What’s Up With Granite Oil

It doesn’t look good from a daily point of view.

GXO StockCharts.com October 7

Source: StockCharts.com

And the weeklies aren’t looking good either.

GXO StockCharts.com October 7

Source: StockCharts.com

So what’s up? Well, we are back to the lower for longer rhetoric.

And if oil prices are lower for longer, then Granite Oil’s whole business model is in big trouble. Especially if we look at current and past guidance from management.

GXO September Presentation October 7

Source: September corporate presentation

GXO August Presentation October 7

Source: August corporate presentation

GXO May Presentation October 7

Source: May corporate presentation

What can we see:

  • We know management is planning for lower for longer;
  • $55 WTI is expected until 2021 compared to 2018 before;
  • Capital expenditures are lower, and therefore production growth is almost nonexistent;
  • And… The juicy dividend is maintained nonetheless.

This is the reason the market is reacting: Management is definitively holding the dividend steady. This is big trouble for Granite Oil’s business model, should oil prices hold $50 in the long-term.

GXO Free Cash Flow Projections October 9

Source: Corporate presentations and my own work.

As we can see in the graph, free cash flow is negative years out using $50 WTI. Debt will increase, and there won’t be any cash to make up for it.

Not to mention bullish assumptions, including a tight WTI/WCS differential and an advantageous foreign exchange rate.

In all, Granite Oil will need higher oil prices for the stock to be worth something. $50 WTI isn’t enough, and it’s the price the market expects in the medium to long-term.

Disclosure: I am long GXO.

If You Give A Driller A Dollar…

I don’t mean to offend any Texans in the room, but if you ever met anybody from Texas, those guys know how to gamble, and if you let them stick a hole in the ground with your money, they’re going to do it.

Stanley Druckenmiller, January 18, 2015

Special thanks to Greenlight Capital for this presentation.

The mother-fracker can drill holes.

PXD StockCharts.com August 7

Source: StockCharts.com

And the father-fracker can drill holes.

EOG StockCharts.com August 7

Source: StockCharts.com

Is the shale bubble about to burst?

Not for republication on Seeking Alpha.

Peyto Exploration: Far-Fetched Explanations

Looking at Peyto, for instance, it was suggested that because our capital expenditures in 2017, plus our dividend, exceed our projected funds from operations, that this was, or is, a bad thing. That type of thinking struck me as illogical (much the same way that half-cycle economics do) and not because leveraged returns can be very powerful but more because if you carry that thinking through the logical conclusion, I don’t think that’s actually where investors want to end up.

Darren Gee, CEO of Peyto Exploration, June 2017 President’s Monthly Report

As you can see, for Peyto’s (PEY) CEO, the high dividend doesn’t matter. There are two points of interest presented in June’s Report:

Firstly, capital investments are ultimately funded from cash flows […]

Darren Gee, CEO of Peyto Exploration, June 2017 President’s Monthly Report

In other words, if you borrow money, overspend your cash flow, and pay the bank the next year, your capital expenditures are funded from cash flow. But it’s not what’s happening at Peyto’s, because debt isn’t repaid.

[…] and secondly, that material profits are generated.

Darren Gee, CEO of Peyto Exploration, June 2017 President’s Monthly Report

However, if generating material profits isn’t possible, and you can’t have high earnings, you need to make your stock trade on the basis of cash flow instead.

When E&P companies are fully taxable they generally don’t trade on before tax cash flow multiples, they trade on after tax earnings multiples. But if you don’t generate very much in the way of earnings, as illustrated in the example above, you won’t be trading on much. So like I said, I don’t think this is where investors actually want to end up. I suspect they would much rather companies continue to trade on before tax cash flow multiples, which requires tax shelter or pools that can only be generated from capital expenditures well in excess of cash flow. Thus the flaw in the concept of free cash flow only.

Darren Gee, CEO of Peyto Exploration, June 2017 President’s Monthly Report

Lastly, the CEO lists a couple more reasons in July. Those aren’t more convincing.

Perhaps one of the single greatest reasons we pay a dividend is out of respect for the rightful owner of the money. As a management team, we invest our shareholder’s capital. True, the vast majority of the Peyto team are also shareholders, but it doesn’t change the fact that this is not Peyto’s money – it’s your money.

Darren Gee, CEO of Peyto Exploration, July 2017 President’s Monthly Report

A steady dividend or distribution also broadened our investor base, as those investors that required a dividend could now invest in Peyto. The broader the investor base, the more liquidity we provide for all shareholders. A variable or sporadic dividend doesn’t accomplish this.

Darren Gee, CEO of Peyto Exploration, July 2017 President’s Monthly Report

A steady dividend or distribution also broadened our investor base, as those investors that required a dividend could now invest in Peyto. The broader the investor base, the more liquidity we provide for all shareholders. A variable or sporadic dividend doesn’t accomplish this.

Darren Gee, CEO of Peyto Exploration, July 2017 President’s Monthly Report

Not for republication on Seeking Alpha.

Point Loma Resources: Insider Ownership

Here are the current holders of Point Loma Resources (PLX).

IndividualRoleCommentsShares
Evenergy Company Ltd.InvestorJianjun Cui, Director of Dayou Energy Ltd., the parent company of Evenergy Company Ltd., is on the Board of Directors8,375,000
Terry MeekDirector, CEO1,922,691
Doug DafoeDirectorCEO of Ember Resources Inc.115,690
Steve DabnerDirector, ChairmanVP Exploration of Madalena Energy Inc.60,000
Jay ReidDirector0
Donald BrownDirector1,171,244
Kevin BakerDirectorDirector at Calfrac Well Services Ltd.6,052,011
Al KroontjeInvestorOwner of Kasten Resources Inc.4,410,291
Richard YurkoInvestor3,981,535

Source: Corporate presentations and my own work.

Insiders own 22% of outstanding shares.

Disclosure: I am long PLX. Not for republication on Seeking Alpha.

Portfolio Update: A Quickie

I bought shares of Cara Operations. I felt like C$23 per share (C$23.37 per share, to be exact) is very opportunistic given current and projected earnings.

CARA StockCharts.com May 30

Source: StockCharts.com

I also added shares of Junex, as you know.

Disclosure: I am long CARA, JNX. Not for republication on Seeking Alpha.