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Posts from the ‘Coastal Energy (CEN)’ Category

Selling: Coastal Energy, after the mistake of buying back

Two weeks ago I looked pretty smart when I sold 2/3 of my position in Coastal Energy at a little over $18.  Last week I looked shrewd when I bought back that position at $16.50.  This week I looked stupid as the stock tanked and I sold.

Its quite possible that I sold at what will prove to be the bottom in the stock.  That would be unfortunate.   But while the timing of my transaction may have sucked, I believe the spirit and intent was right on the ball.

I sold out of Coastal on Thursday after they announced their end of year results.  They had also announced disappointing results at Bua Ban South on the same day (actually the night before) but that had nothing to do with why I sold.  I sold because the year end results showed a disturbing decline in production offshore.  The company did not address this decline very clearly in the news release.

Here is what the company said:

“2012 has also begun extremely well. We have drilled and tied in a handful of additional wells at Bua Ban North which have further boosted production. These wells were tied in during the month of February and brought average offshore production for the entire first quarter up to 21,100 bbl/d. Our current offshore production is 22,500 bopd.  

The  company had previously announced a little over a month ago that they had 26,000 boe/d of production offshore.

The Company has two more wells to bring online at Bua Ban North. Current offshore production is averaging 26,000 bopd, bringing total company production to 28,000 boepd. The rig is now being mobilized to Bua Ban South and is expected to spud the first well there by the end of February.

Now I may have gotten worked up over nothing, and I know of a few players smarter than I that used the dip as a buying opportunity.  $15 is a reasonable price for the production that Coastal has, and there is the opportunity that they will find much more.

Nevertheless, it was what I didn’t hear as what I did hear that made me sell.  I have been in too many situations that followed this script.  And more often than not, the reason that the reasons aren’t stated is because they are something to worry about.

Is that the case here?  I have no idea.  Maybe its operational, mechanical, one-time, short term, or some other adjective that can be dismissed and forgotten.  But the company didn’t say that, when they could have said that, and instead they didn’t say much at all.  So I took the approach that I will ask questions later.

Coastal has been a great stock for me.  Even though I sold out for good after a 25% decline (from $20 to $15) I still pulled off almost a 4-bagger.  It was probably my history with the stock that kept me in it as long as I was.

So of course I wish I would have sold it 3 weeks ago.   But I have learned that decisions need to be made based on current circumstances.  If you do not do what you believe is right today because of a mistake you made in the past and if you hope instead for a return to those past conditions to correct the mistake, you will get killed more often then not.

When I couple the uncertainty of the news release with the opportunity I see to redeploy that capital somewhere else where I believe the opportunity is greater (see my recently finished post on Mortgage Servicing Rights and my post from last week’s portfolio update where I stepped through the breakouts of numerous regional banks), it seemed to me the right thing to do.   Perhaps in a couple more weeks it will look stupid for having sold it when I did.  Be that as it may, you can’t forsee the future, you only have the past as a guide.

Atna Resources, Coastal Energy and the 80-20 rule

I do not know if an 80-20 rule has ever been expressly stated for a portfolio.  However I do feel that such a rule exists.   Anecdotally, I am pretty sure my portfolio follows an 80-20 rule of sorts.  20% of the stocks I own are responsible for 80% of the gains.  Or thereabouts anyways.

If you take a look at the gains in my current online portfolio you will notice the following:

Atna and Coastal make up a massive amount of my current gains.

Albeit this is far from scientific but it is not the first time that I have noticed that I make all my outperformance from a couple of stocks.  In 2010, I’m pretty sure that most of my gains were due to Tembec, Mercer and Avion Gold, all of which tripled or better.  In 2009, it was Western Canadian Coal, Grande Cache Coal Mirasol Resources and Teck Resources (call options), all of which rather insanely increased some 5x to 10x during the year.  2007 and the first half of 2008 was all Potash and Agrium (in the second half of 2008 nothing went up but puts and the dollar).

A couple of points come to mind:

1. Do more of what’s working

First of all, you have to know when you’ve got a winner and when you have a winner you have to add to it.  I have done this of late with Atna.  I bought more Atna this week at $1.30 after having bought more at $1.15 after having bought more at $1 after having bought more at 90 cents.  I have bought it all the way up.  I did the same thing with Coastal (though that acccumulation was unfortunately interrupted by the European fiasco) during the first half of last year, as it ran from $4 to $10.

Of course the obvious question is: Why not just buy more of the position at the start?  It’s a great idea if you know the winners in advance.  Unfortunately you don’t.  At least I don’t.

I come up with lots of ideas.  Some turn out to be really good ideas.  Some turn out to be so-so.  I’ve gotten better at it over the years, so less turn out to be full-on stinkers.  Yet I still get a majority of so-so ideas that do nothing, and a couple winners that go to the moon.  And I generally have very little idea at the beginning which one an idea is going to be.

Take for example PHH right now.  This one feels to me like it could be the next big winner.  It’s worked out so far.  I have been adding some on the way up. But do I know whether the stock is going to be $25 or $12 6 months from now? Nope.  It could go either way.  Nevertheless when it hits $16 I will add more.  And when it hits $18 I will add more again.  If then, it gets to $25 it will be a big winner and I will be talking about PHH like I am talking about Atna and Coastal.  On the other hand, if PHH goes back to $12, I will likely carry a much reduced position in the stock, if I am not out entirely.

2. Don’t give stock tips

This leads me to my second point.  Giving advice on an individual stock, such sharing a stock pick with a friend or relative, or putting the name up on an investment board, is dangerous when taken out of the context of the portfolio as a whole.  My portfolio has had between 12 and 20 stocks in it over the last 8 months.  Unless I know which two or three are going to be the big winners (I don’t) then trying to give someone a tip is a losers game.  There is an 80% chance (give or take a few percent) that I am going to give them a loser (or at least not the big winner)

Letter 25: Tax Loss Buying

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.

Portfolio

The Coastal Cash Generating Machine

I have perhaps underwritten about Coastal Energy given the size of the position I own in the stock.  That is mainly because the Coastal Energy Investors Village board provides such great information about the company.  It leaves me thinking – what is there left to say?

Nevertheless, sometimes it is worth reevaluating exactly what is fair value for a company, and that is what I want to try to do in this post.  For an oil company, the book fair value can be estimated based on reserves, based on a cash flow multiple or based on a more detailed discounted cash flow analysis.  The problem with all of these methods is that the lifeblood of any oil stock (not the company but the stock) is its potential to find more oil than what the market is currently willing to price in. Keep that in mind when looking at some of the valuation metrics below.  The value the market is willing to assign to Coastal is bound to vary significantly from these book estimates depending on the market expectations of what might be lying in wait to be found.  These days it also seems to depend on what happens to pop out of Sarkozy’s or Merkel’s mouth on any given day, but that’s another story.

Coastal is becoming a cash generating machine.

The chart below illustrates how up to this point Coastal, unlike so many of the domestic oil and gas juniors, is not running on a financing treadmill, but has been able to instead fully fund its operations from cash produced.

Its a little difficult to determine exactly when all the wells were drilled but based on the information provided in the MD&A I would estimate the following number of wells were drilled in the last 3 quarters.  This does not included recompletions.

Now in the first three quarters about $5M in total CAPEX per well drilled was spent, however I am not trying to contend that this is how much it will cost to drill wells going forward.   Some of those costs have been starting up the Bua Ban field (17 wells have been drilled at Bua Ban north in Q2 and Q3).  Vertical wells drilled into the Miocene cost $1.5-$2M.  The recent horizontal well that Coastal drilled (the Bua Ban North A-10) cost $3M.  The point here is that further development of the existing found fields should require capex that is less than it was last quarter ($45M).   Capex requirements in the $30M to $40M range going forward seems reasonable, absent another discovery that requires start-up capex but of course that would be a good thing in its own right.

Because of the significant growth occuring from the wells drilled at Bua Ban North, looking backwards to the historical cash flow of the company is of limited value.  What is required is a forward looking estimate of cash flow based on current and expected production.  Below I have estimated cash flow for 3 scenarios.  Current estimated production at the end of the 3rd quarter, plus two increased production scenarios.  Capex estimates for all of the scenarios are based on Coastal’s own estimate of $250M for 2012 ($62.5M per quarter).

The above assumes fully taxed cash flow for the entire estimate.  This is probably not exactly true.  Coastal is going to have to start paying more taxes at some point in 2012.  But  not right away.  When they do they will pay the following taxes:

  • Royalty that is prorated to the production level.  Coastal has said that at 20,000bbl/d offshore they expect a royalty payment of 10%
  • 50% income tax on profits.  Now this number is a bit misleading because according to Coastal’s explanation, the tax includes the deduction of all capital expenditures as they are incurred.  In their November presentation Coastal presented the following table of the effective tax rate at various oil prices, and 20,000bbl/d of offshore production:

One other thing to note about this table is that offshore EBITDAX of $596M at $100/bbl selling price implies a significant drop in operating costs.  I based my cash flow estimates on $29/bbl operating costs, which is consistent with the first 3 quarters.  For the same scenario (ie. $100/bbl oil and 20,000bbl/d of offshore production) my EBITDAX is significantly lower.  EBITDAX is basically the revenues after royalty, less the production expense and the cash G&A expense (it excludes stock option expense).  There isn’t that much to it.  The only way I can get the same EBITDAX as they have in the above table is if I drop operating expenses to about $10/bbl.

I also cannot get the tax numbers to quite line up the way Coastal has them stated in their presentation.  In the above snippit Coastal stated that the taxes are expressed as a percentage of EBITDAX.  I have to wonder if they didn’t mean revenue or revenue after royalty.

But even with my lower and perhaps more conservative estimate, Coastal is still generating a lot of cash.

Week 18 Portfolio Update: Still Cautious but Getting More Optimistic

Last week I posted how I was of two minds; that while I still saw significant risks over the medium and certainly the long term, that I could also imagine a scenario where the market rallied in the short run.

I still think that is a likely scenario.  Especially after having watched Greece peacefully resolve not throw itself and the rest of Europe into utter chaos.  Yet I ended the week with more cash on hand then I began the week with.  Its just a tough market to hold any conviction with.

I am, however, a little more confident about the prospects of Europe than I was a week ago.  Why?  Well this weekend I spent my spare time looking  at Italy.  Last week I wrote a pretty negative piece about Italy. Having re-read those comments tonight, I think that I need to retract them in degree.  I had perhaps  read too many articles slanted with a negative spin on the Italian debt situation.  In truth, I think the situation there is somewhat more balanced than the WSJ, FT, and my other sources have given credit.

I plan to put out a post later this week describing what I have learned about Italy (as well as Japan, but more on that in a minute), but I’ll briefly summarize the main conclusions here.

Without a doubt, Italy has its problems; they have a lot of debt outstanding (120% of GDP), they have a dysfunctional political system that seems to readily make promises but not able to follow through on them, and they have an economy that almost certainly will be in a recession for months to come.

Still, Italian debt is not at the level yet that threatens the ability of government revenues to service it.  And that is really the bottom line.  While the path that Italy is on is not one of prosperity, it is going to take a lengthy recession and a move to even higher interest rates (8-9% at least), to really put the country’s ability to service its debt in jeopardy.

None of this is to say I have turned wildly bullish.  Greece, Portugal, and Ireland all look to be in a whole lot of trouble.  Its really just a matter of time.

What’s more, the real point of my research this weekend was to investigate Japan, and what I found there was frightening.  More on that later this week.

Anyways, back to the portfolio.  I actually lightened up a little on my gold stock holdings on Friday.  This is not an indication of any wavering of my thesis on gold.  It was simply prudent portfolio management.  The gold stocks I own have had a heck of a run over the last couple weeks.  Jaguar Mining has moved over 50% in the last two weeks.  Aurizon had a one day move alone of 10%.  Newmont has moved 15%, as has Barrick.  Gold stocks are finicky and they could just as easily fall back next week as they could break out.

A break out is possible however, and many of these stocks are back to that breakout level that they tested and then subsequently failed at in September.  This week should tell the tale.

On the oil side of the ledger, Coastal Energy is supposed to be releasing results of the A-09 well, which tested between the Bua Ban North A and B fields.  A hit in this area would prove up even more reserves for the company.  I continue to hold Coastal in hopes that with any market turn upward it will begin to be valued to reflect these recent discoveries.  Equal Energy continued to move higher last week.  In a normal market, without the overhang of Europe, I would be significantly more long Equal than I am right now.  Sandridge announced results last week and they showed better than expected production from its Mississippian wells so far.  Its just a matter of time before Equal begins to drill their Mississippian land and gets revalued upwards for it.  Equal remains cheap (look at my oil and gas comparison spreadsheet posted Friday for an idea of just how cheap).  As for Arcan, I await news both on the production front, and hopefully someday, on the takeover front.

I still have a bid in for Gramercy Capital at $2.75.  One of these days the market will have a crippling sell-off and that order will be filled.

Another Hit for Coastal Energy

Oh, but if it wasn’t for the credit crisis…

I like to take big positions in stocks where I see an outsized opportunity in comparison to the risks.  Jump all in.  I believe that the advantage that active investing has lies in the opportunity you have to scale into a name where you see such an outsized reward.  It is in doing so that I have had my greatest success.  It has worked for me before with such stocks as Aur Resources, Avion Gold, Mercer International, etc.

That sort of opportunity exists with Coastal Energy…

If only it wasn’t for the credit crisis.

Coastal put out a news release today that showed some excellent results.

The Bua Ban North A-05 well was drilled to a total depth of 5,650 feet TVD.   The well encountered 81 feet of gross sand and 35 feet of net pay in the Miocene reservoir with 27 percent average porosity.   The well tested the Miocene reservoir on the eastern flank of the Bua Ban North A field.   The oil water contact in the well was seen at 3,770 feet.   The results of the A-05 well add an additional 1,200 acres to the structural closure area.

The A-05 tested the far northern extents of the “North-A” structure.  The following screen capture from the Jennings report put out today shows the location of the A-05 relative to other North A wells.  The light blue outline delineates the expected extent of the reservoir that Coastal has discovered.  You will quickly note just how much bigger the A-05 pool is compared to the other North A pools.

Coastal estimates that there is 108MMbbl of OOIP in the new pool.

Applying  a 30% recovery factor to the OOIP gives us 32MMbbl of recoverable resource.  The company just keeps adding resource at an incredible rate.  Overall, Coastal has discovered 90+MMbbl of recoverable resource this year.  This for a company that had 27MMbbl of proven and probable reserves at the end of 2010.

First Energy raised their estimate of proved and probable reserves for Coastal to an expected 82MMbbl by the end of the year.  They arrived at this number with the  addition of 10MMbbl from the new A-05 reservoir, which is conservative given the overall size of the resource.  First Energy raised their risked NAV for the company to $25 per share.  Jennings has a NAV of $21 for the company.

Based on company specifics alone, each well makes the investment more and more of a no-brainer.  If we take First Energy’s estimate Coastal is trading at about $12/bbl of reserves.  This is cheap for any oil company, but it is very cheap for a company that is growing at the rate that Coastal is.

So I continue to own a large position in the stock. Its just so unfortunate that Europe makes owning anything a hair raising experience.  If it wasn’t for Europe my position would be much larger.