AET.UN.TO - Argent Energy Trust

[xtreeq]

Guys,

 

I think the stock is now cheap, but would love for input from people more experienced with O&G. My brief thesis:

 

1. A Canadian Trust with US Oil assets in TX, OK, CO, KS and WY currently producing ~7,000 BOEPD.  it is more like a US MLP than a US O&G Trust and perhaps this is why it has lower exposure - see this great SA write-up from last month:

 

http://seekingalpha.com/article/1769112-cheapest-u-s-oil-with-a-big-yield

 

It has high (and growing) netbacks per barrel of over 41 dollars, 28 years of 2P reserves and produces about 72% liquids. The company is comparatively attractive based on these parameters compared to other O&G companies.

 

2. Since the article the share price has dropped from 8.7 to 7.7, a 52 week low, with a recent drop from over 10 to 7.7 in 6 weeks (from early October) and despite a successful rights offering of 8 m shares on Aug 15th at 10.2 per share that was fully subscribed (total shares going from 50 m to 58 m);

 

3. MVe = 450 m, Debt =  18 (line of credit) + 88 + 60 (existing + October convertible debentures) +14 (Op leases) = 180 -> TEV = 630; TTM CFO 53.4 m, so CF yield ~ 8.5%

 

4. Both co-CEOs and the CFO purchased shares in October at around 9 dollars, or ~17% higher than the current stock price. They have continued to purchase shares in November, buying over 32,000 shares this Thursday and Friday (Nov. 14 & 15th).

 

5. Dividend yield of 13.6%, guaranteed (for now) by the company until the end of 2014 - paid monthly.

 

Q3 results were out on Nov 12 and were good IMHO but the stock declined further. Should the company return to its unit issuing price in a year's time total return would be roughly 34%. There is always the potential of a buyout or an activist (e.g. Ichan), as others have discussed with respect to Canadian O&G companies.

 

The company doesn't carry much debt, has increased its liquidity via both equity and debt (debentures and increase of 45 m to the bank line of credit) and from what I can tell its development plans are reasonable. The company is close to BE on a net income basis and I think it will get to positive NI in 2014 as its sales increase outpaces its SG&A (this is my hope, I have nothing concrete on which to base it at the moment).

 

The downside is protected by the fact the company has lots of reserves and I think the dividend yield will get to the "stupid" level if it falls much below 7 dollars.

 

Again, I'm a novice in O&G but would appreciate the learning opportunity from more experienced members!

 

Cheers!

 

 

[Hielko]

With zero replies on your post the contrarian in me is thinking that this might be a good idea...

[constructive]

The dividend policy seems aggressive, given that they also need to invest in growing production in order to justify the share price.

 

Why has it slumped so much in the last 2 months?

[Hielko]

I have a feeling that the company doesn't know this either:

 

CALGARY, Nov. 18, 2013 /CNW/ - Argent Energy Trust ("Argent" or the "Trust") (TSX: AET.UN) notes that there has been continued unusual price volatility in Argent units over the past few days. Argent unitholders can be assured that there are no material operational or financial events impacting the Trust's business beyond what has previously been disclosed. Argent's current 30 day production average is over 7,100 boe/d (72% Oil and NGLs) and it remains on track to achieve its 2013 average annual production guidance of 5,700 boe/d and 2013 exit production guidance of approximately 7,000 boe/d. Furthermore, Argent's current distribution level remains intact and the Trust has no plans to reduce the level of distribution.

 

And I also see a lot of insider buying.

[alertmeipp]

Depending on which metrics one is looking at.. there are a few names that are cheaper.

But I like the insider buy. What's insider ownership.

[no_free_lunch]

I don't really get the dividend.  They have negative operating cash flow, and massively negative with capital investments.  Looking at the cash flow they issue $83M in new units in the last quarter and took out debt.  They then use the cash from the unit sales and the debt issuance to pay a dividend and do their exploration.  I get the exploration angle but paying a dividend when you are issuing shares seems like horrible capital allocation to me.

[no_free_lunch]

What's insider ownership.

 

This is the one positive I do see.  The Co-CEO owns about 82k shares today versus 36k shares on Oct 15.  It looks like the CFO went from practically nothing to $100k in the past month.

 

DISCLAIMER: The insider trading website for canadian stocks is hard to use and I may not understand what I'm seeing.

[bskptkl]

What's insider ownership.

 

This is the one positive I do see.  The Co-CEO owns about 82k shares today versus 36k shares on Oct 15.  It looks like the CFO went from practically nothing to $100k in the past month.

 

DISCLAIMER: The insider trading website for canadian stocks is hard to use and I may not understand what I'm seeing.

 

Try this site as a shortcut for insider activity: http://canadianinsider.com/node/7?menu_tickersearch=AET+|+Argent+Energy+Trust

I agree SEDI not the most user friendly.

[Cardboard]

These guys have issued a convertible debenture in October and it seems to have coincided with the start of the decline: buy the convert/short the stock which seems to be a favorite for some traders.

 

I have not had time to look at the financials but, here are some concerns/questions to be addressed IMO based on what has been mentioned on the thread so far:

 

1- Canadian "trust" with only U.S. properties. Taxation is now a big issue for trusts in Canada. Only a few properties qualify for exemption. I would spend some time really figuring this out: can their tax treatment change and why are they only holding U.S. properties?

 

2- 7,000 boe/day means a very small firm, so any change like a higher gas content in their wells or higher decline rate could mean a big change in profitability. Being in 5 States to produce only that amount is also concerning. It may seem like good diversification but, the trend with oil & gas firms these days is to focus on a few plays and really understand the geology and best method to extract at lowest cost possible.

 

3- Hedging and what has been contracted so far. There is an apparent glut of oil now in NA which has caused many small and mid cap oil & gas stock to be decimated in the past few weeks. Sometimes prices go much worse before getting better. Can they survive $70 oil? What is their selling discount to WTI? How are they shipping it?

 

4- Analysts in Canada are going crazy these days if net debt to cash flow exceeds 2 times. If that is the case, they issue downgrades and kind of try to force the company to sell assets at distressed prices to rectify the ratio. This is happening even if no debt covenants have been or are close to being breached. Since we are in a buyers market, these idiots are creating or at least magnifying the issue.

 

5- The dividend model with an oil & gas company is a difficult one. Many have had trouble: LTS, PWT and many others. The payouts never seem conservative enough to account for capex, oil and gas prices, debt service, etc. The stock sticks at a plateau or at an attractive yield and once people get worried about the capability to pay it goes down, down and down. All of a sudden cash flow is not sufficient, the dividend is cut partially or completely and the stock collapses. All along management kept giving reassurances.

 

My suggestion would be that you look at the company with zero regard to the benefit of receiving a dividend. Consider the dividend as an obligation and compare with all other firms in the same sector to determine if it is cheap or not.

 

Cardboard