Posts tagged ‘altura energy’

May 29

Week 359: Buoyed by the CAD

Portfolio Performance

Thoughts and Review

Another quiet month for my portfolio as I only added and subtracted a few stocks around the edges. But I had quite a good month.

I can’t take credit for all of it however. I have been getting a boost from the Canadian dollar. Since March the dollar has fallen from 81c to 77c. Last spring I talked about this when I was going through a period of massive headwind from a rising Canadian dollar. Now it’s the opposite.

If you do the math, the move in the Canadian dollar has added about $25,000 to the tracking portfolio totals since the beginning of March. So I’m looking somewhat better than I actually deserve (which is quite the opposite of last spring, when I looked like a schmuck as the CAD rose some 15% in a few months!).

Much of the rest of the move (which I can take credit for) is the move in Gran Colombia Gold.

Gran Colombia

In the last 5 weeks Gran Colombia completed the redemptions of their 2020 and 2024 debentures and announced first quarter results. The results were great. AISC of under $900/oz and EBITDA of $27 million.

After accounting for debentures redemptions and share conversions (including all the in-the-money warrants and the not yet converted 2018 debentures) I get about 60 million shares. So that’s a market capitalization of about $200 million (CAD) or USD$153 million at the current conversion. There is another USD$98 million of the new debt and they should have about USD$41 million of cash once all the warrants are converted.

The company did USD$27 million of EBITDA in the first quarter. It seems pretty reasonable that they should do at least USD$100 million of EBITDA in the full year. So even after the big jump in the stock price, Gran Colombia only trades at 2x EBITDA. I realize the gold stocks are cheap and unwanted, but even the most unloved get at least 3x EBITDA and some are getting 6-7x.

I think the re-valuation still has a ways to go.

Tornado Hydrovac

Here’s a stock I haven’t talked about in a while. I took a closer look at it after the first quarter results and had someone on Twitter ask about it which got me thinking about the stock a bit more.

Tornado is a $6 million enterprise value company with almost $5 million of cash. However, most of the cash ($3+ million) is in China and not readily available for the North American business. They have an established hydrovac business in North America, and one they are trying to get off the ground in China.

These are the same trucks that Badger Daylighting rents out. But Tornado’s business is not quite like Badger, as they are primarily building the trucks not renting them out. Tornado has had a few rentals (1-4 trucks per quarter) over the past year, so its not a significant business.

The first quarter wasn’t great. I had been hoping for a follow-up on the fourth quarter, where revenue hit a 3+ year high at $9.4 million. But they only had $4.8 million of revenue in Q1.

So it was disappointing and the stock hasn’t really done much. But to be fair, the stock has never really done much so let’s not read into that too much. Still I’m inclined to think the business is turning for the better.

The poor results were partially seasonal – in 2014, 2015, and 2016, there was a significant slip in first quarter revenue from Q4 to Q1 (2017 was a bit of an anomaly because the industry was recovering from the downturn).

Also, inventory ticked up from $6.49 million in Q4 to $9.1 million in Q1. Inventory has been a pretty good indicator of the next quarter revenue, which I imagine is because of the part procurement and build cycle. The company said the following in the MD&A.

For the three months ended March 31, 2018, inventory was $9,072 compared to inventory of $6,490 as at December 31, 2017. The increase in raw materials is due to stocking up for production ramp-up in the second quarter. The increase in finished goods is due to 3 completed trucks held in finished goods as at March 31, 2018 that were not delivered and sold to customers until early Q2 2018.

The other angle with the company is China. They are getting closer to generating revenue from China. Tornado expanded into China over a year ago. Since that time most of the efforts have been establishing a footprint, starting up a manufacturing operation and developing relationships.

In the first quarter they sent out their first three demonstration units in China. Overall, China has overhead of $300,000 per quarter and no revenue.

The inventory related to the three demo units was $1.14 million. Assuming 15% gross margins (margins for the company are around this level), they need to sell about 5 trucks per quarter in China to break even.

But that’s only assuming sales of trucks. The model is China is both sales and services and I’m not sure about what the economics of the services side will look like.

Bottom line is that the stock is reasonable and I think its not a bad bet that they can have a breakout quarter one of these days. Book value is over $17 million while the enterprise value is $6 million.

On the other hand, margins are super-thin and the operating history isn’t exactly stellar. This remains a pretty small position for me, but an interesting one and one worth reviewing from time to time.

Oil Stock sales

I sold out of a few oil stocks last week. I can’t say that I had foresight into the carnage. A lot of my selling was done on Friday, so after the plunge had occurred. I sold Black Pearl, Whitecap and Spartan.

I have to admit, having missed a better opportunity to lighten up earlier in the week, I was a bit reluctant to do so after these stocks sold off. Nevertheless I had a couple of reasons that led me to decide to sell anyways.

First, I was just getting a little too overweight into oil. In particular, I took on a big position in Altura, which I wrote about, and hadn’t really sold anything.

I was getting particularly uncomfortable with my exposure to heavy oil. The Western Canadian Spreads are looking good but I was long Gear, Zargon, Black Pearl, and now Altura. It was a bit too much exposure.

Spartan was really now a bet on Vermillion and I don’t really know enough about Vermillion to want to take a position there.

Whitecap was just because I was nervous about Canada and Transmountain. I know Whitecap isn’t heavy oil so maybe my logic doesn’t string together that well, but I didn’t want to sell Gear, Zargon or Altura and yet wanted to get my Canadian exposure down a bit more, so there you have it.

The other consideration I weighed was the build in crude last week. It was a surprise, to say the least. It could be a one-off and there seem to be indications that this week will look much better. My thought was that the crappy number last week puts a lot of pressure on this weeks numbers. What if, for whatever reason, its another surprise build?

With the Trans-mountain decision out of the way I might look at buying some of these names back. But I think I will wait until after the Thursday numbers (delayed a day because of Memorial day) come out before doing anything.

Solaris Infrastructure

My services companies aren’t doing that well. Cathedral has been terrible, down to almost $1.20 and if it goes much lower its going to hit the 52-week lows of when oil was $20 less. I already gave up on Essential Energy. Energy Services of America is always a next quarter story.

The problem is that none of these service companies can seem to generate any gross margins.

One story that is not a problem for is Solaris Infrastructure, where gross margins are a pretty amazing 60%. But the stock is suffering nearly as much as these other names anyways.

Solaris provides a last mile solution for storing and delivering frac sand. They don’t actually sell sand. They rent out silos and conveyor systems that are installed on the well site and act as a sand buffer during the completion process.

The silo solution seems like it’s a big improvement over the Sand King trucks that are typically used. Costs are lower, trucks don’t have to sit and wait, and the footprint on the well site is smaller.

Solaris builds the silo units and rents them out on a monthly basis. The gross margins are as high as they are because of the rental model of the business.

Solaris is growing like crazy. Revenue grew at over 205% in 2017.

Here’s my back of the napkin math for a theoretical 2018 exit. At the end of the first quarter they had 98 systems in operation. On May 9^th, the date of the conference call they had 108. They are adding systems at 8 per month.

So lets say they have 170 systems at year end. Solaris gets roughly $100k per month of rental revenue per system so that works out to $204 million of annualized revenue.

There is no reason to think they don’t maintain their EBITDA margin of 60%, which would mean they are annualizing $122 million of EBITDA by year end.

In the first quarter they had $3.2 million of depreciation on an average of roughly 90 systems in operation during the first quarter. That works out to $142,000 D&A per system or on 170 systems $24 million annually.

There is no debt so that means income before tax is $98 million and after tax is $77 million at a 21% tax rate. On 47mm shares that would be $1.63 EPS.

If I assume they slow down their build to 6 systems per month in 2019, I get EBITDA of close to $180 million and EPS over $2.50.

None of this includes their new sand terminal in Kingfisher. Or their sand supply chain management tool Propview.

There are a lot of things I like about Solaris but the one thing that I don’t like, that actually gives me a lot of pause, is the stock performance. It is such a good environment for oil stocks and here is a fast growing service company right in the middle of it. And the stock price is as dumpy as can be.

That makes me think that maybe I’m wrong about it. I’m hoping the market is just slow to jump on board, but its also possible that I’m too optimistic. Maybe margins will decline and growth vanish as competition comes on the scene. I have to think that’s what the market is worrying about. Because otherwise the current share price doesn’t make a lot of sense.

One last Buy

The last thing I did was buy a small position in 3 copper stocks. I’m not quite ready to talk about these, meaning I’m not sure I should have bought these stocks or not yet. So I’ll leave that for now.

Portfolio Composition

Click here for the last five weeks of trades.

May 17

14 Comments

A Game Changing Disposition for Altura

I mentioned Altura last week in a comparison table I made to Zargon and Gear Energy. As I noted in the comments, I had a position in the stock in another portfolio (my RRSP and my wife’s account) but not in the portfolio I track online so I haven’t talked about the stock outside of that reference.

Well that changed today. I added to the stock in all my portfolios even though I was getting it up 20% on the day.

I want to give a big hat tip to @BrownMarubozu for bringing my attention to Altura a month or so ago.

Altura announced first quarter results after the market closed last night. The results were fine, maybe a little weaker then expected actually, but the real news was the announcement of the sales of their Eye Hill, Macklin, Wildmere, Killam and Provost Minor assets.

Altura sold the assets to Surge Energy (here’s their press release on the transaction. The transaction metrics the company provided are below:

The sale of these assets leaves Altura with about $20 million of cash and no debt. With the rest of their properties sold off, they are a pure play on their remaining asset: Leduc-Woodbend.

Leduc-Woodbend

They are going after the Upper Mannville formation at Leduc-Woodbend, which is about 1,300 meters deep. They have amassed 65 sections (41,000 acres) in the area, with 40,000 of those acres considered undeveloped. The formation produces 17° API heavy oil.

The Leduc oilfield has been around forever and is a well drilled out area using conventional vertical wells. Given that its not a new area (Altura themselves says there are over 700 vertical wells in the area) I’m not sure if Altura discovered something new here or whether this was a previously uneconomic pool for vertical wells that is now being unlocked by better technology. At any rate Altura described the pool as “one of the largest conventional oil pools identified in the Western Canadian Sedimentary Basin within the last 20 years” in their initial press release on the prospect.

This is early in the game in Leduc-Woodbend. They have only drilled 5 wells in the property so far. But these wells look quite good.

They started drilling into the Mannville formation in early 2016. The first well, the 13-15 (see the map below), produced 230 boe/d over the first 30 days and was producing 160 boe/d after 5 and a half months. It was producing 70 boe/d in July, after 8 months of production (from this news release).

The 13-15 was a one-mile horizontal and cost $1.7 million to drill and complete.

Their second well, the 12-15, was another one mile lateral drilled at the beginning of 2017 and place on production in April 2017. This well was a full 6 sections north of the initial discovery well but production was inline with the 13-15 (this press release).

You can get an idea of how far apart these wells are in the map below (the 13-15 is the well furthest to the south while the 12-15 is the northern most well).

In their November presentation Altura detailed a reasonably steady decline profile from both wells (they are both one mile laterals):

Since the beginning of the third quarter Altura has followed up with 3 more longer wells, 1.5 mile extended reach horizontals (ERH). The first two (03-02 and 13-14) were placed on production in October (from this press release).

The third ERH well (02-02) was drilled in January and placed on production in February. This well averaged 334 boe/d in the first 26 days of production (from this press release).

In the May 15^th release the company said the well had produced 10,626 bbl of oil in the first 45 days, which equates to a 236 bbl/d average before being shut in for a month to replace a broken rod.

The company went on to say that they expected 150-175 boe/d over the first 12 months for all 3 of the ERH wells.

My takeaway from all this well data is that the results are consistent. We only have 5 data points but so far the repeatability looks excellent. Its particularly exciting that the original discovery well is so far away from the others and yet has yielded comparable results.

I was cautiously optimistic about Leduc before the quarterly release but the numbers presented have added to my confidence.

Guidance

The company obviously has confidence. In addition to focusing entirely on Leduc they raised guidance significantly even after divesting over half their production.

Right now Altura is producing around 550 boe/d from Leduc, 80% oil. They expect to exit the year at 1,900 boe/d.

To do this they are increasing their capital budget from $15 million to $33 million and expanding to an 8 well program. So the cash they are getting on this transaction will be put to use drilling out Leduc.

Based on their presentation it looks like the wells cost $2.65 to drill, complete and tie-in. They also spent $7.3 million already in the first quarter. That means the company is spending roughly $7 million on infrastructure at Leduc.

The infrastructure money is going towards a larger oil battery. They are increasing the size of their oil battery to 3,000 – 3,500 bbl/d. So that gives you an idea of where they are expecting to take the property to.

They seem undervalued to me

When I forecast ahead at what Altura looks like at year end using the company’s guidance, it looks cheap to me on most metrics.

Here are my estimates of cash flow and EV/CF using their guidance. I am assuming they use all the cash to complete the drill program which should be conservative. I looked at two scenarios: A WCS price consistent with the first quarter (so a low price) and the current WCS price (a high price).

Apart from the valuation, what’s interesting is that at roughly $70/bbl WCS, Altura can cash flow $30 million based on their exit volumes. So they should be able to fund a similar sized capital program in 2019 (actually a bit higher because they wouldn’t be building an oil battery) without adding at all to debt. If they get similar production growth from that budget (based on exit guidance growth in 2018 is 1,250 boe/d), they’d grow over 60% and be producing over 3,000 boe/d by the end of 2019.

Considering that sort of growth runway, the company seems extremely cheap to me. The risk of course is whether the oil price holds up and whether they can meet their target.

It’s still early days so we’ll have to see. The economics that they present for these wells is impressive.

The wells have IRRs of close to 75%, which is pretty good. But it looks even better when you notice the price forecast these are based on:

They are essentially using $55 WCS prices for 2018, followed by $61 for 2019 forward. At last look WCS stood at $74/bbl.

Conclusion

One question that might be asked is why the stock didn’t move even more? One answer is that I’m totally missing something. Maybe, but I don’t think so. Another is that the market isn’t going to de-risk Leduc until they drill more wells. That definitely accounts for some of it.

A third reason has to do with liquidity. I know that one of the reasons I didn’t buy more Altura before today was because it was so hard to buy. The share volumes were anemic and it seemed like my bids would sit for days some times before getting bought up. The Level 2 liquidity was usually equally sparse and it seemed like I would quickly move the price up to 44c or higher if I bought too much.

With that in mind I wonder how many sellers today are just liquidity sellers. This is a liquidity event, lots of volume, so it’s a chance to unload shares. If you have a very big position, you probably want to take some off.

Whatever the reason I took advantage of the volume and bought a decent position. I’m looking forward to the next operations update.