Dirt-Cheap Junior Oils - New Oil Will Be Expensive And There Won't Be Enough Of It
Investors Digest (Canada), October 6
By Carlos Sagnay De La Bastida
Has it really taken this long for the market to realize that higher oil prices were inevitable and that they are here to stay? Fortunately, what appears to be the world's best-kept secret is now out of the bag, with the recent OPEC meetings focusing attention on the real world of oil, rather than on the sound-bites of media types and various alleged experts.
Eighteen months ago in this space, I berated a panel of "experts" featured in the Globe for advising investors to "get out of Canada," in the belief that "a severely depressed market in some sectors had served up a number of clear-cut bargains. Oil prices are at or near major lows and certain to recover as Asian recovery proceeds ... (and) ... particularly in the oil service sector, Canada is at the leading edge of technology."
It proved to be a good call, with the TSE O&G Producer's sub-index rising in the subsequent six months from under 3,400, for an 83 per cent gain before declining (for no good reason) to under 4,500 earlier this year.
In the process, the oil service stocks soared, with Precision Drilling ($15.80 at the time) rocketing to $57, Tesco, then $4.70, now trading over $17, and a subsequent favorite, Plains Energy, initially recommended at $4, recently taken over by PD at close to $20.
Back in November, we commented that "our continuing attraction to the oilpatch stems from our belief that oil prices will continue very firm in the $20- to $25-range for many months ahead, until moving higher as annual global depletion (now around 3.5 million bbls/d). combined with rising demand, inexorably reduces the global reserve life index."
Well, we took a lot of heat from some quarters at the time for being far too bullish, which we hope can excuse a little bragging now. The fact remains that we are at a major watershed in oil. There remains virtually no effective producibility in OPEC or elsewhere, and what can be brought on stream will be both expensive and less than needed to replace global depletion.
While the oils have led the parade since the first of the year, many of the junior producers continue to be dirt cheap by any standards.
One that we have been keen on for many months, Best Pacific (BPG-TSE, $0.95), has been particularly doggy since reaching a high of $1.30 in February.
Hedging program
Six-month results have been disappointing. in part because we misjudged the extent of the company s 'prudent' hedging program, and did not adequately allow for the loss of gas production as a result of the earlier sale of the mature Gadsby property.
Despite this, cash flow of $0.16 per share for the period was 77 per cent ahead of a year ago, while revenues rose 68 per cent to $9.3 million. For the full year, management's cash-flow estimate of $0.47 per share is still in view, although the slow first half, which saw wet weather delay second-quarter drilling, restricted production gains to 12 per cent.
Production in the period averaged 1,750 BOE/d. with expectation that new drilling will still result in the expected year-end exit rate of 2,400 BOE/d being realized.
While BPG is not as cheap as we had believed, based on current cash flow we expect this to be redressed as the year progresses. With prices of both crude and gas well ahead of even our optimistic estimates. and little change likely in 2001 (forget the street's $23/bbl expectations), cash flow of $0.80 per share is in view for next year.
With short-term disappointment fully factored into the current market equation, we believe BPG, selling at 1.3 times next year's cash flow in a market gradually understanding that higher oil prices are here to stay, is an outstanding bargain.
Another junior we commented on a year ago, Danoil Energy (DAN-TSE, $3.80, 800-541-7263. www.danoil.com), then $1.75, has exceeded expectations, with first-half cash flow of $12.1 million, up 165 per cent.
Following a share buy-back of three per cent, which reduced outstanding shares to 22.6 million, cash flow per share rose 170 per cent to equal $0.54 per share from $0.20 a year ago. Revenues more than doubled to $28.3 million.
Oil production rose 31 per cent in the period to average 3.023 bbls/d, while gas production rose six per cent to 12.9 mmcf/d. Drilling success was exceptional, with 15 wells drilled, resulting in only one dry hole.
Looking to the balance of the year. management has estimated production volumes of 4,780 BOE/d in the third quarter, increasing to 5.200 BOE/d in the fourth quarter. Cash flow is projected to increase to $1.30 per share for the year.
Turning to next year. cash flow is projected to increase to $1.43 per share, based on $25 WTI and gas at $4/mcf. We believe both these prices will prove conservative, and that with average exploration success, cash flow in 2001 could well exceed $1.70 per share.
With the market at last showing signs of understanding that higher oil prices are here to stay, a CF multiple of four times suggests a six-to 12-month target of $7, at which price DAN would still be cheap in a good oil market. As with BPG, a great place to switch some overvalued hi-techs, or some old dogs that, at best, continue to limp along. |
