This Junior Oil Stock Ticks ALL The Boxes

by Keith Schaefer on May 21, 2015

 Advertorial by Keith Schaefer

I think junior oil stocks are ready for a Big Run.  The four month drop in US oil rigs is likely to result in a very bullish weekly inventory number from now through July.

But I don’t want to run and buy any junior oil—I want to find The Best One that hasn’t run yet.  I have to use my discipline—my Blueprint for Small Cap Oil and Gas Investment success that I talked about Tuesday.

I outlined the Six Boxes I have to tick off to get me really excited; where I think I have found myself an exceptional opportunity.

✔    Proven Management Team That Owns A Lot of Stock
✔    Great Balance Sheet
✔    Proven Play with Low Finding And Development Costs
✔    Years Of Growth via Development Drilling
✔    Tight Share Structure
✔    Attractive Valuation

All my research led me to this company—an exceptional opportunity that I’ll share with you now.

This is an off-the-radar junior oil producer that ticks every box in my Blueprint.  After my research, I liked it so much I went out and bought a lot of stock myself.

The company is called Canamax Energy (CAC-TSX; DTEYF-PINK) and I’m going to show you how it ticks every box that I want to see ticked……..

Box #1 – Proven Management Team With Real Skin In The Game

This team has not one, not two but THREE senior management people who have built and sold junior companies, making their shareholders millions in the process.

Honestly, when you’re investing in these ground floor opportunities—you are really buying management.

At the top of the list is Canamax Chairman Kevin Adair that attracted me to the company.

Adair co-founded and was Vice President Engineering of Spry Energy Ltd.   Spry went from 0-2,800 boe/d of production before being sold for $225 million to Whitecap Resources—at roughly $6.80/share.

Adair chose his suitor well, as Whitecap traded at over $18 per share prior to the oil collapse and still trades at over $14.

Prior to Spry, Adair was COO and a director of Petrobank, where he was a key cog in taking production from 600 Boe/d to 4,000 boe/d.

Adair knows how to build (and eventually sell) a junior producer. Adair owns hundreds of thousands of Canamax shares.  As a group insiders own 15% of the company fully diluted. Adair and his management team’s interests are fully aligned with Canamax shareholders.

Canamax CEO Brad Gabel has started, grown and sold multiple public companies in the oil sector over the past 19 years.  His Big Win was Pure Energy Services—he was President from June 2009 until it was sold for $300 million in October of 2012.  Prior to Pure, Gabel was CEO of Canadian Sub-Surface Energy Services which he had co-founded in 1996 until its acquisition in 2009.

And Harry Knutson was an instrumental board member working with Hugh Ross to get Novus Energy sold to the Chinese two years ago.

Even the up and coming technical star, Jeremy Krukowski, has built and sold 4 junior oil producers in his career.

Adair and Gabel are major league managers who have chosen to target the world of micro-cap oil and gas.

These guys are here for one thing……to make a ton of money alongside shareholders by growing this little company into a much bigger one.

Canamax checks the first box and then some.

That means I can proceed to Box #2.

Box #2 – Low Debt–A Strong Balance Sheet

Analyst reports show Canamax with a debt-to-cash-flow ratio of between 1.0-1.5.  That’s well within the range investors want to see.

That gives them lots of dry powder—and they are scouring the micro-cap oil market for companies being forced to dump high quality assets at exactly the wrong time.

They have also got creative, selling royalties on their production at very high multiples—which really increases their Internal Rate of Return and keeps debt low.

I can check Box #2 and proceed…..

Box #3 – Low Finding And Development Costs

Canamax has very low costs for two reasons

  1. The geology/play is great
  2. It was the Steal of the Decade when they bought it

It’s main play—a Montney oil play called Flood—is perfect for a small company.

This play is drilled with cheap vertical wells; it’s not an expensive horizontal resource play.  This is a huge differentiating feature for Canamax.

The Montney oil wells have low Initial Production (IP) rates, which kept The Big Boys away (no competition for the property)—but they have very low cost wells with fast payout that make the play extremely economic.

Wells will only cost somewhere around $750,000 a pop and have IP rates of 30-50 boepd.

Flood is very similar to what Raging River (RRX-TSX) has in the Viking.  It’s a simple, boring, low cost, yet highly profitable oil play with very quick payout periods.

Part of the reason for that is they bought this asset out of bankruptcy for a crazy low price—a grand total of $1.1 million for a 100% working interest in the initial 37 sections of land.

The value of the infrastructure on that land was $15 million by itself…..multiples of the tiny purchase price!

There is a bit more to this story…

The acquisition also included a heavy oil property at Lloydminster which they sold for $570,000.

Kevin Adair is one mean deal maker! It means Canamax paid almost nothing for a fast payout oil play with $15 million of infrastructure in place…that’s why it has such low overall costs.  And it has lots of running room as we will see in Box #4.

Box #4 – A Multi-Year Inventory of Low Risk Development Drilling

This asset is both cheap and profitable. It also has a ten year drilling inventory on its current 59 net sections that will give it Big Growth.  There’s a total of 149 well locations booked and unbooked.  They recently proved up a second zone on their lands which they will be able to exploit as well.

A big bonus with Flood is that the decline rates are much lower than the horizontal resource plays. That means a steady base of production and more cash flow can be used to grow production instead of just maintaining it.

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Even after the ten years of drilling, management expects to profitably waterflood the play which will add additional barrels of reserves and generate more cash flow, and increase the life of the asset.

The neighbouring Montney play at Dixonville is under waterflood and the decline rate is only 10%.

Investors should understand that the Flood asset is exactly the type of asset the junior dividend companies want to buy—a growing oil field with a very low decline rate.  It’s the most in-demand asset class in the junior oilpatch now.

Put a tick beside Box #4, lots of running room.

Box #5 – Few Shares Issued; Low Float

The Biggest Wins come in small share structures. That gives me the leverage I’m looking for in my trades—a little bit of field success can make a big difference in the shares.

Because they have cut such good deals for properties, Canamax has guarded its share count very carefully while growing.  Canamax has only 42 million shares outstanding.

All boxes have been ticked so far…time to look at the final one.

Box #6 – An Attractive Valuation

I don’t expect companies that make it through the first five boxes of my Blueprint for Success to have a low valuation.

And that is fine by me.  Great companies should be expensive.

With the best teams, success comes at a low risk, so the Market prices a lot of future success quickly into the stock.  A profitable high growth story will quickly make a seemingly expensive initial valuation seem like a bargain.

Canamax is so small it has escaped the market’s attention.  It’s one of the very rare ground-floor companies that ticks all the first five boxes:

✔    Proven Management Team That Owns A Lot of Stock
✔    Great Balance Sheet
✔    Proven Play with Low Finding And Development Costs
✔    Years Of Growth via Development Drilling
✔    Tight Share Structure

It’s even more rare company that such a company has an inexpensive valuation.

A shockingly inexpensive valuation.

Canamax is an oil-weighted producer yet it trades at only $27,000 per flowing barrel based on Q4 2014 production.

At twice this valuation it would still be cheap.  At three times this valuation it still wouldn’t be expensive.

The reality of this low-prices oil market is that deals—mergers and acquisitions—are still being priced at $90K-$100K per flowing barrel!  That leaves a potential 300+% gain on the table for investors today.

Here is another data-point that shows how low the current share price is.

Canamax is trading at $5 per barrel of proved and probable reserves.  The average for junior producers in Canada is $15.39, says the most recent report by Canadian energy boutique brokerage firm Peters & Co.

Remember, this isn’t an overleveraged company with one foot in the grave.  This is a junior with a great management team, solid balance sheet and tremendous long term growth ahead of it.

I’ve got one more data point to put this low valuation in context.

Canamax believes that the PV10 value (a metric that accountants use to guess the Present Value of future cash flows discounted at 10% a year) of the unbooked 146 locations at the Flood property is $193 million at $70 per barrel.  That’s a lot of low-risk, high upside drilling to do.

That is $4.59 per share, against a current share price of around 50 cents.

Production, barrels of reserves and PV10.  Those are three different valuation metrics and they all suggest that this low debt company with a proven management team is trading for a fraction of what it should be.

That’s what I call a mis-understood story—and it’s where the Big Capital Gains are.

I’m long.

This article has been sponsored and reviewed by Canamax management

 

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