GXE - Gear Energy

[investor-man]

This has been a good one to reflect on. It wasn't hard for me to buy this one, but it certainly wasn't something to go out and brag about while oil companies were going bankrupt left and right. While I do live in NYC, I'm glad I don't work on Wall Street. I could see how holding this would have been tough to share with colleagues, even though clearly a good decision.

[tombgrt]

Some fool just bought GENGF at a 25% premium to the Canadian stock price. Probably assumed he was buying GXE instead of GENGF.

 

Let the frenzy begin!

 

This has been a good one to reflect on. It wasn't hard for me to buy this one, but it certainly wasn't something to go out and brag about while oil companies were going bankrupt left and right. While I do live in NYC, I'm glad I don't work on Wall Street. I could see how holding this would have been tough to share with colleagues, even though clearly a good decision.

 

Yes. Another neglected COFB topic too. Too small and ugly, taking too long. Certainly wasn't brooming with confidence during early 2016. I've owned it for more than 2 years, it's hopefully time to profit. Was a 15% position during much of 2016 - 2017 and raised it to 30% late 2017. We'll see how well siting tight goes as we - hopefully - move up.  8)

[Pondside47]

I have read from a few well known value investors that investing is determining the private market value of an asset and to try to buy it for less on the stock market.

 

Currently, Gear Energy trades for $33,300 per boe/d and carries $17,000 of debt per boe/d. Its EV/2P of reserves is $8.32/boe.

 

On the other hand, Twin Butte trades for $18,300 per boe/d (using current price of convertible) and carries $20,700 of debt per boe/d (convertible at par). Its EV/2P of reserves is $4.64/boe.

 

A bit less than half of Twin Butte is the exact same asset as Gear or Lloydminster heavy oil produced with low cost horizontal wells. The other half is Provost medium oil or wells that are also shallow with similar cost but, with a product that sells for more than heavy oil.

 

It appears that Twin Butte cannot find a buyer for itself at around these prices. So if you are a Gear Energy holder and are also exposed to bank credit line redetermination, I do believe that you have to ask yourself what is your margin of safety at current price? What is your downside if the banks also decide to reduce again their credit line and demand some repayment?

 

Cardboard

 

Bringing up a post from 2 years ago. Looking back, what can we learn from the bankruptcy of Twin Butte vs the survival of Gear Energy? In other words, regardless of the outcome today, was it the right decision to hold on to Gear at that time when Twin Butte could not find a buyer for its assets? Was it the fact that Gear had more drilling location than what's booked into the 2P reserve? Or was it because Gear's founder and management were simply more resourceful in terms of lining up rescue compared the the management of Twin Butte?

 

 

[investor-man]

I have followed and read much of Cardboard's advice and found it very helpful and rewarding, so I think this simply echoes what we all know to be true: none of us can predict the future.

 

As to my investment in Gear - it just read like "value-porn". The monthly letters are amazing. The CEO is amazing. The board members are amazing. I've noticed that every investor I admire consistently states that companies like this are where they've made the most money, and that they wished they had avoided the cigar butt investments even though some of them work out. That's is what I want to learn from this.

[tombgrt]

http://gearenergy.com/wp-content/uploads/2018/07/Press-Release-July-23-2018.pdf

 

Light oil acquisition.

 

Maybe first time in a while market reacts positive to M&A activity in the Canadian E&P space.

 

 

And I agree Investor-man. Also believe this acquisition will ultimately help them continue their growth (or even speed it up). Good diversification of asset base. Need to just continue sitting on our hands and soon enough GXE might even command a premium vs peers.

[bizaro86]

http://gearenergy.com/wp-content/uploads/2018/07/Press-Release-July-23-2018.pdf

 

Light oil acquisition.

 

Maybe first time in a while market reacts positive to M&A activity in the Canadian E&P space.

 

 

And I agree Investor-man. Also believe this acquisition will ultimately help them continue their growth (or even speed it up). Good diversification of asset base. Need to just continue sitting on our hands and soon enough GXE might even command a premium vs peers.

 

I like this. They paid a low price based on cashflow. The high liability management ratio suggests these are high rate wells and not much legacy/inactive stuff came with it. Torquay in SK is a growing, economic play, so there is an opportunity to drill this further and sell it. 50 contiguous sections is a big enough asset that they could sell it to a big company at some point. Saskatchewan is a better regulatory environment than AB, so moving more assets there is nice. Finally, growing the size of the company probably allows them to get a re-rate.

 

I wouldn't normally be in favour of them issuing stock at $1.35, but I think the value received here is sufficient to justify it.

[tombgrt]

Agreed. I think this way both parties win here, not zero sum. Steppe wouldn't really have been able to grow their production given debt overhang.

[Cardboard]

The main negative with Gear, and it has been for a while, is its reserve life. It was only 9.5 years on a 2P basis prior to this acquisition.

 

Makes it real hard for me to justify when I have CVE trading at the same flowing metrics with a cost per barrel in the ground of $3.80 vs $14.25.

 

Then you have decommissioning liabilities of $79 million which is not insignificant at Gear EV. Then the decline rate.

 

Cardboard

[bizaro86]

Their reserve auditor probably cuts their wells off at a specific RLI. I own CVE too, but given how reserves are done I don't think their RLI is a big deal.

[Cardboard]

I have 30 companies in my spreadsheet (mostly horizontal wells producers) and GXE is the only one below 10 years. If you were to do it on PDP reserves, it is pretty low.

 

That is something that you guys should ask the CEO about IMO.

 

Cardboard

[cameronfen]

I have 30 companies in my spreadsheet (mostly horizontal wells producers) and GXE is the only one below 10 years. If you were to do it on PDP reserves, it is pretty low.

 

That is something that you guys should ask the CEO about IMO.

 

Cardboard

 

If I may take the devil's advocate position, Gear is a really good operator, I think there performance and reputation of there executives demonstrates that.  If you trust that management will make good acquisitions then you dont want their PDP to have a long life.  The longer PDP is the more capital you have lying around earning no return.  The faster you can extract the oil out of the land the less time you have money tied up in capital, land, or management costs, without the assets being fully productive.  This is one reason their ROI is so high, they are very effective in extracting as much of their PDP as fast as possible.  The analogy here is with asset plays and compounded and almost looking for the opposite in P/TBV for one versus the other. 

[Cardboard]

Yes they are a good operator and have done a good job at keeping costs low and made heavy oil wells look pretty attractive with sound drilling and fracking techniques.

 

However, reserves is the lifeblood of an O&G company. And even if it would be nice to extract everything instantly from PDP, you can't. So maybe I should have mentioned 1P instead of PDP.

 

On that point, 2P NAV is how you normally assess value. Before taking this acquisition into account, GXE trades at 0.83 times which is pretty high vs an average universe at around 0.4 to 0.5 times. And keep in mind that evaluators are using energy prices in future years at higher prices than today.

 

So if people are looking for a premium, it seems to be already trading there today.

 

Cardboard

[cameronfen]

Yes they are a good operator and have done a good job at keeping costs low and made heavy oil wells look pretty attractive with sound drilling and fracking techniques.

 

However, reserves is the lifeblood of an O&G company. And even if it would be nice to extract everything instantly from PDP, you can't. So maybe I should have mentioned 1P instead of PDP.

 

On that point, 2P NAV is how you normally assess value. Before taking this acquisition into account, GXE trades at 0.83 times which is pretty high vs an average universe at around 0.4 to 0.5 times. And keep in mind that evaluators are using energy prices in future years at higher prices than today.

 

So if people are looking for a premium, it seems to be already trading there today.

 

Cardboard

 

My point is not that PDP isn't like a valid way to value and E&P, my point is you are too used to saying PDP is 3x EV this company is a good buy.  PDP is .8 of EV this is overvalued.  This is one way to buy E&P but not the only way.  Gear is a different kind of E&P.  One reason their PDP is so low, is because they have expertise in extracting oil from land really fast.  This results in high ROI.  If you want more PDP as a premium to flowing barrels or market cap, by necassisty you will lose the ROI that makes Gear attractive.  I don't think you can insist on a higher reserve life without significantly harming ROI.  Personally ROI is more what I look for. 

[Pondside47]

http://gearenergy.com/wp-content/uploads/2018/10/Gear-Insider-Trading-Report-October-5-2018.pdf

 

Latest insider purchase record shows Ingram exercised option purchase at $1.17 a share, spending $136K CAD in total.

[Pondside47]

I hate to bring up this topic but does anyone know if the borrowing base is determined by WTI or an actual price reflecting the WCS differential?

[Cardboard]

It is based on the NPV of reserves so it will use WCS future estimated price for the heavy portion.

 

If you look at the Annual Information Form, the evaluator shows assumptions used.

 

Cardboard

[Pondside47]

It is based on the NPV of reserves so it will use WCS future estimated price for the heavy portion.

 

If you look at the Annual Information Form, the evaluator shows assumptions used.

 

Cardboard

 

Thanks, but I don't think the AIF shows the assumption or details of the new debt facility after September acquisition. Any idea why Gear can't get rid of the semi-annual review of borrowing base? Is it more of a size issue?

[Cardboard]

Amended credit facility would have taken into account reserves and cash flows acquired to determine new authorized amount.

 

The semi-annual review is standard procedure accross the industry especially for small to mid-cap players.

 

The bankers will review recent results with the company, cash flow, covenants and yes will likely calculate NPV using strip prices (actual). They also look at PDP NAV and 1P and not only 2P.

 

Cardboard

[influx]

Amended credit facility would have taken into account reserves and cash flows acquired to determine new authorized amount.

 

The semi-annual review is standard procedure accross the industry especially for small to mid-cap players.

 

The bankers will review recent results with the company, cash flow, covenants and yes will likely calculate NPV using strip prices (actual). They also look at PDP NAV and 1P and not only 2P.

 

Cardboard

 

 

Not much interest here, eh? Is anyone invested in this one or PRQ?

[tombgrt]

Trading at a ridiculous price here. Wcs pricing at 2018 highs, not impacted by line3 delays (in fact benefits because of temporary gov. restrictions). Should cut off at least 20m in debt by end of q2. Should consider buybacks too, especially once production up again.

[Spekulatius]

Trading at a ridiculous price here. Wcs pricing at 2018 highs, not impacted by line3 delays (in fact benefits because of temporary gov. restrictions). Should cut off at least 20m in debt by end of q2. Should consider buybacks too, especially once production up again.

 

Looks like one of the better run small cap E&P. At least they mention reserves/ share and not just total numbers and they are profitable (excluding the swings from hedging) in the current price environment. how much could they earn in a good year- $40M CAD? that would be 18c/share or a PE of 3x.

[tombgrt]

I don't want to make specific guesses but even at current wti of 60 and wcs diff of 10-15, they should be able to remove $20-25m by end of Q2. Then make up your mind about production growth after they pay back some debt and where prices for (heavy) oil are likely to go. I don't think much more in a good year would be outlandish. But they definitely could use a good year to grow production meaningfully and show how much they lowball actual reserves on hand.

 

Current stock price is purely sentiment based. Was valued 100% higher last summer at same wcs prices, which even seem more stable now. It was cheap then. Don't know what to call it now... Also consider stock price is the same now as when wcs price was just $10...

[tombgrt]

Below some short snippets from e-mail convo I had with Mr Gillmore.

 

Current US$60 WTI, US$10WCS differentials and the associated strong forecasted cash flow is very encouraging for the fundamentals of the company

However, to continue to suffer a low share price is painful, to say the least.

It is of limited comfort that the rest of our peers are suffering similar fates.

Investor sentiment for junior Canadian Energy feels like it has never been worse

All the reasons are discussed daily; pipelines, politics, rail, egress, etc.. etc..

After suffering the ridiculous prices of Q4 2018, I think investors are just plain scared to invest in Canada.

 

Regarding NCIB, we discuss this option regularly and to date the Board of Directors (who are also very large shareholders) have consistently prioritized debt reduction over share buybacks. I cannot speculate when or if their direction on this may change. We do not have a specific debt target in mind, but have tentatively started planning for a cash flow based investment in the second half of 2019, yet to be finalized

 

If you look at the hedging summary in the new presentation you will see a new contract (which is on rail) for 1,000 bbl/d Apr to Dec with a WCS diff collar of $15-$26US/bbl. We will continue to look for similar opportunities in the future. We are also not afraid of a longer term contract but have yet to be offered anything compelling.

 

 

That answer is more difficult to address right now as production continues to be noisy due to apportionments. And capital efficiencies can vary greatly depending on the total scale of capital invested and the balance between heavy and light oil opportunities. We are hoping to clarify full 2019 expectations with a formal budget in the next month or so. Hopefully our plans will benefit from further clarity/stability on egress and pricing by then.

 

(Second alinea from this part followed on a question I had on current sustaining capital and how it is evolving considering the latest acquisition.) Let's see what the next month brings. Also updated presentation online.

 

With the rumblings at the Canadian federal government level and more clarity for Line 3, not to mention Trump pushing for Keystone XL, you would think the market gets slightly more optimistic about Canadian E&P. They really are in 'wait and see'-mode. But for Gear apportionments remain maybe the biggest issue. Let's hope they can get mostly past that in 1-2 years time.

 

[Lakesider]

Thanks for sharing this Tom!

[investor-man]

Thanks for sharing this Tom!

 

+1