Letter 25: Tax Loss Buying

by Lsigurd on December 27, 2011

I am on vacation with limited computer access so this is going to be a short letter.

There was some good news for the oil stocks in my portfolio this week.

News that should help Equal

Equal Energy has not performed very well lately. I don’t expect much from the stock until something is announced with the companies Mississippian lands in Oklahoma. While we wait, Sandridge, the biggest landholder in the Mississippian, jv’d 363,000 acres of their land to Repsol this week for $1B. That works out to $2,754/acre.

SandRidge will sell an approximate 25% non-operated working interest, or 250,000 net acres, in the Extension Mississippian play located in Western Kansas and an approximate 16% non-operated working interest, or 113,636 net acres, in its Original Mississippian play. The 363,636 net acres in total will be sold to Repsol for an aggregate transaction value of $1 Billion. Repsol will pay $250 million in cash at closing and the remainder in the form of a drilling carry. In addition to paying for its working interest share of development costs, Repsol will pay an amount equal to 200% of its working interest to fund a portion of SandRidge’s cost of development until the additional $750 million drilling carry obligation is satisfied.

Admittedly, this is a little on the low side compared to some of the earlier deals. That is because this deal included 250,000 acres of the second Mississippian play that Sandridge is involved in. The second play is newer and riskier.

The fact that Sandridge was able to get $2,750 per acre while only including 113,000 acres of the prime land (in Oklahoma the heart of the Mississippian is Grant, Alfalfa and Woods) provides another positive data point for Equal.

Equal has 20,000 acres of land in the heart of the Mississippian. This is another deal that suggests that the land is worth around $70M. At $4.50, the stock trades at an enterprise value of $300M and with a market capitalization of $150M. It is clear that that the Mississippian land is not priced into the stock.

I bought some more Equal on Thursday at $4.50. I believe the recent decline in the share price is simply tax loss selling. I believe that the stock would be undervalued at $7/share. At $4.50, its a little ridiculous.

Coastal Energy News

Coastal Energy has been the best performing stock for me over the last few months. They have hit on well after well after well. The string of success continued with the B-09 well news released on Tuesday.

“The Bua Ban North B-09 well encountered the largest pay zone we have seen to date in this field. We are particularly excited that we have encountered oil across five Miocene zones. This confirms the lateral extent of the deeper pay zones below our main producing reservoir. Following this successful result in the deeper zones, we plan to drill further appraisal wells to continue testing the 63.0 mmbbl of prospective resources defined in the RPS report ofNovember 15, 2011, which are incremental to the 67.0 mmbbl of 2P volumes defined in the report.”

What is most important about the result is that it begins to prove up the lower miocene sands. First Energy noted the following:

The Bua Ban North B-09 well discovered 3-4 mmbbl in deeper Micocene sands which could open a new play for Coastal with an overall prize of 63 mmbbl prospective resources.

The Miocene sands that Coastal is drilling into are actually a number of layered sands as shown in the illustration below. Up until the B-09 well, Coastal had been focusing on the upper two layers. The B-09 explored the lower layers. The RPS report distinguished between reserves and prospective resource in the Miocene. While the news release did not say so specifically the above snippit implies that most if not all of the prospective resource is in the deeper sands.

There is an excellent summary of the Micoene sands that Coastal is drilling into that was posted by Oiljack on the Investorsvillage Coastal board.

Midway gets us Excited and then…

The moment I noticed that Midway Energy was halted I went out and bought shares in Second Wave. I thought for sure that the halt was due to a takeover bid and that there would be a subsequent boost to the other Swan Hills players (Arcan and Second Wave). Unfortunately, while a takeover bid may indeed be in the works, the clarification by Midway left the waters muddied.

Midway Energy Ltd. (“Midway” or the “Company”) announced today that it has become aware that information may have entered the market with respect to certain potential transactions. The Company has not entered into any definitive agreement with respect to these transactions and will issue a press release when and if a successful transaction has been negotiated.

Nothing like clarity. Nevertheless the stock popped when it opened and Second Wave popped along with it.

I think I will hold onto Second Wave for a while; their latest update was mildly disappointing with a few of the recent wells producing at far less than the earlier more prolific Crescent Point JV wells. However according to an Acumen Capital report, the lower production rates can be attributed to a failure of the packer equipment during the frac operations, while the 100% WI well drilled to the south (08-23-062-10W5) was limited to 100bbl/d by the surface pumping equipment. I’m not sure I understand that second one entirely, I mean why would the company install insufficient surface pumping, but nevertheless I hold out some hope that the going forward results for SCS will improve on these numbers. Meanwhile SCS does not appear to be as encumbered with infrastructure requirements as Arcan is in the short term, so capital is going to be spent drilling wells.

Unfortunately, as seems to happen from time to time, the practice account I post here had my SCS order rejected because of a lack of margin, something that clearly isn’t the case (I don’t think RBC spends much time updating and debugging the practice accounts functionality). I am reluctant to try to re-buy the stock now after the pop so for the moment I will not have my SCS position reflected unless it falls back to the $2.45 range that I bought it at in my actual accounts.

Gold Stocks

I am not sure if it was a smart thing to do but I added positions in a couple of gold stocks this week. These should not be considered long term positions; they are simply me trying to take advantage of what I see as the severe underperformance of the stocks when compared to the bullion. I added a position in Semafo at $6.40. Semafo is a mid-tier producer that has generally held up well in the market but that got taken down to new lows of late. I also added a position in Canaco. Canaco has had a rather spectacular decline from over $5 a share to a low of a $1. That is where I bought it. The company has what looks to be a decent deposit in Tanzania. Moreover, at $1 they have a market capitalization of $200M and with cash on hand of $115M.