If I close my eyes for a few seconds and concentrate, I can transport my mind back to the fall of 2008. Those were terrifying times for investors and most Americans, as the fallout from the financial panic cost a lot of people their jobs and their homes. I can still feel my personal fear, as various investments of mine dropped day after day after day. I remember thinking that I didn’t sign up for this when I started equity investing.

We were all pretty much in the same boat that autumn. But back then, I noticed one group enjoying the distress. No, not enjoying it — more like thriving on it.

I distinctly remember in November of that year watching a certain financial network when they rolled to a commercial. Up popped a tribute to all of their talking heads, as they had a message patting themselves on the back for being America’s number one source for coverage of the financial collapse. During the self-congratulatory message, they disclosed that they were just coming off their highest ratings month ever.

I clenched my fist and swore that forever going forward, this particular network and I would be enemies. Thank you very much for selling fear to the general public, I thought. You’ve done a great job exacerbating a shocking destruction of wealth.

Now, I don’t begrudge a media outlet covering the news. But, in my opinion, what they do is much more than cover the financial news. They sensationalize the news in order to feed their viewers’ emotions.

Back in the tech bubble in the late ‘90s, they fed the public’s greed. This helped people buy stocks that were multiples and multiples of the true underlying business value. It also helped people lose money in the eventual crash.

During the financial panic, they fed fear to everyone. They extended their coverage into the late evening so we could all sit up and get anxious for the market opening the next morning. The stock prices for the financial stocks that were crashing the worst were displayed at all times in flashing red on the screen. The ticker for the overall market constantly throbbed in red, with a giant arrow pointed down. How many people in a state of panic sold stocks at half of what they are selling for today?

The more anxious viewers are, the more they watch.

I’ve long believed that watching the financial networks is counter-productive for an investor. You get non-stop opinions from talking heads, offering opinions on ANY subject. There is nothing of value coming out of their mouths.

This week, in my regular reading of all things investing, I came across two items that I thought I would share.

The first was from the T2 Partners August letter to investors. They were explaining key parts of their successful investing process and included the following:

“We read constantly, with an emphasis on company and industry reports, market history, and lessons from the greatest value investors. We do everything we can to tune out the short-term noise so, for example, we almost never watch financial television.”

The second was from Howard Marks of OakTree in his latest letter to investors:

“We face a new world nowadays in terms of the speed of media coverage, the vast number of outlets competing for people’s attention, and in many cases their seeming lack of concern over their own partiality, volatility and non-objectivity. I have no doubt that the media contribute significantly to the manic swing from ‘it’s all good’ to ‘it’s all bad,’ with its highly unsettling effect on the markets. Emotion takes over from reason. Hysteria rules the day. Nobody knows what the developments mean or what to do about them.”

My advice to investors is to turn off that television. Focus on the businesses you own. If they are progressing well, you don’t need to do anything until Mr. Market offers you a price that you like. Until then, everything else is just useless noise.

The truth is that these financial networks are doing us value investors a favor. The more everyone else uses their emotions to make decisions, the more likely it is that there will be mispriced securities for the rest of us. I guess then what I meant to say was, “Keep up the Good Work!”

Follow us on Twitter @CompleteGrowth.

Devon Shire

There’s no doubt in my mind that the longer a person plays at this investing game, the better he gets at it. A couple of years back, Charlie Munger made the comment that Warren Buffett was still improving as an investor. Warren was already in his seventies at the time. Charlie knows what he’s talking about.

I know that I’m getting better every year. A significant improvement that I’ve made in recent years is in my ability to be patient with the market’s regular fluctuations between greed and panic. In my own portfolio, I saw individual equity investments lose 75% of their value in the 2008 panic, but within months, they recovered. That fact that I made significant money on them has certainly helped provide perspective.

As Buffett learned from Ben Graham, the stock market is there to serve you, not instruct you.  I believe that more today than ever.

On August 9, 2011, I gave you a list of ten stocks that I thought were so undervalued, it was akin to shooting fish in a barrel.  It didn’t take long for a value realization event to occur for one of these stocks, which, thankfully, I owned.

The company that I’m referring to is Hathor Exploration (TSE:HAT), which is a junior uranium company with operations in northern Saskatchewan. I thought Hathor was a pretty simple investment idea — a stock beaten down after the Japan nuclear accident. But it was also a company that had just discovered one of the richest uranium deposits in recent memory, and I thought that it was worth considerably more than Mr. Market suggested.

The value of the uranium deposit was pretty easy to determine. I knew the size and grade of the deposit. I knew the prices paid for recent acquisitions of uranium companies in relation to the size of their resource.  And I expected that one of the larger uranium producers would, in fairly short order, make an offer for Hathor. The stock market was valuing Hathor at less than half of what I thought it was worth.

Much sooner than I ever expected, Hathor got an offer from another company — Cameco Corp. (CCJ) — offered $3.75 per share. Hathor, which was under $2.60, is now trading at $3.90 – which is above Cameco’s bid — because the company’s management and the market both think that the offer is too low.

I think that the offer likely undervalues the property, as well, but I sold my position at $3.90 and reinvested the proceeds back into several other companies in the list of ten that I provided on August 9, because I think that they are much more attractively priced than Hathor at $3.90, which is a quick 50% increase from the August 9, 2011 price.

I’ve brought the Hathor situation forward to reinforce the point that if you do your homework and control your emotions, you can soundly defeat Mr. Market. Valuing Hathor was simple — it honestly took me about half an hour of reading to be convinced that the company was, at worst, a 50 cent dollar. Anyone could have figured that out — except, apparently, Mr. Market.

Finding undervalued securities is the easy part. The hard part is being willing to invest in a company when the valuation isn’t realized quickly through a catalyst. The harder part is when Mr. Market kicks you in the head repeatedly and your original investment is cut in half. The hardest part is when Mr. Market tries to shake you out of your investment, and have you sell and turn a paper loss into a real one.

That’s when experience becomes important. If you’ve gone through Mr. Market’s wild ride a few times, you can really know that the price quoted in the stock market on a daily basis can have no relation to the fundamental intrinsic value of a business. I held ATP Oil and Gas (ATPG) on March 6, 2009 when it was $2.78 per share. By September 2009, the stock price was over $23. I held Steak n Shake (SNS) in the fall of 2008 when it was under $3 per share. By 2010, it was well above $20.

I didn’t buy either ATP or Steak n Shake at their lowest prices. I was able to ignore Mr. Market when I was seriously underwater, and believed that what I owned in each of those companies was worth multiples of what Mr. Market was suggesting. I held through the storm, and profited on the other side.

I’ve offered another nine investment ideas on my August 9th list. There are a group of them that are Canadian oil producers that have huge exposure to unconventional oil resource plays. Right now, Mr. Market is suggesting that virtually all of their undeveloped unconventional acreage is worthless. I think that’s dead wrong and that, as a group, these companies are worth at least twice their current share prices. This idea isn’t going to work out as quickly as Hathor did. But over time, something will transpire to remedy Mr. Market’s ignorance.

Here are the companies:

1. 1. Petrobank Energy (PBG:TO)
   Price when I first wrote on Aug 9, 2011 – $10.70
   Current Price – $12.00
   Estimate of Intrinsic Value – $30 to $40

1. 2. Novus Energy (NVS:V)
   Price on Aug 9, 2011 – $.80
   Current Price – $0.90
   Estimate of Intrinsic Value – $1.50 to $1.60

1. 3. Skywest Energy (SKW.V)
   Price on Aug 9, 2011 – $0.35
   Current Price – $0.36
   Estimate of Intrinsic Value – $0.90 to $1.00

1. 4. Penn West Energy (PWT)
   Price on Aug 9, 2011 – $17.72
   Current Price – $18.18
   Estimate of Intrinsic Value – $32 to $35

1. 5. Westfire Energy (WFE:TO)
   Price on Aug 9, 2011 – $5.68
   Current Price – $6.60
   Estimate of Intrinsic Value – $12 to $13
2. 6. Bellatrix Exploration (BXE:TO)
   Price on Aug 9, 2011 – $3.6752
   Current Price – $4.00
   Estimate of Intrinsic Value – $7.50 to $8.50

I own each of these six companies. Every one of them is trading at a multiple of cash flow and booked reserves that suggests that they have little growth in the future. Oh, if Mr. Market only knew!

Follow us on Twitter @CompleteGrowth.

Devon Shire

Has the recent stock market mania caused any (or all) of the following thoughts to go through your head?

• The market is crashing, and my paper wealth is disappearing.
• I better sell something quick before it goes down more.
• I checked my portfolio five minutes ago, and I better check again, because it’s probably down further now.
• There’s an uprising in the Middle East and a Japanese nuclear meltdown.
• A Greek debt default is looming, and America is being held prisoner by political gridlock.
• Italy’s bond yields are skyrocketing, and there were more jobless claims than expected this week in the United States.
• We may enter a double dip recession in the United States, and China is clearly slowing down.
• There are so many things to be worried about, I can’t remember which one to focus on!

I would describe my feelings during these market gyrations as uncomfortably numb. But I’m sticking with a very simple belief: If the world didn’t end in late 2008 and early 2009, it isn’t going to end now.

How do I know that?

Because I vividly recall how I felt during that period. If I close my eyes, I swear that I can actually feel it. And if the investment world can get through that, it can get through anything.

Like me, you’re likely sitting on some gut-wrenching paper losses on some investments in your portfolio from this year’s craziness. With that in mind, I’d like to pass along a couple of memories from 2008/2009 that help me remember that whatever quote the stock market is assigning to my specific equity holdings today is only temporary. Over time, the underlying intrinsic value of my investments will dictate the stock prices. What’s going on today has no bearing on that.

Simply put, I suggest not making a bad decision today simply because Mr. Market has gone nutso. If the business or assets behind your equity investment hasn’t changed, and you still think your original valuation is appropriate, then sitting on your hands is likely the correct course of action.

Exhibit A – Stone Energy (SGY)

Like with most energy companies, the stock price of Stone Energy collapsed late in 2008 and into 2009.  From a high of $67 in the summer of 2008, the company’s stock price fell all the way to $1.81 on March 6, 2009.

Stone had taken on debt in 2008 to fund an acquisition right before the market collapse. It was the victim of bad timing. The increased debt load, along with the collapse in oil and natural gas prices, gave Mr. Market the willies. But, while things looked very dark on March 6, 2009, Mr. Market neglected to realize that, over time, the world was actually not going to end. Oil prices were not going to zero, and all financial markets wouldn’t stay frozen forever.

The world did not end and, roughly two years later, Stone Energy’s share price had returned to touch $35. Heck, Stone Energy’s share price had touched $20 before the end of 2009. Ultimately, it was up ten times, simply because the sun kept rising in the morning.

Imagine if you had been one of the many people who sold at $1.81 on March 6, 2009.

Exhibit B – American Express (AXP)

In 2008, the share price of American Express touched as high as $50. By March 6, 2009, the share price of the very same dominant franchise was barely above $10. The company was guilty of one thing — it was a financial company with exposure to credit quality of Americans, and leverage on its balance sheet. There was certainly reason for concern over credit quality, but Mr. Market completely lost his perspective as to what a reasonable outcome would be. As it turned out, American Express didn’t even miss a dividend payment during the darkness of 2008/2009.

If you sold at $10 on March 6, 2009, you missed out on the share price hitting $40 within six months.

Your emotions are your enemy

I’ve been investing in equities for at least 15 years. My emotions still push me towards making the wrong decisions, despite my knowing that they’re wrong. When an investment of mine seems to drop every day for three months, I generally get the urge to just get rid of it.

My only solution for combating my emotions is to make sure that I have a high degree of confidence in the intrinsic values of the companies that I own. If I know a business is roughly worth $30 per share, then it doesn’t matter that Mr. Market is offering it at $10 or $20, because I’m not selling at either discounted price.

A perfect example of this is a company that I own named Petrobank (PBG.TO).  The stock price has been cut from $25 to $11 this year.  I think that the assets underlying this business, however, have actually increased in value over this time.

Petrobank has alerted shareholders to the fact that over the past two years, they’ve acquired — very inexpensively — more than 120,000 acres in five new light oil resource plays. If Petrobank has the same core assets that they had at the start of the year, but now we know that they also have another large set of assets that have significant value, it means that the value per share has increased.  At worst, you would have to admit that these additional assets likely mean that a haircut from $25 to $11 doesn’t make a lot of sense.

Unless the actual business of one of your investments has been negatively impacted, do not let Mr. Market’s volatility impact your decisions. It’s easier said than done, but definitely the right course of action.

Disclosure: I own shares of Petrobank

Follow us on Twitter @CompleteGrowth.

Devon Shire

Oh dear, I’ve done it again…despite literally having a note on my computer reminding me to hold on tight to my cash because there are always better stock prices just around the corner, I find myself fully invested. And wouldn’t I dearly love to have cash to play with today.

I had a good plan, I really did. Slowly, over the course of Q2, I bought Canadian oil producers that were getting sold off relentlessly. I didn’t expect to pick a bottom for them all, but I thought that, as I was buying, I was likely in the same area code as the bottom. Many of these companies were down 30% to 40% year-to-date prior to my purchases. Maybe I was close to what was the bottom but, over the past week, that bottom simply fell out.

I think this stock market panic business is getting a little tired. The way I figure it, if the world didn’t end in 2008/2009, when virtually every financial institution on the planet was technically insolvent, we can probably get through what is going on today, as well.

I don’t just have the financial panic of 2008/2009 to draw on.  Last year, I was holding a large position in ATP Oil and Gas (ATP) prior to the Macondo spill.  I was also able to enjoy that British Petroleum (BP)-induced stock price collapse that took ATP from $23 to $8 in the blink of an eye, and quite a bit of my net worth with it. (I was able to exit in early 2011 around $20).  So, I’ve been riding a roller coaster over the past couple of years and, to be quite honest, I’m a little numb to Mr. Market’s regular vomiting sessions that, in the end, are only temporary.

I know what I own, and I think I know what the companies I own are going to be worth three or four years from now. What Mr. Market does in the short term is of no consequence to the ultimate value of these businesses. I’m happy to hunker down and let the managers of these companies go to work, and will wait for Mr. Market to get his head on straight.

But that doesn’t mean that I don’t wish that I had loads of cash to deploy today. And for those of you who do have cash, I’d like to present for you a list of companies that I think today are basically fish in a barrel. The key is going to be having enough patience to wait a couple of years for the rewards.

If you’d like to discuss the valuation of these companies, join me over in the forum, and we can get into the specifics.  Here, I’ll simply present the current stock price, the 52-week high, and what I conservatively think is a fair valuation for the company.

1.  Berkshire Hathaway (BRK.A)
Current Share Price – $101,000
52 Week High – $131,463
Estimate of Intrinsic Value – $150,000 to $170,000

2.  Petrobank Energy (PBG:TO)
Current Share Price – $10.70
52 Week High – $25.50
Estimate of Intrinsic Value – $30 to $40

3.  Ensco PLC (ESV)
Current Share Price – $40.42
52 Week High – $60.31
Estimate of Intrinsic Value – $60 to $75

4.  Novus Energy (NVS:V)
Current Share Price – $.80
52 Week High – $1.45
Estimate of Intrinsic Value – $1.50 to $1.60

5.  Skywest Energy (SKW.V)
Current Share Price – $0.35
52 Week High – $0.93
Estimate of Intrinsic Value – $0.90 to $1.00

6.  Petrominerales (PMG.TO)
Current Share Price – $24.69
52 Week High – $41.83
Estimate of Intrinsic Value – $45 to $50

7.  Penn West Energy (PWT)
Current Share Price – $17.72
52 Week High – $28.20
Estimate of Intrinsic Value – $32 to $35

8.  Hathor Exploration (HAT:V)
Current Share Price – $2.56
52 Week High – $3.57
Estimate of Intrinsic Value – $6 to $6.50

9.  Westfire Energy (WFE:TO)
Current Share Price – $5.68
52 Week High – $9.99
Estimate of Intrinsic Value – $12 to $13

10. Bellatrix Exploration (BXE:TO)
Current Share Price – $3.6752
Week High – $6.19
Estimate of Intrinsic Value – $7.50 to $8.50

Give me some time on this before you laugh at the performance of my picks.  Most of them are weighted to oil prices, so how about we check back in December of 2012 to see how I do?  I think that, at that point, we could have a pretty lofty oil price and, hopefully, much, much higher stock prices for most of these companies.

Happy hunting…I mean fishing.

Disclosure: I own positions in PBG, NVS, SKW, PMG, PWT, HAT, and WFE.

Follow us on Twitter @CompleteGrowth.

Devon Shire

Over the past few months, I’ve been writing about energy companies that I think own valuable land positions in emerging light oil resource plays in North America. My focus on oil has been driven by what I think is an obvious long-term supply and demand problem that we are facing in the global market.

I believe we humans have reached the point where it is going to be very difficult to raise the amount of oil that we can produce on a daily basis. And much of the incremental production that we now bring on is at a much higher finding and development cost. We aren’t running out of oil, we just can’t find any additional super giant reservoirs that produce at prodigious rates at a low cost. What we now find is smaller and, often, under a few miles of water or in a remote location. As the old super giants produce less and less every year, we have more trouble making up for that lost production.

It’s bigger than just supply issues, of course, as this oil challenge is a double-edged sword. The demand side is equally challenging. The numbers tell the entire story.

The United States has 309 million or so people who, on a daily basis, consume 19 million barrels of oil.  India and China combined have 2.5 billion people and consume 11 million barrels of oil.  In one year, each American consumes 22.4 barrels of oil, while each Indian/Chinese citizen consumes 1.6 barrels of oil — 7% of what each Americans use.  As you know these countries are rapidly developing and consuming more oil every year.  If India and China simply increase their per capita consumption to 14% of what an American uses, world oil demand grows by 11 million barrels a day.

The International Energy Agency (IEA) has historically not been one to push the panic button.  As recently as 2007, the IEA was suggesting that if daily oil demand increased to 116 million barrels a day by 2030, we could comfortably supply that.  In recent years, their message has dramatically changed, starting in 2008, when they warned the world that current energy trends are “patently unsustainable.”

I started reading about the subject of Peak Oil in detail in 2007.  The concept seemed obvious to me given the simple mathematics involved.  What I’ve never really had, though, is much confidence in the timing of serious supply/demand issues happening.

That is I think until now.  I’ll refer you to the table I’ve included below.  It’s directly from the most recent IEA oil market report, and shows daily oil supply and daily oil consumption.  Focus on two numbers.  One is the daily oil demand in the fourth quarter of 2012, which is 92 million barrels of oil per day.   The second is the daily oil supply in Q2 2011, which is 87.6 million barrels of oil per day.

We need to come up with an additional four million barrels of oil per day by the end of next year to keep the oil markets in balance.  I don’t think anyone who has been paying attention thinks that we can come anywhere close to doing that.

I don’t understand how this isn’t getting more attention in the media.  It seems to me that we have a serious oil price spike coming within 18 months and there isn’t anything we can do about it.

Link to the IEA site: (http://omrpublic.iea.org/balances.asp)

Devon Shire

In April, I devised a plan to focus on Canadian oil producers with large undervalued positions in emerging unconventional light oil resource plays. The opening paragraph read as follows:

“I feel like I’ve been spinning my wheels in recent months. I’ve been looking pretty hard for investment ideas, and I’m not coming up with much. To be honest, I’m kind of happy about that, because I think it might mean that I’ve raised my standards and finally became mature enough to sit on a large amount of cash and not worry if the market goes up.”

Mr. Market then did me a big favor by hammering small Canadian resource stocks. Since then, I’ve been able to invest almost all of the cash I was sitting on at what I believe are very attractive prices in a number of Canadian companies. The one that I owned going into this sell-off was Petrobank (PBG: TSX), and I took a deep gulp and doubled what was already a pretty large position.  I’ve previously written about Petrobank, in addition to two other companies that I’ve invested in so far — Skywest Energy (SKW) and Novus Energy (NVS:CN).

The three companies above provide exposure to three of Canada’s largest resource plays. Petrobank, through Petrobakken (PBN:TSX), has large positions in the Bakken and the Cardium. Skywest is fully focused on the Cardium. And Novus is your entry into the Viking.

Next, I was going to write about another company that I own that’s focused on a fourth resource play, but a funny thing happened before I could take pen in hand – the large Canadian unconventional oil producer Crescent Point Energy (CPG: TSX) stole my thunder. Here’s what happened.

An unconventional light oil play

In April of this year, I started buying shares in a company called Arcan Resources (ARN:TSX) around $4. I built up a half-sized position, and was hoping that the stock price would decrease further. Arcan has a massive position in the Swan Hills/Beaverhill Lake emerging unconventional light oil play.

My thesis on Arcan was basically the same as it is for Skywest and Novus:  the market values these companies based on their booked reserves. But I believe that the intrinsic value of Arcan is much higher than just its booked reserves — and stock price — because booked reserves recognize very little of Arcan’s huge undeveloped/unbooked land position that lies within the Swan Hills play.

In the case of Arcan, the company believes that at least 200 million barrels of oil are recoverable from the land that it controls.  The company has booked reserves of about 20 million barrels, or 10% of what they think is recoverable. I wasn’t sure if the upside is 10X the current stock price, but I felt pretty sure it was considerably higher.

A secret revealed

I started building an Arcan position around $4, and invested a fair amount, but was hungry for more should the stock price drop. But it did not drop — in fact, it did the opposite. From $4 in April, it opened over $7 on Monday of this week. I sold the shares that I owned it around $6.90. The 75% increase in a couple of months was even more impressive, given that virtually every other junior to mid-sized oil producer that I look at in Canada was down 20% to 50% over the same period.

Shortly before the stock price hit $7, Crescent Point, which is a major unconventional player, revealed the following about their activity in the Swan Hills/Beaverhill Lake play:

“Over the past 18 months and through a series of joint ventures, farm-ins and Crown land sales, Crescent Point has accumulated more than 380 (165 net) sections of land highly prospective for the Beaverhill Lake zone in the Swan Hills area. The majority of the lands were acquired in a joint venture with Coral Hill Energy Ltd. (“Coral Hill”) through Crown sales by way of exploration licenses, which have a nine-year development term with minimal drilling requirements to hold the lands.

“Crescent Point is also pleased to announce that it has acquired ownership of 8,000,000 common shares of Arcan Resources Ltd. (“Arcan”), which is a leading Beaverhill Lake producer, at an effective price of $5.08 per Arcan share. These shares, which represent 9% of the issued and outstanding common shares of Arcan, were acquired through the facilities of the TSX Venture Exchange. As a result of the acquisition of the Arcan shares, Crescent Point now has ownership and control over 16,750,000 common shares of Arcan, representing approximately 19% of the issued and outstanding common shares of Arcan, as of the date hereof, on a non-diluted basis.”

Obviously, word of Crescent Point’s share buying was the reason for the increase over the past few months in a very weak market.

More where that came from

I think there’s more upside in Arcan’s share price before it gets fully taken out.  But I‘m not writing about Arcan because of that. I’m writing about it because I think there are a number of companies that will be taken out like Arcan over the next couple of years.

Small companies have moved quickly to lock up acreage in these emerging light oil plays. They aren’t going to have the capital to fully develop them and will be looking to sell. But current share prices are too low for them to sell, so they will be acquired eventually at significant premiums to current share prices.

I think that the stock market is way too slow to assign value to the land positions these companies have put together. The market seems to want to wait to see production from undeveloped land before recognizing its value. But if you watch not only what the oil companies are saying, but also what they’re doing, it becomes pretty clear that the industry has taken much of the risk out of these emerging plays.

Disclosure: I hold positions in Petrobank, Skywest, Novus.

Follow us on Twitter @CompleteGrowth!!

Devon Shire

Last week, I looked at a small Canadian producer that has locked up an unappreciated acreage position in another emerging Canadian unconventional oil play.  It’s Novus Energy Inc. (NVS: CN) and has acreage in the Dodsland Viking. This week, I’ll take a look at what they own and what it’s worth.

The reason I like companies like Novus is because I think that they own more than we can easily see.  Using a stock screen isn’t going to find a company like Novus.  And what we can’t easily see is undeveloped land that’s owned within the established boundaries of a resource play — land that doesn’t carry exploration risk because the geology is known.

That land isn’t producing any oil currently.  It doesn’t have any reserves booked because it hasn’t been drilled.  So it really doesn’t show up in any financial or reserve reports.

From what I have noticed, Mr. Market prefers to wait to assign value to undeveloped land, not recognizing that value until that land commences producing oil.  These land positions, however, have significant value today that can be verified through transactions between companies.  And this land provides the companies that own them with a clear path to long, steady production growth.

In my mind, this creates an opportunity to buy companies for their current production and then just simply sit back and wait for the market to reward the company as production increases as the land is drilled.

On December 31, 2010, Novus had 9.24 million barrels of oil equivalent (boe) of proved and probable reserves with a PV10 value of $164.7 million. To make things simple for us, Novus has about 170 million shares outstanding.  Simple math suggests that Novus has pretty close to $1 per share of booked reserve value.

But, as I said before, it isn’t what we can see easily that’s interesting – it’s what doesn’t show up that is.

A typical Viking Dodsland well has 57,000 boe of recoverable reserves.  According to Novus management, the company has 575 risked Dodsland drilling locations.  Again, simple math: 57,000 x 575 = 32.7 million boe.  That’s more than three times the current booked reserves of 9.24 million boe, which offers a PV10 value that supports most of the current share price.

I’m guessing that you probably roll your eyes when someone suggests that the actual asset value of a company might be triple the current share price.  But I’m going to step your eye rolling up a notch now, because that 32.7 million boe figure assumes eight wells per section of land. Novus has competitors who have successfully gone to 16 wells per section, which would mean almost 65 million boe recoverable for Novus.  And companies in the Redwater area of the Viking pool are even considering 32 wells per section.

I don’t know exactly what the eventual amount of recoverable oil will be.  But given the booked reserves on a small portion of the Novus property already, it almost supports the current share price. I’m willing to bet that the final amount of recoverable oil for Novus is worth quite a bit more than I’m currently paying in the stock price.

It’s also important to note that this gives no consideration to use of secondary recovery techniques, such as water flooding, which could provide another bump up in recoverable oil.

Final Thoughts

If, like me, you think oil prices in the future are likely to be pretty high — and really, anything over $70 would do the trick — I think it would be pretty hard for the value of what Novus has assembled to not materially exceed the current enterprise value. And the company has basically no net debt.

And if, like me, you think $100-plus oil going forward is likely to be the norm, AND you think companies like Novus will keep finding ways to extract more oil from their large pools of original oil in place, there is potential for a multi-bagger here.

I started buying Novus at about $1.10 and am happily averaging down.  For a company this small that’s selling a commodity, there’s no telling how volatile the stock price could be in the short term, so I will continue to be patient and expect to get even better entry prices.

Disclosure: I hold positions in SKW, NVS, and PBN.

Follow us on Twitter @CompleteGrowth!

Devon Shire

If you don’t like what Mr. Market has to offer,
sit on your hands and check back in a month.

It’s amazing how quickly things can change in the equity markets.  A couple of months ago I wrote this article and complained that:

“I feel like I’ve been spinning my wheels in recent months. I’ve been looking pretty hard for investment ideas, and I’m not coming up with much. To be honest, I’m kind of happy about that, because I think it might mean that I’ve raised my standards and finally became mature enough to sit on a large amount of cash and not worry if the market goes up.”

I ended the article with the following game plan:

• “I’ve identified several interesting companies, and am going to keep digging.  Crescent Point Energy (CPG: TSX) and Petrobakken (PBX: TSX) are two of the large companies in these plays in Canada, but I think the valuation of some of the smaller players is more interesting.
• “One thing is nagging at me, though. I find it extremely hard to buy oil assets aggressively when the price of oil is over $100.  A pullback in oil prices to $70 on some relaxation in the Middle East crises could result in a big sell off of the smaller producers and give me a much, much nicer entry point.
• “I’m nibbling at a few and trying to stay patient.”

Fast forward to today, and this game plan seems to have paid off. The stock prices of small and mid-sized Canadian company stock prices have had a serious drubbing.  I’ve managed to be patient, and am now starting to put some of my cash to work.  I must say, though, that I’m going slowly, because there’s likely plenty of room for oil to fall, and stock prices of oil producers to go along with it.

Last month, I wrote about a small producer called Skywest Energy Corp. (SKW) that has locked up a nice position in key areas of the Cardium in Alberta. I think the market has greatly underestimated the value of Skywest’s acreage.

This month, I have another small Canadian producer that has locked up an unappreciated acreage position in another emerging Canadian unconventional oil play. This time, the acreage is in the Dodsland Viking, and the company is called Novus Energy Inc. (NVS: CN).

Novus Energy was formerly known as Regal Energy. Like Skywest, it is a young company. In March 2009, Regal was recapitalized, and the Board of Directors brought in a new management team led by Hugh Ross.

Ross was the CEO of Gentry Resources Ltd. (GNY: TSX), which he built and eventually merged eight years later with Crew Energy Inc. (CR: TSX) in a transaction that valued Gentry at roughly $300 million.  This money represented more than an 800% return for founding Gentry shareholders.

The business strategy for Ross and the new Novus Energy is as follows:

• • Target large original oil in place (OOIP) opportunities where little of that oil has been recovered using conventional methods
• • Apply horizontal multi-stage fracturing technology to exponentially increase recovery factors
• • Focus on light oil
• • Continuously improve fracturing techniques to reduce costs and improve recoveries

This strategy is not unique to Novus, but it is a recipe that has created a lot of value for shareholders of several Canadian companies over the past few years, and matches exactly with my own thinking.

Focus On The Dodsland Viking

Novus Energy was clearly formed with a plan in mind.  That plan was to establish a significant land holding in the Viking Light Oil Play and unlock the large amount of oil in place with horizontal drilling and multi-stage fracturing.

Some things to know about the Dodsland Viking:

• • Over 2 billion barrels of original oil in place
• • Shallow depth play (750m) which reduces drilling costs
• • Has been producing since the 1950s, through 7,500 vertical wells
• • The play is currently producing 12,000 barrels per day
• • The first horizontal well with multi-stage fracturing was drilled by Reece Energy (RXR: TSX) in 2007
• • In total, 447 horizontal wells with multi-stage fracs have since been drilled

After formation in March 2009, the Novus team took the following steps to assemble their Viking position:

• • Completed a $30mil equity raise at $.65 per share in November 2009
• • Acquired Ammonite Energy in December 2009 for $22.5 million in Novus common shares
• • Completed four other Dodsland private company acquisitions in 2009 for $7 million
• • Acquired a private company in February 2010 for $17 million in Novus common shares
• • Completed a $25mil equity raise in May 2010 at $1.10 per share
• • Acquired 73.5 net sections of land over the remainder of 2010 for $12 million

Next week, I’ll take a look at what they own and what it’s worth.

Disclosure: I hold positions in SKW, NVS, and PBN.

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Devon Shire

Last week, I introduced you to SkyWest Energy Corp (SKW), a little guy that is traded in Canada. Today, I’ll look at its valuation.

I feel valuation is not an exact science.  I like to get a rough idea of what I think a company is worth, and then compare it to the enterprise value (EV).  If it is close, then I pass. If it looks like there’s a big undervaluation by the market, I look closer to see if I’ve made a mistake. If I don’t think I’ve made a mistake, then I’m interested.

There are a couple of pretty simple ways to look at SkyWest.

Value Per Flowing Barrel

Most recent SkyWest production was 1,700 boepd. If you look at page eight of this presentation, you’ll see that the median Cardium acquisition has taken place at about $100k per flowing barrel.

That would value SkyWest, which is 100% Cardium-focused, as:

1,700 x $100,000 = $170 million

$170 million / 229 million fully diluted shares = $0.74 per share

Current share price = $0.51 per share

Looks interesting. The one comment that I would make is that this company had production of only 20 boe/day at this time last year.  As it drills its land, production will grow pretty quickly.  Analyst year-end 2011 production targets that I have seen are closer to 2,800 boepd, at which time, this valuation metric would result in $280 million / 229 million = $1.22 per share.

Value on a Net Asset Value Basis

I’m going to lay this out a little differently, and you can use it as you wish.

SkyWest believes that they have 130 drilling locations on which only 30 have had reserves recorded. They are limited in what they can book reserves on to the amount of drilling done. Those 30 locations have a PV10 value of $126 million.

If those other locations were similar to the booked locations, they would then have a PV10 value of $420 million.  Add those together, and you get $420 million + $126 million = $546 million. That would be $546 million / 229 million shares = $2.42 per share.

That isn’t going to happen, as this is pre-tax.  But cut that in half, and you still have $1.21 per share versus a share price of $0.51.

Trading at Net Asset Value Excluding the 100 Unbooked Drilling Locations

Here are a couple of final big picture valuation thoughts:

PV10 value of booked reserves on 30 locations per share is $126 million / 229 million shares = $0.55. The current share price is $0.51 per share. That means that the other 100 locations don’t have to be worth much to create some upside.

Enterprise value is 229 million shares x $0.51 = $117 million.  So, $117 million / 11 million BOE of proved and probable reserves = $10.63 per barrel of booked reserves. That seems very cheap when you consider that the vast majority — 100 of 130 locations — do not factor into this calculation.

Investors are basically paying for the property where reserves have been booked, and are getting the unbooked locations for free.

Final Comments

I’ve been watching Petrobakken (PBN) and Penn West (PWT) pretty closely.  These are the two big landholders in the Cardium.  Penn West has made it pretty clear that Willesden Green is likely the best portion of the Cardium, and that is where the majority of SkyWest’s acreage is located.  The remainder of SkyWest’s property is in the West Central portion of the Cardium at Carrot Creek that, although not as prolific as Willesden Green, is a very successful portion of the play.

What is the biggest risk in this investment? A large portion of SkyWest’s locations are not in quality Cardium areas. This does not seem to be the case based on what I know from PWE and PBN, and also from reading analyst reports.  If anything, SkyWest seems to be situated in the best spots.

The share price looks attractive to me but, because it is a small company, I expect that, at some point, it will go lower.  I started buying last week under $0.55 and will continue buying as long as it is in this range or lower.  If there ever were a company that is likely to get acquired, I’d say this is it.  If that transaction were to happen at a multiple similar to others in the Cardium, I would expect almost a double from the current share price.

Disclosure: I own shares of SkyWest.

Devon Shire

In my last column, I wrote about my recently developed interest in the unconventional oil resource plays of Western Canada. There are a few reasons that companies with oil assets concentrated here could make for excellent investments over the next five years.  Those reasons are:

1. 1. Oil is going to be in high demand over the next decade, and these companies have direct exposure to it.
2. 2. The oil reserves that these companies own are located in Canada and not in the Middle East, Africa, or Venezuela.
3. 3. Many of these companies are priced reasonably in relation to the present value of their proven and probable reserves.
4. 4. While these companies are often priced reasonably in relation to their booked reserves, a large portion of the actual intrinsic value to a potential acquirer is in the raw land owned by the company that has yet to be drilled or have reserves assigned.  In other words — pay for the booked reserves, and get the land that hasn’t been drilled, yet is in the same resource play, essentially for free.  Or, if you like, you could consider it reserve growth at a very reasonable price.
5. 5. The stock market is especially conservative in valuing the properties of companies that are in relatively new plays, even though those inside the industry may consider the play pretty much de-risked.
6. 6. And, as the icing on the cake, it’s very likely that these resource plays will grow in value as enhanced oil recovery techniques, such as waterflooding or natural gas injection, further increase the amount of oil that can be recovered.

Enough talk for now.  I think I’ve got a company that fits my criteria and is worth buying today.

A real find

The company is called SkyWest Energy Corp (SKW) and is just a little guy that is traded in Canada.  Skywest was incorporated in October of 2009 as a private company, with the intent of building an oil and gas producer focused on the Alberta Cardium play.

This is a very new company, so I can actually recap virtually its entire history for you:

• October 2009: Incorporated as a $1.5 million private company.

• April 2010: Private placement at $0.30 raising $20 million.

• April 2010: Acquires EMM Energy Inc. for 12.6 million Skywest shares and cash of $6.7mil.

• August 2010: Raises $10mil by issuing 18.5 million Skywest shares at $0.54.

• August 2010: Reports first South Pembina well — 44% working interest. Has an IP of 335 barrels and 1.2MMcf/day natural gas, combined 530 BOE per day.

• October 2010: Reports first Willesden Green well — 100% working interest. Has an IP of 515 barrels of oil and liquids and 2.6MMcf/day natural gas, combined 948 BOE per day.

• November 2010: Acquires for $8 million a Cardium land block and natural gas compression facility beside their first Willesden Green well

• November 2010: Acquires all of the shares of a private company — Base Resources — in South Pembina for $23 million, which includes a contiguous five net sections. ($10mil cash, 20 million shares issued, $3mil debt assumed.)

• December 2010: Raises $25 million through issuance of special warrants priced at $0.52.

• December 2010: Announces results of the third company well, this one at Willesden Green, which had an IP of 985 BOE.

• December 2010: Announces results of fourth company well, this one in South Pembina, which had an IP of 570 BOE.

• December 2010: Operations update — five wells now on production with total production exceeding 2,000 BOE per day. Another nine sections of Cardium land acquired through farm-ins and land sales.

• December 2010: Option grant of over eight million shares to executives, with an exercise price of 68 cents per share.

• March 2011 Update: Eleven gross wells — 9.2 net — have been drilled to date.  Six on production for more than 30 days, and have averaged 340 boepd.  Five on production for more than 60 days, and have averaged 300 boepd.  Current production — 1,750 boepd, with another 900 boepd awaiting tie in.

• March 2011:  Announces that reserve auditors have confirmed 11 million BOE of proven and probable reserves.

This is an overview of Skywest Energy from inception in October 2009 to now.  They have been busy building a company that’s focused entirely on the Cardium play, and specifically the areas of Willesden Green and South Pembina.  And here is what they have assembled in total:

• Proved and probable reserves of 10.96 million BOE — 52% oil and liquids — with a PV10 value pre-tax of $126 million.

• Internal estimate of 130 net Cardium drilling locations on which 100 have not had any reserves assigned.

• Total shares, options, and warrants issued — 229,333,224, and about $2.7 million of debt

Next week: A look at valuation and risk factors.

Disclosure: I own shares of SkyWest.

Devon Shire