX stake is closer to $1.9B. So this looks more like a $3.2B value for a market cap of $2.5B. Add risk of heavy government ownership of both Japan Petroleum and INPEX and the investment idea looks somewhat less compelling.

Nonetheless, I'd like to dig into it a little deeper.
batbeer2
Batbeer2 premium member - 4 years ago
deferred tax liability of¥67B ($750M) related to unrealized cap gain for held securities.

Hmmm.... Another way to look at this fact is to note that they are very smart investors; but it is a good point.

Add risk of heavy government ownership of both Japan Petroleum and INPEX

True, the government holds large (minority) stakes. Why exactly is this risky ?

buynhold
Buynhold - 4 years ago
I initiated a position in Japex on Nov 30. My 1 minute back-of-the-envelope valuation was:

Balance sheet Investments: $1.95 Billion ($2.7B - $.75B of deferred tax)

Proven reserves: 272 million boe, valued at $1.35-$2.7B (Proven reserves times $5-$10 is what I use for a conservative value range based on some takeover valuations I saw in 2006-2007).

Total intrinsic value range: $3.3 Billion to $4.65 Billion.

One can get a better estimate using a PV-10 or similar valuation of the reserves based on a conservative estimate of oil/gas prices in the future - I didn't bother 'cos I am getting the oil & gas reserves for free.

batbeer2
Batbeer2 premium member - 4 years ago
Proven reserves: 272 million boe, valued at $1.35-$2.7B (Proven reserves times $5-$10 is what I use for a conservative value range based on some takeover valuations I saw in 2006-2007).

You obviously know more about oil than I do. I tend to ignore oil stocks. This is the one exception. I did notice that reserves had not declined in recent years and and represent many years of future production. A lot of it is natural gas by the way. This is what gave me the confidence to stick a value on current earnings.

One can get a better estimate using a PV-10 or similar valuation...

It may be more accurate; but would it be more usefull ?

buynhold
Buynhold - 4 years ago
> A lot of it is natural gas by the way.

Maybe I misread their annual report, but I thought the reserves were 75% oil and 25% gas. And reserves have actually increased quite a bit in the last few years (see Page 6 in http://www.japex.co.jp/pdf/ir_03/2009e.pdf)

> One can get a better estimate using a PV-10 or similar valuation...

> It may be more accurate; but would it be more usefull ?

In this case, not really - hence I did not bother. My guess is it'll give a higher valuation - useful if one is considering a large concentrated position and wants a better handle on the discount the market is offering.

Japex happens to be my only oil/gas holding currently, though I have owned a couple in the past.

batbeer2
Batbeer2 premium member - 4 years ago
Maybe I misread their annual report, but I thought the reserves were 75% oil and 25% gas. I believe it's te other way round; but in any case, a lot of it is gas.

And reserves have actually increased quite a bit in the last few years

hmmm.... yes. some of it is due to accounting though and not actual new finds. Also, when I state " they have not gone down" that is just the way I refer to and think about positive trends ;-)
superguru
Superguru - 3 years ago
A year old thread. Meanwhile Japex (TYO:1662) is down 22% since Batbeer originally wrote this .

Has batbeer or anyone looked recently at this company? Does it still look attractive and a better value?

batbeer2
Batbeer2 premium member - 3 years ago
I track it.

Japex dropped along with Inpex. As explained, much of the value of Japex is in its stake in Inpex. IMHO the thesis still holds. Having said that, If memory serves, Mason Hawkins sold out his position in the summer.
Sivaram
Sivaram - 3 years ago


Problem with almost all Japanese companies is that it is hard to unlock shareholder value... ok, so, say this company is undervalued. How is anything going to change?

Japan is a graveyard for classic value investors...
batbeer2
Batbeer2 premium member - 3 years ago
Yes

There are a lot of interests served by management; investors come last. Not all Japanese companies are the same but IMHO Japex is not an exception to that rule. Shimano is one I really like but it's certainly not cheap

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