I raised cash after selling part of my Amaya position (I bought back some, as I said on StockTwits). To let you know: I already spent that cash on Gear Energy last week. My quick calculations were right: Gear Energy is cheap.
I will be looking for a solid balance sheet just in case the rout in oil prices continues. As you know, I already own MEG Energy, a leveraged E&P company. One is enough.
I made a basic stock screening of Canadian oil E&P companies (75% or more liquids production) with low debt (total debt on equity needs to be under 30%).
Unleveraged Oil E&P - TSX Screening
|TSX Tickers||Net debt (C$M)||EV (C$M)||FFO (C$M)||Net debt/FFO||EV/FFO|
Source: Corporate Presentations, Cadotte Capital Partners
I already own Raging River Exploration. I will include the company in today’s comparison nonetheless. I have been handsomely rewarded by holding on Raging River Exploration, let’s try and repeat that.
As you know, I need an unlevered company. Gear Energy is an unlevered company in disguise for three major reasons:
First, 38% of Gear Energy’s debt is convertible to equity. The extra dilution from these convertible debentures is included in the EV/CF ratio.
Second, Gear Energy’s cost profile will improve. Indeed, the company purchased Striker Energy, a light oil producer in Western Alberta. This will increase corporate netbacks by over 25%.
Finally, Gear Energy plans to increase production by 10% next year while holding debt steady.
The additional cash flow and decreasing leverage warrant a higher EV/CF ratio. Furthermore, Gear Energy’s transformation is complete after multiple dilutive equity placements.
The company took care of its balance sheet and bought a light oil producer to diversify its production away from heavy oil. It also has an incredible board member in Neil Roszell (CEO of Raging River Exploration), which I know well.
I will update the table above with estimated numbers for next year. I believe the picture will be even clearer.
In conclusion: I’ll buy the dips.
Disclosure: I am long GXE. Not for republication on Seeking Alpha.