Value investors should be jumping all over this if they have a little patience. The equity is probably worth $1.3 billion, but is only currently valued by the market at $430 million. The whole co. is probably worth at least $2.5 billion. I get this number by discounting the $300 million annual cash flow back to the present value at a 10% discount rate over 20 years (co. has 20 years worth of proved reserves) which equals a PV of $2.7B. Alternatively, just look at the PV-10 value of current proved reserves which is $2.4B. And this assigns no value to the unproved reserves. If you then subtract the LT debt of $1.2B, it leaves an equity value of $1.3B or about $30 per share. Now, this valuation sort of assumes that oil and gas prices hold fairly steady in the future.
Long-term debt is twice annual revenue. The highest debt to revenue ratio in the entire exploration industry. Also, their cash balance was virtually zero at the end of the 3rd quarter. Where are they going to get the capital to continue drilling? Their cash flow from operations is something like $85M a quarter, not a whole lot of money for drilling new wells. I doubt the creditors are going to lend them anymore money. They are tying to sell some of their LA property, but there is no guarantee that they will find any takers at a decent price. So what is left to do, sell more stock and dilute shareholders interests? This what I think the shorts see. I am actually long the stock, but just trying to get into the head of the shorts. If the next earnings release beats estimates and they announce a buyer for the LA property then I think the price will jump. If earnings miss and there is no deal for the LA property, then it is probably going back to $10.50. The risk/reward would seem to favor the longs, however, given that the stock is quite cheap, even with the debt.
Good post. You obviously know a lot of detail about this company. I recently bought in due to the price spike and volume. Strictly technical reasons. But I did get the sense that introducing new products is the key for this firm. Hope they are up to the challenge. All investments at this low price are a bit of a gamble.
Yea, I would have liked to bought today at the lower prices, but I spent my money buying yesterday. I am not a hedge fund that has an endless amount of capital to just buy whenever there is an irrational price move. Who could have predicted today's sell-off after yesterday's positive move?
In the 3rd quarter, revenue for the Central LA/E. TX area was $15.4M. If they have increased daily production to 4.0 MBOE/day we are talking about $75-80 M annual revenue. Even if they sold it all, I don't see how they get $500 M for it. Even 4x revenue is only $300 M. Of course, a lot will depend on the reserves as well, but I don't think that this area is considered prime property.