VAALCO Energy (EGY, Financial) is a tiny independent energy company with a small market cap of around $51 million.
It specializes in oil producing properties in Gabon, West Africa and Angola. Specifically, activities include production, development, exploration and acquisition of oil and natural gas properties.
Vaalco manages exploration as an operator in Gabon, Equatorial Guinea and West Africa.
The main idea is that its intrinsic value is linked with oil prices. For each $5-per-barrel improvement in oil prices, it increases annualized cash flow by approximately $6 million, per management’s public guidance.
On Dec. 31, Vaalco had $2.6 million barrels of oil equivalent (BOE) of proved reserves related to its property in offshore Gabon, Africa. Its U.S. property ownership and interest are in North Texas and Montana, which is not a relevant oil producer.
A small tidbit is that Vaalco was incorporated in 1985 and has 104 employees. Despite the tiny market cap, it’s been around and it is a legitimate business.
Enterprise Value Metrics and Insider Activity
The enterprise and market value for Vaalco dropped 89% since 2012 and 84% from 2014.
In contrast, the company reported exceptional trailing-12-month financial performance, with a reasonable and improving balance sheet.
- TTM EV/operating Income = 2.49
- EV/gross Profit = 1.21
- EV/EBITDA = 1.86
- EV/sales = 0.62
These measures support the deep relative and historical bargain-price thesis.
The numbers, along with other reasons, are making Vaalco attractive to quality longer-term value institutional owners.
Further evidence of the market’s overreaction to the downside is the declining inconsequential short balance (1.20% short float) coupled with modest positive insider activity with no sells.
Insider transaction summary:
- April 2017: 50,000 shares or total of $47,000 purchased for 94 cents per share.
- The fiscal year 2016 recorded 60,000 shares purchased for an average price of $1.08.
- During 2015, 159,317 shares were purchased for an average price of $1.68, a total of $267,219.
If the favorable TTM results continue, Vaalco Energy offers at an extreme discount to current operating performance and proven reserves.
What will be the result?
A higher stock price.
To see the continued improvements, Vaalco just published its June lifting results with 629,246 oil barrels (bbls).
These bullish production results have not been exceeded since Sept 25, 2015.
Current valuation metrics
Refer to my comments in the tables.
The table below highlights and comments on historical 2012 to current deep and mean reverting valuation discounts. Click the image to see a bigger version.
Industry valuation analysis
Here’s how I found Vaalco.
Relative industry valuation analysis started with 413 companies in the Oil Gas Exploration / Production industry.
The list cut to 45 by filtering for a market capitalization between $10 million and $300 million.
Then, I removed per-share prices less than 50 cents and OTCPK exchange-listed companies.
This list of 45 I first analyzed for insider transactions and institutional ownership.
Vaalco, PQ, GST and AREX are the only companies with 2017 positive insider activity.
I went further looking at the number shares purchased to total shares outstanding as a measure of conviction.
Vaalco ranked second most favorable behind PQ. Further, institutional activity for the quarter ending March 31 and total ownership I analyzed for the 45 companies.
The best results are shown for Vaalco.
Petroquest Energy placed second for value institutions adding to existing Vaalco positions during the quarter ending March 31.
Specifically, for Vaalco, the Tieton Capital Group, a small value investment firm, added 1,102,610 shares to increase its ownership to 2,244,631 shares.
LONE STAR Value Management, Wilen Investment Management and Renaissance Technologies also adding to existing position during the most recent reported quarter.
The table below compares the group of 45 competitors to Vaalco. It highlights its valuation advantages.
Risks With Vaalco
"In a commodity type business, you’re only as smart as your dumbest competitor." – Warren Buffett (Trades, Portfolio)
- Declining oil prices are always a possibility with multiple competing sources.
- It could revert to its unprofitable negative cash flow impacting access to financing.
- It could have unexpected operational accidents or litigation and disagreement with local African governments.
Opportunities
- A strong production update was published in June’s lifting results, 629,246 Bbls. These bullish results have not been exceeded since September 2015.
- Strong reserves were reported at Dec. 31. Vaalco had 2.6 MMBOE of proved reserves related to offshore property at Gabon, Africa.
- An experienced small team has years specializing in African oil production. Management’s public commentary and investor presentations show a deep, detailed understanding of the operational and financial levers needed to drive its stock’s value higher.
- The recent strong operating and financial results show an improved company versus multiple negative quarters fighting lower oil prices and operational challenges.
- Clean capital structure with the financial strength this quarter will secure access to $4.2 million of added funds for financial flexibility and help execute strategy.
- The strong financial results over the trailing 12 months, if followed by another one or two quarters, will move the stock price significantly higher.
- There is real institutional coverage. But National Securities said it reaffirmed a “neutral” rating and issued a $2.00 target price on shares in a report on Wednesday, March 15.
- There could be reversion to the historical and industry mean valuation.
Disclosure
Shadowstock is long EGY.
This article was originally published on ShadowStock and is reprinted here with permission.
