Portfolio Update: MEG Energy And It’s New CEO

I am simply astonished by the choice of the Board of Directors of MEG Energy.

Derek Evans served as CEO of Pengrowth Energy from May 2009 until March 2018.

I extracted a weekly view of the stock price of Pengrowth from the time he became CEO of the company.


Source: TMX Money

Shareholders never recovered.

MEG is still touting the prowess of Evans to streamline Pengrowth…

During his tenure, Mr. Evans streamlined the Company’s asset base from 35 properties to two growth assets, with over $9 billion of development opportunities.

MEG Energy Press Release, August 8, 2018

Evans did streamline the company. Although he streamlined Pengrowth from the many properties he himself acquired with debt.

To me this choice doesn’t make any sense at all. The market is also in disbelief as the stock fell 8% today.

The company has a great asset and egress out of Western Canada. It only needs a good leader shareholders can trust. It’s not the case currently. Really it’s more of the same.

I sold half of my position in MEG and I bought back Gear Energy. I am not cashing out my entire position only because I want to know what Highfields Capital Management will do. Highfields asked the Alberta Securities Commission permission to contact MEG shareholders directly.

The Filer wishes to communicate with the holders of Shares (the Shareholders) in advance of the Meeting to solicit such Shareholders’ proxies in respect of the business to be transacted at the Meeting. The Filer may wish to conduct the solicitations by public broadcast, speech or publication (the Public Solicitation) without sending a dissident’s proxy circular to each of the Shareholders.

Alberta Securities Commission Press Release, August 8, 2018

Highfields previously had a board seat. Daniel Farb resigned on July 24.

Disclosure: I am long MEG, GXE. Not for republication on Seeking Alpha.

Portfolio Update: Selling Gear Energy, Buying Peyto Exploration

I realized two new transactions in my portfolio today. It has been a long time since I traded.

I took profits by selling my position in Gear Energy. The stock currently looks weak in the short term.

GXE StockCharts.com July 26

Source: StockCharts.com

The WTI/WCS differential has been collapsing for the last couple of days… Yet again. This explains most of the weakness seen in Canadian energy stocks. I will nonetheless buy Gear again soon.

I bought a small position in Peyto and kept the rest of the proceeds in cash.

PEY StockCharts.com July 26

Source: StockCharts.com

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

Gear Energy, Raging River Exploration: Exchange With A Fund Manager

The following is a conversation between a fund manager and me regarding Gear Energy and Raging River Exploration. This fund manager wishes understandably to remain anonymous.

Both of us make interesting points on recent developments regarding Gear and Raging River. Here is the conversation.

Fund Manager: I was reading your recent Raging River article and I noticed you mentioned Gear was selling their Duvernay land position. I own a bunch of Gear and talk to Ingram every couple months and I didn’t even know they had any Duvernay!

I have a few questions for you about it. Why do you think they’d sell it instead of hold it or drill it? And how do you come to your estimate of C$15M to C$20M of value for it?

I’m kicking myself for not knowing about this and grateful for you uncovering it and writing about it.

I’m thinking about Raging River, but I haven’t even finished your article yet, so I’ll hold off asking about your take on it. I know a bunch of their competitors thought the stock was overvalued considering the high base decline rate.

Cadotte Capital Partners: I didn’t know either… Not until I searched for Gear and Duvernay.

I figured with under 7,000 acres you don’t really have the scale to develop a meaningful new growth play. Gear can already drill for light oil in Central Alberta. In all, better to sell it, especially with big operators near the acreage (Raging River and Vesta). Both could be very interested to add to their land position.

I obtained a total value of C$14M using a valuation of C$2,000 per acre. This number could be way too bullish in retrospect… Raging River values its Duvernay position at C$400 per acre. The bidding deadline is tomorrow. We’ll see soon enough.

FM: Well, 7,000 net acres could be a huge number of locations, and it looks like Gear is in or near one of the cores of the play. Vesta is ramping up drilling big time and Raging River is just to the north and the combined company will likely drill more up there too. I get why Gear would sell it, but if it were me I’d hold it or maybe even drill one well and see what I have.

I don’t think you’re off in terms of what they should be able to get for it. I should probably be bidding on it, below C$10M, unless there’s near term lease expiries or something, I’d buy it! And I’m a little worried because the obvious bidders, besides Vesta, are Raging River and Crescent Point Energy. Raging River is otherwise occupied, and Crescent Point just got new management and the executive who was responsible for the East Duvernay play left.

Also, I noticed in some of your articles you’re referencing the Montney offer as a dollar per acre comparison metric. I think liquids rich Montney is apples and oranges with Duvernay. Not guiding higher or lower on either of those, other than my thoughts on adjacent-to-core East Duvernay land value above. There are also specifics of land positions that can dramatically alter their dollar per acre value metrics.

The Raging River and Baytex Energy merger is thought provoking. I’m tempted to start buying Raging River given the large drop in share price and the arbitrage with Baytex. But… Raging River wasn’t cheap: Valued at about 4X PDP, high decline rate, rapidly burning through inventory, waterflood apparently isn’t working because the decline rate doesn’t seem to be falling, and finally the fact that its doing this deal means that this was the best deal they could find, which is troubling. It could probably mean their East Duvernay play isn’t working how they hoped. I guess the question is how much does the share price needs to fall for a higher bidder to come along or for the combined company to be cheap enough to offer enough upside to buy.

CCP: Yeah, drilling one well… Gear might as well concentrate on its own assets. As I say: Go big or go home. And those wells aren’t cheap either…

Gear is tiny compared to its neighbors. Could be one of the reasons Neil Roszell wanted to get bigger: He knew he would need to have size to develop Raging River’s massive acreage.

The high decline rate, the high valuation of flowing barrels: I see a lot of people claiming Raging River wasn’t trading cheaply. I disagree. The consensus EPS is C$0.62 in 2018 and C$0.76 per share in 2019. Of course I don’t have access to the models of the analysts so these numbers are to be taken with a grain of salt. But at first sight it seems like Raging River is trading at under 10X earnings.

And free cash flow was just around the corner. Higher oil prices will increase free cash flow exponentially. Yes, the decline rate is high. But I believe it all depends on earnings. If a high decline rate is met with low drilling costs, or higher oil recovery, or anything that increases earnings, then in the end, even though the oil flowing out is depleting quickly, you’ll still be making money. My thoughts anyway.

As for the waterflood, I can’t find anything mentioning the results aren’t encouraging. All the latest presentations (January, February and March 2018) pointed to a possible recovery factor of 25%. The recovery factor I usually see for waterflood is 20%.

It’s troubling Raging River couldn’t find a better alternative… Clearly I overestimated the sentiment in the Canadian oil patch. It isn’t bullish for Granite Oil, another small company I own. It also started a “review of strategic alternatives”.

I slowly bought some more shares of Raging River. I was barely in the red. Turns out my entry point wasn’t so bad after all.

The low end of my price range was C$7.25 per share: Upside is about 20% upside from current levels.

Probably the only good news in the short term is that Neil Roszell will become Chairman of the new company. Hope he really takes a very active role and improve governance. No need to tell you Baytex could use a little bit of that…

FM: Interesting. Thanks for sharing your thoughts.

CCM: Sure thing!

Disclosure: I am long GXE, RRX. Not for republication on Seeking Alpha.

Raging River: Endure The Pain

  • Raging River agreed to merge with Baytex for a small premium. After today’s selloff, the market is saying both are better at it alone.
  • Raging River is worth somewhere between C$7.25 and C$10.00 per share.
  • Baytex was trading at C$5.10 last Friday, which would value Raging River at C$6.94 per share, which is in the low end of the price range above.
  • Investing in Raging River is now like investing in Baytex: It’s a leveraged play to future oil prices.

Click here to read the entire article on Seeking Alpha.

Point Loma Resources: The Duvernay Pop

This was a well deserved stock surge today.


Source: TMX Money

We already know what happened:

But still, there is some value in the company. Indeed, Point Loma owns a substantial number of prospective Duvernay oil sections.

Cadotte Capital Partners, May 27, 2018

There is definitely value hidden in those sections.

Time for the market to realize Gear Energy also has Duvernay lands for sale.

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

Gear Energy: More On The Duvernay Sale

We have more information on the sale of the Duvernay land held by Gear. Final bids are to be submitted on or before June 21, 2018.

GXE Sayer Energy Advisors June 2018

Daily Oil Bulletin, May 24, 2018

Duvernay rights amount to 6,640 contiguous acres, situated in the oil window, and really close to land owned by both Vesta Energy and Raging River Exploration.

RRX Duvernay Land

Source: Raging River Exploration, March 2018 Corporate Presentation

The potential location of the lands of Gear are highlighted in the red circle above.

Those have the potential to be very valuable, especially for players like Vesta and Raging River. Both are already well-established in the play.

Those Duvernay rights are worth C$13M to C$20M at current market value.

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

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.