Value Investing Muddy Waters’ Carson Block targets Manulife Financial due to their ongoing litigation |
- Muddy Waters’ Carson Block targets Manulife Financial due to their ongoing litigation
- Bob Iger’s Bets Are Paying Off Big Time for Disney
- Journey Energy (TSE:JOY)
| Muddy Waters’ Carson Block targets Manulife Financial due to their ongoing litigation Posted: 06 Oct 2018 10:56 PM PDT |
| Bob Iger’s Bets Are Paying Off Big Time for Disney Posted: 06 Oct 2018 04:47 AM PDT |
| Posted: 06 Oct 2018 07:41 AM PDT Hi there, was just hoping for some feedback on my report on Journey Energy Inc. (TSE: JOY) It appears to be a "net/net" with an upcoming catalyst, but perhaps I'm missing something. Thank you! TB Journey Energy (TSE: JOY) September 28, 2018 Journey Energy (TSE: JOY) is a Canadian junior oil and gas producer that provides a wide margin of safety (i.e. paying 50 cents for a dollar) between its current share price and its intrinsic or, net asset value per share. This disconnect is due to the 2014 oil price collapse and continued disinterest by investors in the Canadian energy sector. The expiration of Journey's 2018 hedging program will nearly double cash flow, and likely provide a catalyst for an upward valuation in its share price to reflect this underlying value. In addition, Journey's land holdings (~150,000 hectares) are located in central Alberta are producing ~10,000 bbls (49% liquids) per day (~16% decline), and contain ownership rights in the prospective Duvernay formation adding a speculative possibility for further increase in share value. Net Asset Value and Catalyst Journey IPO'd in June of 2014, trading at ~$12 per share. Since that time, the share price has steadily decreased to a low of ~$1 (December of 2015) as oil prices collapsed in late 2014. In 2016, Journey was forced to cancel its dividend program in order to protect its balance sheet further disappointing investors. In the last two years, the company has survived the Canadian oil and gas downturn and has managed to avoid bankruptcy. However, the stock price has not recovered and at the time of writing, is currently trading around $2.00 per share. This has created an opportunity to invest in a company that is being ignored by the market and is trading at a discount to net asset value. Proven Developed Producing (PDP) Reserves are the closest thing an oil company has to tangible 'inventory' and contain a 90% chance of recovery. PDP reserves are outlined by producing wells and are the most accurate measurement of an oil company's 'inventory'. Subtracting company debt from this PDP value gives a close approximation of net asset value (assets - liabilities). While other factors can be added into calculating the net asset value per share such as land, and more speculative reserve estimates, PDP (less debt) offers the most reliable measurement of what value or 'price' one should receive for selling the business today. The market Is currently discounting Journey when compared to its industry peers (see corporate slide below) on this PDP or net asset value per share basis. With oil prices stabilizing (and perhaps rising further), it is only a matter of time before the current gap between net asset value per share (~$3.40) and the market price (~$2.00) per share starts to narrow. This is especially true as Journey's 2018 hedging program is set to expire. (SLIDE 19) https://www.journeyenergy.ca/wp-content/uploads/FINAL-Corporate-Presentation-Sep-2018.pdf The expiration of the hedging plan will nearly double current cash flow from ~$27 (MM) to $44 MM (see slide below) and with ~38.5 MM shares outstanding, will take cash flow per share from ~$0.70 to ~$1.13. The end result will be a catalyst for an upwards valuation in the market. The previous hedging program was set in place to protect Journey during a period of lower oil prices ($30-50 per barrel), but is no longer needed as reflected in the 2019 hedging program. 2019's program has ~80% of its oil production hedged at $70-80 barrel CDN. (SLIDE 14) https://www.journeyenergy.ca/wp-content/uploads/FINAL-Corporate-Presentation-Sep-2018.pdf While Journey carries a significant amount of debt (~$120MM), a majority of its equity base is institutionally owned. AIMCO for example, owns 17% of Journey's outstanding shares. As long as the company is able to maintain current debt levels (which should be attainable given improving oil prices), Journey's real value lies not so much in the company's future (albeit speculative) plans and expectations, but more simply as a "mark to market" valuation of its shares. With expiring hedges nearly doubling cash flow, and a discounted share price (compared to market peers), investors are presented with a margin of safety allowing for a capital gain of roughly 40-50% to reflect net asset value per share. Journey is led by Alex Verge (former CEO of NuVista) who was brought in by a pension fund and is supported by an experienced management team in engineering and geology. But again, the risk-adjusted opportunity to investors exists not so much in optimistic plans for the company, but rather in a rational market correction of its current share price. Furthermore, Journey bought back approximately 20% of its stock this year with Mr. Verge and other executives participating. All told, Journey has inside ownership of ~15%. This gives investors even more assurance as to management's confidence in the company's long-term prospects. Duvernay Along with undervalued PDP reserves and increased cash flow, Journey sits on a quality Duvernay land position. While not all Duvernay acreage is created equal, and means close to nothing until drilled/proved, there are some large names in the area (Baytex Energy, Crescent Point) that have been buying acreage up at fairly sizeable rates ($400-$1000 hectare). (SLIDE 5) https://www.journeyenergy.ca/wp-content/uploads/FINAL-Corporate-Presentation-Sep-2018.pdf The company also recently entered into a Joint Venture deal with Pat Carlson (former CEO & Founder of Seven Generations Energy) to explore and develop these Duvernay lands. This arrangement should help Journey understand what possibilities exist in the area and potentially increase the value of its land holdings. If the Duvernay hype does turn out to be profitable, Journey may turn out to be a sensible acquisition candidate for larger companies in the area such as Baytex or Crescent Point. This is very speculative, but at the very least could add a cherry to the cake in the form of increased oil production. Summary Duvernay land holdings aside, the main argument for Journey is that an out of favor Canadian energy market is currently undervaluing the company on a net asset value per share basis compared to its peers. An upwards evaluation should be aided by a near doubling of cash flow in 2019 as its current hedging program expires at the end of 2018. This undervalued position presents a significant margin of safety without consideration for future plans of the company. Margin of Safety (50 cents on the dollar) Market Value: ~$85-90MM Enterprise Value: ~$200MM PDP 10 Reserve Value: $251 MM Debt: ~$120MM Current share price: ~$2.30 Net Asset Value = PDP 10 Reserve Value – Debt= $251 MM - $120 MM= $131 MM Net Asset Value: ~$130MM / ~38.5MM(shares outstanding) NAV Per Share (Target Price) = ~$3.40 which at minimum, provides ~40-50% return to investors 2) Catalyst Higher oil prices combined with an old hedging program set to expire at the end of 2018 which will almost double cash flow. This combined with a market realization that the PDP reserve value and net asset value are below market value (on a per share basis). 3) Duvernay Land Holding Entered into large JV with Pat Carlson for its Duvernay rights which doesn't mean much at this point but could provide value in future in the form of proprietary drilling information, increased oil production, or the chance being acquired by a larger company. [link] [comments]  |
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