Point Loma Resources: The Duvernay Oil Play

The story of Point Loma has been very much different than what I was thinking. Meaning: The stock has been a big disappointment.

PLX StockCharts.com May 27

Source: StockCharts.com

But still, there is some value in the company. Indeed, Point Loma owns a substantial number of prospective Duvernay oil sections. Let’s value this land using the recent hostile takeover announcement of Iron Bridge Resources by Velvet Energy.

The Offer values Iron Bridge at an enterprise value of approximately $120 million, which implies a multiple of 12.2x Iron Bridge’s 2018 consensus EBITDA.

Velvet Energy Press Release, May 22, 2018

The real prize for Velvet is the 49,600 net acres of Duvernay land Iron Bridge owns. In other words, Velvet is paying C$2,400 per acres for a total price of C$120M. Point Loma owns 13,600 net acres. Using the same valuation, Point Loma is worth C$0.60 per share.

However, there is some negatives that could impact the value of Point Loma’s land: The land isn’t contiguous, and its potential is yet to be confirmed. But, the price paid by Velvet is somewhat lower than previous transactions of around C$3,000 per acres, and the Duvernay oil play is really hot. Actually, Gear Energy just hired bankers to sell its prospective oil rights.

As such, we can say there is value buried inside the company. I would still be careful with Point Loma (I wasn’t, unfortunately). The company has negative netbacks: It’s burning money to keep producing its natural gas.

The turn of the tide would be positive cash flow from operations. Given the current challenging natural gas environment in Western Canada, it can’t happen unless the company gets liquids off the ground.

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