CDN Oil & Gas Investing - Hydra Capital some names to mull over.Includes Advantage Valeura and Altura. - CDN Oil & Gas Investing - InvestorVillage
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Msg  1810 of 3281  at  1/10/2019 9:28:07 AM  by


The following message was updated on 1/10/2019 9:29:15 AM.

Hydra Capital some names to mull over.Includes Advantage Valeura and Altura.

 Credit to theactivist. 
 No Lack of Action in 2019


By: Malcolm Shaw

(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long every single stock in this article.)

I’ve been quiet lately, but it’s not been for lack of interest in what’s sure to be a year of “action” on so many names that I own and follow. It’s been a long time since I looked forward to progress reports from so many different companies against a backdrop of optimism for the resource sector. After being sold down to punishing lows in 2018, most energy and mining stocks have already staged decent recoveries, and while I’m always hesitant to call a bottom, things did get stupidly cheap there in the midst of that broader market volatility and tax-loss selling season. 
I did a quick scan of most of the metals and energy sector not long ago and I came to the conclusion that it didn’t really didn’t matter what you owned in 2018. Despite a strong start, by the end of the year, resource stocks were down anywhere from 40-80% from their 2018 highs. With volatility like that in sectors that have been largely shunned by mainstream money managers, it can almost make that shunning feel justified. And yet, a quick scan of base metal inventories shows that physical stockpiles are all at or near multi-year lows with new investment needed in the sector in order to avoid future deficits.  In Canada, oil and gas stocks are trading at multi-year lows in terms of price, cash flow, and NAV multiples. I’m seeing energy companies trading close to, or in some cases below, PDP (proved developed producing) net asset value. You can poo-poo Canada all you want, but there are still companies here that can make good money doing what they’ve always done while the politicians flounder to understand common business sense.
In the mining world, names like Trevali (TV.TO, last at $0.43), Capstone (CS.TO, last at $0.65), and Lundin Mining (LUN.TO, last at $5.99) traded (or are trading) as low as 2-3x EV/EBITDA. Yes, that’s right, 2-3x. I just read a report today that has TV trading at less than 2x EV/EBITDA. Battery-metal streamer Cobalt 27 (KBLT.TO, last at $4.45) trades at roughly 0.3x its net asset value versus its metal-streaming-royalty peers that trade at an average of over 1x NAV, and up to 2x NAV.  Can you say sitting duck? 
Energy names like Parex Resources (PXT.TO, last at $17.57) traded into the 2.5x EV/CF range. Yields on names like Whitecap (WCP.TO, last at $4.78) and Vermillion (VET.TO, last at $30.48) got to the point where they had 8-10% yields, and they aren’t fair off those levels yet, with 6.7% and 9% yields right now respectively. Little Altura Energy (ATU.V, last at $0.42) ticked as low as 33 cents for a nanosecond, before recovering to 42 cents, which means that someone sold stock at less than 2x the most conservative estimate of 2019 cash flow that I can reasonably come up with right now. I could say similar things about dozens of resource companies as this is just a tiny cross-section of what I’m seeing. Are the prospects for global economic growth really that bad? Is the market on the verge of a global recession? I just don’t see it right now. Even if there was a global recession, would I want to own Netflix at 100 times earnings, or would I maybe prefer something like Lundin Mining that trades at a low-single-digit earnings multiple and has ~$2B in liquidity (nearly 2/3 of that being cash) to buy things on the cheap should things get messy in the market again? That's the choice the portfolio managers have to make right now. The FAANG/ETF momentum story has shown its ugly side and now managers are going to start looking for defensible value. 
Look, I don’t know how much cheaper people think that resource stocks are going to get, but at valuations like these I was okay with opening partial positions in a number of names with the intention of taking a walk down Value Lane. I probably opened new positions in 10-15 names that got to just stupid levels and added to several other existing positions. So far so good, but there’s a lot of year to be written and I don’t think that gold and base metals are out of the woods yet, so I’m still keeping one foot on dry land. There seems to be a good underlying bid to a lot of the base metals and gold names and, at the same time, sellers are somewhat scarce after many years of floggings that have left only the most stalwart resource investors still in the trade. It’s an interesting time in the market to say the least, but there’s hope on the horizon… BMO did a whole “Metals Report” yesterday advocating exposure to the sector as part of the broader rotation trade as the market cycle progresses. First of many? We’ll see.
One thing about resource stocks is that there are always a lot of “catalysts” to look forward to, and 2019 is no exception. I thought that a quick list of what I’m seeing out there might be something fun to look back on in a year, so here goes my best shot… there is a link or two in each paragraph for those who want to read more:
Altura Energy (ATU.V, last at $0.42)
Altura Energy should publish a reserves update this month that reflects the results of last year’s drilling program at Leduc-Woodbend. I expect this will be followed soon after by a new bank line/credit facility and 2019 capital budget. WCS spreads dropped to $10.50/bbl the other day. That means that at a US$50 WTI oil price, WCS producers get US$39.50 /bbl (C$52/bbl). ATU’s all-in costs per boe are around C$16, leaving C$30/boe of margin (80/20 liquids/gas mix). That means that on a spot basis, ATU is trading at a little over 2x 2019 EV/CF (using my ’19 2,500 boepd avg. estimate), and likely a big discount to its soon-to-be-published NAV. So far, they are doing all the right things. Well performance leads me to believe that the type-curve for the ERH wells may be getting revised higher, which will only make the economics better. I look forward to continuing to watch them execute, because so far, they've been nothing other than methodical and effective in their approach.
Advantage Oil and Gas (AAV.TO, last at $2.27)
Let’s see what the updated reserve values are for Advantage early in 2019. At its current price, Advantage trades at about 0.8x its PDP reserve value from a year ago. The company has a credible 3-year plan in progress to shift towards a higher liquids ratio in its production mix and the credit facility was recently reconfirmed. This company is one of the best Montney developers out there, but its Western Canadian gas price exposure has put it in the doghouse. Even in that doghouse, AAV keeps churning out very respectable results quarter after quarter with debt to cash flow expected to fall to between 0.5-0.8x in 2021. I was lucky enough to pick the bottom right around Christmas when AAV was being kicked out of the TSX composite index. Hopefully that was the low point. So far, so good… BIR, TOU, ARX, VII, and dozens of other Canadian Energy companies made lows right around the same time – take your pick. They were all too cheap. If any of those “mainstream” companies started making new lows I will likely sell first and ask questions later, because those were real pile-on/blow-out lows.
Valeura Energy (VLE.TO, last at $3.41)
Inanli-1 is expected to reach total depth in 3-4 weeks and I fully expect the logs and drilling reports to show a massive vertical gas column. With reports of gas shows, overpressure, good reservoir/net-to-gross, and fractures already encountered down to 4,145 metres, I’d say that the Thrace BCGA is standing on two legs now. One day the broader market is going to realize  that (a) there’s a massive gas prize in play here and (b) its eventual development is inevitable. When that happens, the stock bouncing between $3-4 will seem like a distant memory. Don’t get me wrong, a lot rides on Inanli and I don’t mean to discount the risks involved, but when you’re talking about 10 TCF of prospective resources in such a strategic setting, you’ve got to think about what a fair “risked value” is for Valeura at this stage. Analyst price targets for Valeura range from $5.75 (Mackie) to $12.50 (Cormark), so the goalposts are pretty wide. GMP First Energy ($11 target) suggested that there are parallels between Valeura Energy and Cove Energy that support the billion-plus takeout hopes of longs like me. First things first, let’s see a report from Inanli once drilling is completed with testing to follow. Who knows, maybe BP might even be interested one day. Lots of options for giant players for whom this would be a sweet asset to own should it prove out... dare to dream. 
Sun Metals (SUNM.V, last at $0.295)
It’s hurry-up-and-wait time for Sun Metals. Since last writing on the story, I’ve had a chance to do a little more reading and have caught up with CEO Steve Robertson. Steve has the mind of both a geologist and an operator (see the new "2km ramp slide" in the linked presentation above) and I think his optimism here adds a huge degree of credibility to the story. Pair that with the formidable CRD/skarn expertise of Peter Megaw and you’ve got something that will get real market traction if/when additional drilling around hole 421 (100m of 5% Cu Eq) shows that Stardust isn’t just a one hit wonder. I told Steve that I couldn’t believe the price action around the time of the discovery and he didn’t seem to disagree with me. It’s not often that you get a 100m hole of 8 g/t Au equivalent in a totally blind discovery that the market gives you very little credit for, but that’s fine by me as someone who wants more stock. Drilling is expected to start again in late April/May and, with Teck’s recent financial investment, SUNM has $8.5 million of cash in the bank. I’d expect interest to start building “for real” around PDAC because I can’t think of a lot better exploration targets that have holes like 421 to key off of, and that core is going to show well in the booth/Core Shack. At this point the sky’s the limit, so dream away.
Pure Gold (PGM.V, last at $0.65)
Another one from Mark O’Dea’s Oxygen Group is Pure Gold. I’ve owned PGM for years on the basis of it being once of the highest grade (8-9 g/t) ~2 million ounce gold resources out there. PGM is due to release a definitive feasibility study early in 2019 that should reinforce the view of Madsen as being a low-capex/quick payback operation right in the gold old Red Lake district. Low political risk, massive amounts of definition drilling, test mining runs and underground sampling all come together to make this one of the most attractive undeveloped high-grade gold assets in the hands of a junior that I am aware of, and PGM has the capability to either “build it” or “sell it”, so take your pick. I like the optionality on gold that it offers and, in a good gold tape, assets like this go for a real premium; especially given the exploration upside that's presented itself with recent drilling and test mining.
Minera Alamos (MAI.V, last at $0.11)
Minera Alamos fits into the same low-capex/quick payback category as PGM, but MAI is an open-pit miner/developer in Mexico. Osisko Royalties is backing MAI and has a big equity piece of the company already. As far as I know, MAI is Osisko’s only Mexico vehicle. The goal is to be producing 100,000-150,000 ounces/year of gold in 3 years. Initial projects may look small at 40,000-50,000 ounces per year, but the capex is very modest and the costs are low, which makes for fast payback. The catalyst that I want to see in MAI in 2019 is financing for its La Fortuna project, which should kick-start the whole company. I’ve met management a number of times over the years and have always come away convinced that MAI is going to be a real gold producer that will scale over time. As it stands, it has a $30 million market cap and a lot of 10-15c warrants that all expire by mid-2019. Once there’s a financing plan in place for La Fortuna (and/or Santana) and the warrants are out of the way, I see higher prices in MAI’s future assuming that gold is at least moderately in the same price range as it is currently.
Cantex Mine Development (CD.V, last at $0.92)
Don’t let the name fool you, Cantex is a long way from developing a mine, but it does have something very intriguing in the Yukon. I’ve followed the name for years and 2018 was a big year for the company in that the first unweathered massive sulphide mineralization at the North Rackla property was intersected. The sulphide horizon had been traced in outcrop (i.e., at surface) for some 3 kilometres along strike, but prior drilling was only into shallow weathered rock where most of the metals had been leached out by groundwater over the millennia. The unweathered (“fresh rock”) drill results released in October showed a combined average grade of 20% lead-zinc and 107 g/t silver over an average composite width of about 9 metres. The most intriguing thing about these hits (other than the 3km of exposed strike length) is the fact that the geological setting and timing of the deposit’s formation is comparable to some of the most well-known lead-zinc-silver mines on the planet, including Broken Hill (the foundation for what would eventually become BHP) and the legendary Sullivan Mine in British Columbia. These are deposits that are known for their lateral continuity, owning largely to the geology and processes that led to their formation. Anyone can draw parallels with world-class mines in the early days, but Cantex plans to swing the truth stick (the drill) to the tune of an as-yet-to-be-raised $10 million this spring/summer drilling off 800 metres of strike at 50 metre centres with fans to depth at each drill pad. That is how you build tonnage. If results continue to show grades and (quite mineable) thicknesses like those already seen with limited structural complexity, Cantex could see much higher levels. The stock is incredibly illiquid, the float is very tight, and you can drive a bus through the bid-ask spread on any given day, but it’s certainly worth watching given the geological setting and early results. With three rollbacks under its belt (ranging from 10:1 to 15:1), it should be clear to anyone that junior mining exploration is not for the faint of heart. These things can and do go to zero. They can also generate enormous wealth. The summer program will be telling… if it’s as big as hoped, the hit rate could be quite high. If not, well, it had to be tested… the target is too big not to get a fair shake. 
Pan Orient Energy (POE.V, last at $1.46)
One word: Anggun. That’s the big well that will make POE either a massive win in 2019 or just a cheap oil stock with some cash in the bank. That multi-hundred-million-barrel target (Anggun-1X) was last guesstimated to spud between March 15 and May 15, 2019. At these levels, I like the risk reward, but won’t make it too big of a bet until results are known, because if Anggun-1X misses, short-term sentiment could outweigh the value backstop scenario that I’ve laid out before. I think my approach is to remain disciplined on price and position size while waiting for some kind of operational update once the well has finished drilling. But first things first, let’s see the well spud... 
Like I said, no lack of action in 2019… and this is only a partial list. If there’s one thing about the market, it’s that there’s always an opportunity somewhere, but there sure are a lot of places to look. Hopefully I'm sniffing up some of the right trees. 

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