November 30, 2016 - 9:25pm EST by
2016 2017
Price: 0.49 EPS 0 0
Shares Out. (in M): 216 P/E 0 0
Market Cap (in $M): 110 P/FCF 0 0
Net Debt (in $M): -25 EBIT 0 0
TEV ($): 85 TEV/EBIT 0 0

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Despite our name, here is another small cap long idea. And *shudder* it is another oil company. We track stock promoters to find quality short ideas, and in the process we occasionally find a quality longs in the process. We think the following idea has a few benefits that make it timely. There was overhang from a large seller, but that was burnt through. Historical leverage and low margins have been resolved but haven't yet shown up in the financials. And a spinoff of substantial asset retirement obligation along with conventional assets should highlight the core high-value, low cost Montney gas assets. We did consider posting Sandridge as a short position. Considering the recent OPEC agreement, we think it is prudent to overlook their high cost of operations, massive potential earthquake liability, and questionable upside from their new core asset to focus on this undervalued long idea.

It is worth reviewing the three articles that were published on Chinook recently on Seeking Alpha. Value Digger does a good job with the relative valuations of Chinook and the spin-off and highlights the extreme valuation disconnect between Chinook and its Montney focused peers. Here is the link to the first article 

The Seeking Alpha articles caught our attention and called for further work. The author has done well with Chinook in the past and with certain other companies he has covered, however some of his recommendations have declined precipitously as well.

Our work on the name involved validating the valuation, exploring the reasons for the value disconnect, and evaluating catalysts for revaluation. We connected with management teams and-side analysts, evaluated precedent transactions, and deconstructed the valuations of comparable publicly traded companies. We point you to the Seeking Alpha articles for exhaustive valuation work. We think the author more or less gets it right in many pages of detail, and the more interesting aspects to us are related to the factors driving undervaluation and the Catalyst that will unlock it.

Chinook traded in line with its peers from August of 2014 until February of 2016, down about 80%. However, subsequent to then, peers are up 50% to as much as 300%. There are a few differences between Chinook and its peers that have driven this performance disconnect. These differences include Chinook entering into a strategic review of alternatives, Chinook drilling proportionally fewer wells, Chinook announcing a spin-off, and Chinook seeing substantial selling by two of its largest holders.

With a more aggressive and focused drilling program that should lead to highly economic growth, a spin-off that should be completed before the end of 2016, the Strategic review nearly over, and block transactions that culminated with the sale of the final position by the largest-selling holder, Chinook's stock price and Market valuation are positioned to revert closer to peer levels. And with the recent OPEC agreement and out performance by its most similar neighbor, Blackbird, Chinook could exceed the valuation targets in the Seeking Alpha articles and more than triple in the next year.

Management is prudent, the balance sheet is strong, the assets are proven, the prices of oil and natural gas are recovering, and the overhang has burnt off. Buy CKE.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Spin off. Overhang burned off. Rapid growth. Emergence from a strategic review process.

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