Posts from the ‘Coastal Energy (CEN)’ Category

Dec 16

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.

Nov 6

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.

Sep 7

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.

Aug 25

What I’ve Been Doing

On the weekend I posted the reasons why I am very afraid that the situation in Europe is about to get a whole lot worse. At the end of that post I highlighted a number of things that I planned to do to deal with this risk. Over the last 3 days I have mostly completed these items.

Get out of Gramercy – I sold out of Gramercy today at $2.56. In retrospect I could have waited and sold out 10 cents higher. We can’t know which way the market will go on any given day. I may regret this. Gramercy is likely coming ever closer to the day they settle their Realty division issues with their lending consortium. The stock could make quite the pop on that day once the deal is announced. I will be watching the news very closely for that day and will pounce if it settles positively.
Trim Oils – I did this in my actual account but not in the practice account. In my actual account Arcan, Coastal and Equal Energy were all trimmed by 10%. I am dealing with somewhat larger positions in my actual account, so trimming is a more reasonable proposition. I have found that using my strategy of taking off little bits at a time leads to extraordinarily high commissions with the practice account. If and when I get to the point where I want to trim these positions to 25%, I will do the same in the practice account in one move.
Cut the Banks in half – Oneida Financial was cut in half. I held onto all the Community Bankers Trust that I own. I sold all of Xenith Bancshares. I don’t think I will regret these moves. The US economy, at best, will be sluggish for the next few months. I don’t expect big moves in the banks for a while yet.
Cut Leader Energy Services by as much as I can – In my actual account I cut the position by half. In the practice account I had a stink sell order at 69 cents and low and beyold it got filled today so I am out of Leader entirely there. Some might say this is hypocritical. How can I write up Leader a few short weeks ago and then suddenly turn around and liquidate my position. All I can say is that when the facts change… look I underestimated the crisis that is occuring in the Eurozone. Leader Energy is in a cyclical business and has a lot of debt. This is a good company to be in during a economics expansion and especially during a time when oil prices are highly profitable. This is not a good company to be invested in during a time when debt markets tighten.
Watch Gold Stocks Closely – I haven’t done a lot here, though I did lighten up on Jaguar on Monday and add to Argonaut Gold today. I’m still of the mind that gold stocks are breaking out and have higher (maybe much higher) to go. But I reserve the right to change my mind here. I am wary of how far this gold correction will go. However, the stocks never priced in the move anyways. To take an example, should Newmont be crushed as gold moves from $1900 to $1600 when its price is lower than when gold was $1200? Its ridiculous.

We’ll have to see how the next few days play out and what Bernanke announcement comes out of Jackson Hole. But for the moment I feel a lot more secure after having made these moves.