As a believer in sustainably high oil prices, I think that there is considerable value in near term oil
producers that trade at significant discounts to NPV and traditional cash flow metrics. I prefer near term producers that typically get re-
rated upon production. That re-
rating is often a
several multiple increase
in valuation. As such, I feel that
the risk /
reward for preproduction juniors is the best in all of the energy sector.
Many investors/analysts use cf multiples based on proven reserve life, but that is an imperfect valuation metric for fast growing producers as their "probable" reserves are typically quickly converted to proven once production and further drilling occurs. As such, looking at NPV of 2P reserves after tax at 10% is one of my preferred valuation metrics.
But I give strongest weighting to cash flow as that is what really matters to grow a company.This brings me to CEN.V, which is the cheapest, oily junior energy play I know of (CEN is about 60-40% oil reserves at the moment, but almost all of their near production ramp is oily and I expect oil reserves to increase significantly in the next year assuming they have drilling success).
CEN's 2P NPV at 10% discount after tax using $90 Brent = US$754MM (C$792MM - C$8.43/sh). The stock's current share price of C$2.50 represents a 70% discount to 2P NPV.
The company's '09 cash flow is projected to be approximately $250MM (again, using $90 Brent) = $2.65/sh. So CEN is trading at less than 1x '09 cash flow.
CEN is a Thailand play - mainly offshore oil in shallow waters (60'). The company is modestly profitable at its current production level of 12MM cfd (2000 boed) onshore gas but this production is not a near term catalyst (although these fields have considerable potential).
CEN is about to spud a 40+ well offshore drilling campaign in the next few weeks. A new build jack up rig is contracted for 3 months plus a 3 month extension to drill up two proven offshore fields and test several look-alike nearby structures. ~4000-5000 bpd light sweet oil is expected by around year end from their first field (Songkhla). Another 5-7000 bpd is expected mid '09 from their second field (Bua Ban). Management is guiding for 20,000 boed by Q4 '09, which will provide transformative cash flow.
On top of that, they are planning to drill 6-8 near-by high chance of success fields that have the potential to quintuple reserves. And with such shallow water, shallow depth wells, costs are low and speed to tie in production is relatively fast (months rather than years).
I have a ~C$8-$9 target price based on standard cash flow and NPV valuation metrics. (ie 3x cf and 1x 2P NPV after tax @ 10% discount). ...which would be roughly ~250% upside from here.
Tremendous production growth and extreme undervaluation being recognized and corrected by the market.
|Entry||11/04/2008 01:48 PM|
|Just a quick heads up to say that i exited this position at 2.05 CAD today. I didn't see the complete carnage in the energy sector coming. But it happened, and CEN was totally destroyed down to .84 as a result- so I'm finding the door on this nice bounce and considering myself fortunate not to lose bigger here.|