Mike / Northstar Energy
The most recent activity type report I have is three weeks old and capsule comment amounts to test results from Blairmore and the new Racehorse Creek wells are expected soon. If recent trading patterns are related to current operational activities, I imagine it can be related to these three wells in the Alberta southern foothills area. The area has been described as an high impact area for the company.
Mike, Northstar is one of those companies I don't talk about too much, but do attempt to stay on top of their progress. When I first got into the Canadian oil's, this was the "Berkley Petroleum" of its time. I've watched them drift awhile since that time, waiting for that telltale sign that the company has refocused and are showing signs that real growth is once again imminent.
When I saw the huge debt they took on for the Morrison deal, I voiced an opinion at the time that investment in the company should be considered a high risk situation. The market reacted much in the same manner, for shares did sweep downward pretty quickly. 1997 results actually reflected the company taking a step backwards when you factor in the Morrison acquisition. This has held shares of the company at current low levels.
However, recent events have stimulated my interest in the company once again. The company is currently a 50/50 producer of oil and gas. The ratio will change in the immediate future. They plan to dispose of non-core assets with emphasis on oil properties. The company has also made it known they want to sell mature oil properties. I view this in a very positive manner.
To begin, the debt to cash flow multiple of 2.6X will be reduced. That's excellent. I anticipate most of the capital gained from property dispositions will be applied against debt. I say this because the company plans to work within their cash flow for 1998. Their expenditure program will amount to roughly $215 million. To further expand upon their debt multiple, I would estimate the increasing cash flow over the course of 1998 would automatically reduce the multiple to 2.0X. Applying proceeds from property dispositions will take that figure lower. If they realize this factor, the company will be on firm financial footing.
Next, the reserve picture is expected to change to a favorable position. Focus is on the life of reserves. They will eliminate the short term life reserve of their oil properties. That's also excellent. One factor to also keep in mind is that anticipated new longer term gas reserves will more than offset the oil property dispositions. That factor also applies to production. I still expect production to grow by 10% minimum in comparison to 1997. If the company pulls this off, the future lying beyond this year is fantastic.
Which brings me to the subject of property holdings. They have the quality and quantity of acres to serve them well over the next few years. In addition - and a big plus, is the joint venture agreement they reached with Amoco Canada Petroleum. This involves access to another 600,000 acres of undeveloped acreage in Northeastern British Columbia. I absolutely love the natural gas potential of this high impact area.
Fifty percent of their planned expenditures for this year is to be spent this quarter - which is drawing to an end. So, what they have done this quarter will give one an idea how the company is to proceed in realizing their operating and financial goals for 1998. That's the clinching telltale sign. All steps taken in their planning to put the company in a position to realize strong growth have been taken. Now it's time to allow for the drillbit to do the talking. I like the company's prospects of succeeding.
Mike, I suspect this is the major contributing factor for recent trading patterns. The big boys are betting the same on their prospects of success also. They are staying close to current drilling activity and they are buyers. A good sign. They also probably see downside risk at a minimum. Net asset value is pegged at around $11.40. Shares are selling at a good discount to net asset value. In addition, shares are selling at less than 4X my 1998 cash flow estimate.
To conclude, I would be a buyer in shares of Northstar. But, I wouldn't dive headfirst into the stock. I would accumilate shares (cost averaging) over the coming months. Perhaps I would buy more than the average amount of shares if the company has a gangbuster 1st quarter report in relation to drilling.
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