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Oneida Financial – Local MHC Continues to Make Good

I got introduced to the idea of buying regional banks stocks about 6 months ago.  Two separate catalysts piqued my interest in the idea:

  1. Last summer I read the David Einhorn book, “You Can Fool Some of the People All of the Time”.  In that book, which is about a fraudulent business development company called Allied Capital, Einhorn spends a chapter outlining his investment philosophies.  One of the ideas he puts forth is investing in mutual holding companies.   Seth Klaman has been another proponent of investing in MHC’s.
  2. Tim Melvin’s trade of the decade.  Melvin, a fairly well known value investor, believes that the small regional bank stocks have been beaten up well beyond what is justified and that their recovery represents the trade of the decade.

After spending a few months getting to understand the banking industry, and scouring the net for cheap MHC’s trading below or at book value, I stuck money into a couple of them, with one of those being Oneida Financial.  Now, in the 5 or so months that I’ve owned it the stock has done absolutely nothing.  You might want to take that as neither a good or bad thing in this market.  Oneida has bounced back and forth between 8.40 and $8.80, but does not seem in any hurry to break out in either direction.

I have already written an extensive write-up on Oneida’s regional banking business and why I picked Oneida as one way to play this trade of the decade.  I’m not going to go further into the details of my reasons here.  I’m just going to focus on their second quarter results.

Another strong quarter for earnings.  Oneida earned 24 cents for the quarter.  Stripping out loan loss provisions they earned 25 cents.  Over the past 4 quarters their earnings have been 84 cents basic and 91 cents after stripping out loan losses.  Below is a chart of their earnings over the last 5 years.  There has been a steady upward march over the past two years.

I bought Oneida in part because I thought they were cheap based on earnings power.  They should easily be able to earn a $1 next year, meaning they are trading at less than 9x earnings on a forward basis.  What I have been waiting for is for Oneida to begin to grow their loan book again.  Its been shrinking (albeit at a small rate) since the 2008 debacle.  This looks like it might be starting to change.

Oneida’s loan growth is a bit tricky because they sell of much of the fixed rate loans they generate.  So to get a true picture of their loan generation, you have to add back the fixed rate loans that are being sold off.  Below is a chart of loan growth at Oneida showing both growth before and after accounting for the fixed rate loans sold.  Up until this last quarter loan growth has been negative since Q2 2009.  That changed this quarter with the uptick.

Deposit growth declined somewhat in Q2 from the last few quarters.  Nothing to worry about yet though.


The company continues to sell below book value and tangible book value.  More importantly, book value continues to grow at a smart pace.

Coastal Energy Results are Worth Buying More on

The results from Coastal Energy last night are incredibly good.  I have bought more of the stock this morning.

At Bua Ban the company announced that two wells, the B-06 and B-08, tested at 2,000bbl/d each.  The company has, thus far, drilled 7 wells into the Miocene structure at Bua Ban North B.  The company had estimated before these tests that they had found about 50MMbbls at Bua Ban North.  With these results blowing away expectations, you have to wonder how much more is there.  Keep in mind that Coastal’s year end 2010 reserves were 27MMbbls of oil.  So they have basically tripled their reserves with the discoveries thus far at Bua Ban North B.

Below is a map of Bua Ban.

Now these estimates of recoverable reserves at Bua Ban North B, which are impressive in themselves, are before we even touch on the Bua Ban North A discovery, of which Coastal has already attributed about 10MMbbls of recoverable reserves. And the real big prize is if it turns out that Bua Ban North A and B are one in the same.  If the two reservoirs are really one big reservoir, the reserves could double or more.

The new discovery at Songhkla was also a positive, though maybe not as big of a one.

The Songkhla H-01 well was drilled to a total depth of 9,256 feet TVD and encountered 32 feet of net pay with 20 percent porosity in the Oligocene interval. A drill stem test was performed and the well produced 1,000 bopd with minimal initial pressure drawdown of the reservoir. The crude has an API gravity of 29 degrees. The H-01 well has the potential to produce in excess of 3,000 bopd using an electric submersible pump (“ESP”). The Company has spudded an appraisal well to delineate the reservoir.

Its too early to know how big this reservoir is, but Coastal was attributing an unrisked OOIP of 6.7MMbbls for the Oligocene.  It doesn’t appear that the Oligocene was the primary target, and so the release of the H-01 results could be taken somewhat negatively  as there was no mention of the higher Miocene interval where Coastal had a much higher potential OOIP.

This morning Canaccord raised their target on Coastal to $14.75.  This is based on a NAV of $14.75.  First Energy already had a target of $18.75

I bought some more Coastal this morning at $10.  Its tough to buy anything with this silly debt ceiling issue overhanging everything.  But these results, in my opinion, are too good to pass up.

The Good, the Great and the Ugly – Start with the Ugly and OceanaGold

Lots of news and lots of portfolio changes so far this week.  When earnings season come I’m generally adding and removing positions on the fly depending on whether the results are meeting my expectations.  Add to that the debt ceiling issues and the need to hold more cash than usual with that uncertainty, and you end up with a lot of changes.  I want to talk about 4 items in the next few posts.

  1. The Good – Oneida Financial released solid results yesterday and Lydian International released a solid economics study
  2. The Great – Coastal Energy announced some extremely good results
  3. The Ugly – OceanaGold…

I’m going to start by talking about OceanaGold in this post.

What can you say other than what a terrible update!  Lower production and much higher costs (61,335 ounces of gold at cash operating costs of $921 per ounce) than anyone would have expected.  The chart below looks frighteningly like a hockey stick (we don’t know costs per tonne for the quarter yet).  You can’t even blame the cost increase on the New Zealand dollar.  Costs are spiking regardless of currency.

Investing in gold companies right now is turning out to be difficult.  More difficult then is worth while.  The market is not giving the companies any respect for the current price of gold, and the companies are almost all disappointing.

I sold out of OceanaGold this morning in the first six minutes after the market opened. When a company announces an obviously bad result, and you are fairly small fish as I am, you have to take advantage of the situation by selling BEFORE the market figures out what the new fair value is.  In the case of OceanaGold, I sold at $2.58, which was a lot less than I would have gotten yesterday, but a lot more than I would have gotten a couple hours later.  As you can see below, it took a couple tries before I finally got someone to buy my shares.  Unfortunately if I wouln’t have put in such a high bid at the open I might have been able to get out in the 2.60′s.  Oh well.

I’ll take another look at OceanaGold some day, but right now I have been disappointed a couple times in the stock, so I’m walking away for a while.

Oritani Financial Posts a Solid Quarter

Three banks I follow, Oritani Financial, Oneida Financial and Eagle Bancorp or Montana reported earnings in the last couple days.  I want to look at each, and I will start here with Oritani.

I don’t own Oritani but it is a reasonably priced and well run regional that I follow closely.  Their CEO, Kevin Lynch, has an extremely low tolerance for non-performing loans, which is why non-performing assets are down to 0.50%.

With earnings of 0.52/share the bank is trading at  26x earnings, which isn’t particularly cheap on that metric.

Book value of the stock is $11.45, meaning the bank is trading at 1.13x book.  But not reflected in book is around $50M, or $1/share, in REO (real estate owned).  Now this isn’t foreclosed real estate owned, but instead its JV real estate that the company bought in the past for the purposes of capital appreciation.

The company is showing extremely strong loan and deposit growth.  The loan growth is particularly impressive because so few companies are growing their loan book right now.

Oritani pays a 3% dividend.
The company last presented at the Stifel Nicolaus conference late last year.  Its worth listening to.

Week 3 Portfolio Update

Portfolio is up a little over 7% since its inception 3 weeks ago.  My cash position is a bit lower than I would like it.  That is something I will look at rectifying in the upcoming couple of days.  I added a couple of new positions this week with Prophecy Coal and Novus Energy.  I also increased my position in Mercer, in Coastal, and in OceanaGold.  I also, of course, reduced my position in Jaguar Mining.

Leader Energy Services – Finally a Move in the Stock

I had large moves over the last couple of days in 2 stocks that I own, Leader Energy Services and Prophecy Coal.  I want to talk about one of them, Leader Energy Services (lea.v), in more detail in this post.

To be perfectly honest I’ve been pissed off with myself for buying as much of this stock as I did.  Its affected my decision making in other stocks and that has cost me.  Because I didn’t want to be too leveraged to the Oil Services sector, owning so much of Leader has kept me from feeling comfortable holding on to Open Range.  When the market looked like it was going to tank because of Europe, I went to lighten up on some stocks.  Because Leader was illiquid, it was difficult to sell without cratering the share price.  Open Range has lots of liquidity, so rightly or wrongly I dropped Open Range and held onto Leader.

Well now Open Range is almost $7 and Leader was, until Friday, languishing under a $1.  I had clearly made a bad choice and it was discouraging.  Fortunately Friday’s move of 20% in the stock helped wipe away some of those frustrations.

Leader is the small (~$20M market cap, $35M EV), illiquid little stock of a oil services company located here in Calgary.

The Oil Services Leader Provides

Leader provides the following services:

  1. Coiled Tubing: you put coiled tubing down the well generally with the intent of pumping some sort of fluid thru the tubing down into the wellbore.  There are a whole bunch of reasons you might do this, and they are actually described in good detail on wikipedia.  Calfrac also has a good description.
  2. Nitrogen Services: One of the reasons you put coiled tubing downhole is to pump a fluid down.  Nitrogen is sometimes pumped down to either flush out unwanted materials trapped in the wellbore or to lighten the fluid coming out of the formation, making it easier to flow more readily.
  3. Fluid Pumping Services: This really goes part and parcel with the tubing.  After you have injected the coiled tubing, you need a pump to get the fluid down the hole

The coiled tubing operations are more and more in demand.  Raymond James recently described the market as extremely tight.  The tightness is also mentioned anecdotally here , here and here.  Xtreme coil explained the usage in horizontal multi-frac wells succinctly with this snipit from their Q1 release:

“[There is] robust demand for coiled tubing services, especially in developing complex resource plays where long horizontal wells are the norm. Since these wells are completed with multiple-stage fracture treatments, they require cleaning out after all the stages of treatment are completed. The application of coiled tubing can dramatically improve the outcome of this complicated work scope.”

A Growing Business

Leader has been growing their business.  Below is the quarterly EBITDA for the company for the past 3 years.  Note that the cyclical nature of drilling in Alberta (spring break-up) always leads to a weak second quarter, but ignorning that the trend is clearly bottom left to upper right.

Margins have held up well too.  Below is gross margins over the same period.

Too Much Debt

The biggest problem that Leader has is the amount of debt on its balance sheet. There is about $14M in debt right now, which compares to a company Enterprise Value of $31M, making the company fairly leveraged, particularly for a tiny company in a cyclical business.

I think this is why the stock performs so poorly every time there is a worry about European debt.  When you have a lot of debt you are a slave to the underpinnings of the debt market.  I have heard the company expects to devote cash in 2011 to reducing the debt load.  I think this is a good idea; investors will be a lot more confident in the long term performance of the stock if it isn’t so leveraged.

The debt load used to be worse.  Going into 2008 the company have over $31M in debt.  This was obviously not a great position to be in when the debt markets seized up. To deal with the problem at the time they had to issues convertibles at a low price and restructure and it got messy.  Hopefully Leader has learned their lesson that debt is ok if its done in moderation.  The commitment to using free cash to reduce debt instead of to fund growth suggests they have.

And they should be able to reduce debt quite quickly.  Leader had operating cashflow of about $6M in 2010.  They generate $4.5M of operating cashflow in Q1 alone.  By the end of the year they should be able to make a good sized dint in their long term debt.

Peer Comparison

Leader compares well to its peers.  Below I have provided a comparison I did a while ago of a number of the oil services companies that (in most cases) specialize in coiled tubing and/or pressure pumping.  You can see that Leader is at a discount to most of them.

For all the EBITDA calculations I tried to ex-out any one time charges or non-operating effects.  Note that of the above companies that are listed, that Technicoil Group was taken over by Essential and so the stock price is TEC is as of the takeover date.  Open Range is difficult to value because of the natural gas business, so I used Canaccord’s EBITDA estimate for Poseiden (the name of Open Range’s services business) for 2011, and I subtracted a simple $40,000/boe flowing using the 2011 estimate of production to ex out the exploration business).

Dalmac is the only company cheaper than Leader.  They might be worth a look themselves.

There is a pretty decent report put out by some firm called eresearch that has a similar comparison done.

Conclusion

So I guess that my investment thesis is two-fold.  The company is undervalued compared to its peers, and I suspect that valuation gap will close as the company brings down its debt.  Second, as the company pays down debt that enterprise value should move from the debt into equity.  And third, the company is in a business that is experiencing growing demand and so margins should stay high for at least the short and medium term, allowing the company to generate a lot of cash and potentially begin to grow their business in 2012 once the debt load has been reduced.  The stock has been slower to move than many of its larger peers that have brokerage attention (ie. Open Range), but hopefully Friday’s move is evidence that the move is upon us.

Arcan Shows some Good Results at Ethel

In other news last night, Arcan came out with an operational update that showed some excellent IP30 results.  The news release detailed the following:

  • Two wells drilled at Ethel (1-04 and 5-35) showed IP30 of 732 and 681 boe/d.  Ethel was thought by some to have thinning net pay, and so there was some concern that results would be poorer then the Deer Mountain unit wells.  So far those folks have been wrong.
  • Arcan provided a comparison of the two new Ethel wells with another older Ethel well drilled last year (10-27).  The two new wells highlighted in this NR had about double the cumulative production that the 10-27 had in the first 30 days.  The wells are quite close to one another, so this could presumably be attributed to the new frac design that Arcan is using.  It is good news that the new fracs are making such a difference.
  • The implementation of waterflood is now scheduled for Q4.  This had previously always been somewhat vaguely scheduled in 2012.  Great news that they can bring on waterflood sooner.
  • Current production is 4,400boe/d.  This is up 500 boe/d from their last news release in early June.

In all it was an all good news report.  Good for Arcan, and good for Second Wave by association.  I am glad that Arcan is my largest position (by far) and that I have been adding to Second Wave.  I may add more to Second Wave this morning if it opens flat on the news.

Reshuffling the Deck on the Jaguar Miss

The miss by Jaguar yesterday was disappointing.  If you had wanted to look at the bright side you could have focused on the June production number and the performance of Turmalina and Paciencia.  But I have learned enough to know that when a “dog” digs a deeper hole, the market will be more than willing to push him down it.

Therefore I really lightened up on Jaguar yesterday. I cut my positions in half in all accounts.  One benefit of knowing a company well, and knowing just how good or bad the results are, is that you can sometimes act before the market fully prices in those results.  Yesterday I sold a lot of Jaguar above $5 (Canadian) in the first few minutes before the market took the stock down into the $4.80s.  Once you have decided  to sell, I do not believe you should hold out hope for a better price.  Just get out – and that’s what I did.

Here is what I sold and here is what I decided to jump into with some of the proceeds (note that as shown I did lighten up a little on Jaguar on a couple days before the release – call it a premonition but I wasn’t comfortable with the risk I had on the table given the track record of the company).

As the order list shows, I added to OceanaGold, Mercer International, and I started a position in Novus Energy.  I wish that I had owned a little more of OceanaGold and a little less of Jaguar to begin with.  There was a time when they had equal weightings but I liked the upside of a Jaguar turnaround story better.  Unfortunately that story is still on hold, at least at Caete.  Now, my positions in Jaguar, OceanaGold and Lydian are all comparable.

I will probably wait and see what Jaguar management has to say on the conference call in August before I make any more moves with the stock.

I plan to talk about both Mercer and Novus more in separate posts.

Caete Kills the Quarter

Not a great update released today by Jaguar .

http://phx.corporate-ir.net/phoenix.zhtml?c=71999&p=irol-newsArticle&ID=1586708&highlight=

I guess that my fears about Caete proved to be true. In fact Caete performed quite a  bit worse than I would have expected.  Turmalina still appears to be turned around, but Caete struggled in the quarter due to a mill issue.  Cash costs ($799/oz) were about $70 higher than Q1.  Given that the company said that both “Turmalina and Paciencia, performed at or above targets in terms of gold production, grade and recoveries”, the costs at Caete must have been quite bad.

On the bright side of the report, by June it looks like they had fixed the issues at Caete as production was up at an annual rate of 185,000oz, which would be 46,500oz per quarter.

46,500oz would have met their guidance for the quarter.  Unfortunately, what they produced, 40,257oz, did not.  Its a miss on production and poor costs to boot.

So what am I going to do tomorrow?  Likely sell some.  I have learned that when a story isn’t working out the way you had hoped it is better to sell.  The good news here is the stock is up almost 20% over my purchase price.  So I’ll get some profit.

How much will I sell?  That is tough to say.  I would want to see how the market reacts first.  The market could look positively at the Turmalina turnaround and the June production numbers.  And Jaguar has been such a dog for so long that expectations are sure to be low.  On the other hand, the shorts can pounce here and they might take the opportunity to.  Either way I expect to end tomorrow with a reduced position in the stock.

Big News for Arcan (and Second Wave)

I’ve owned Arcan Resources (ARN.v) since November 2009, when Sculpin2, an Investors Village poster, introduced me to the company.  Its been a love, hate relationship, with the hate culminating during the second half run last year when pretty much all stocks went up but Arcan did nothing.

Now, I am rarely so patient but in this case I was, and I held on to Arcan through it all, increasing my position in the stock until it was (and is) the largest in my portfolio.  Why?  Because it was clear that the Beaverhill Lake formation had a lot of untapped oil, I was confident that clever reservoir engineering now equipped with the new weapon of horizontal mult-fracs would eventually figure out how to tap that oil is a consistent and profitable way (being one of these myself I may be biased in my enthusiasm here), and it was clear that Arcan had a wonderful land position to take advantage of that success.

Well it looks like that investment is really beginning to flower now.  Last night Crescent Point Energy released this news release.

  • Identified the Beaverhill Lake formation around Swan Hills as an emerging oil resource play that they have taken a large position in
  • Announced the “acquisition of ownership and control over 16,750,000 common shares of Arcan, representing approximately 19% of the issued and outstanding common shares of Arcan”
  • Announced three recently successful wells in the area producing well above their expectations, “with average first-month production rates exceeding 1,000 bopd gross.”
  • Significantly expanded their capital budget to drill wells into the Beaverhill Lake, saying they “could spend up to an additional $100 million on capital expenditures in the play this year”

This is all great news.  The evidence is suggesting that Crescent Point may eventually take Arcan out. But maybe not.  I’m not in Arcan for a short term takeover so I would be equally happy to let the company continue to drill out their land and increase production. I suspect there will be more surprises (like these recent 1,000+bbl/d IP wells) as the engineers and the geologists figure out better ways to optimize getting the oil out.

Second Wave is looking better and better as well.  I’m glad I bought what I did a few days ago, but I do wish now that I had been even more aggressive.  Oh well, that’s how it goes.

There was also a good post on Seeking Alpha about Arcan that came out last night, discussing the possibility of a takeover.

Update

I caved and bought more Second Wave this morning.  It probably sounds stupid to buy a stock up 10%.  Maybe.  But this is a case where there are good well results coming out, where the stock is still trading within the range it has traded at before the news came out, and you should start to see more investors take an interest in the story as they hear about the Crescent Point interest in the play.  I am betting this 10% is the first of many.

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