STRIKER EXPLORATION CORP SKX.
May 22, 2016 - 7:06pm EST by
valueshort
2016 2017
Price: 1.40 EPS 0 0
Shares Out. (in M): 32 P/E 0 0
Market Cap (in $M): 39 P/FCF 0 0
Net Debt (in $M): 10 EBIT 0 0
TEV ($): 49 TEV/EBIT 4.9 0

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  • Oil
 

Description

Despite our name, we will occasionally put out buy recommendations as well as shorts. This one is a small Canadian oil company. It is cheap and is in the midst of a strategic review, which we think will culminate in a corporate sale at a premium to the current price.

Striker produces 2,500 boepd, mostly oil, in the Belly River play in Alberta. It was previously called Elkwater, and has an unusually strong board for a small company. Of note, the founders of Raging River and Painted Pony, both billion dollar oil and gas producers, are sitting on the board. Our understanding is that, as Striker trades at a discount so it can't make accretive acquisitions, and it hasn't gotten to scale yet organically, the company was put up for sale.

For context, Striker trades at 4.9x ev/dacf and $21,000 per boepd, according to an investment bank's estimates, versus a peer average of 10.4x and $54,000. The bank calls it a "steep discount" and we agree.

Of note, that bank projects Striker to exit 2016 with less than $2 million of debt, putting it among the lowest d/cf companies in the space. This makes Striker a prime target of a stock for stock deal, where it could be used to de-lever another public company trading at a high multiple. Low debt also means that Striker can continue as an independent entity even in a lower for longer oil price scenario. 

The list of potential buyers is long, and it includes serial acquirors like Pine Cliff (trading at 17x 2016 dacf), Tamarack Valley (trading at 9.4x), Nuvista at 9.9x, and Cardinal at 12.7x. Each have operations in Strikers area.

A good recent comp is Boulder Exploration, a belly river focused company, which was bought out by a premier Canadian private equity firm (Arc Financial). Boulder was bought for 9.2x ev/dacf and $48,000 per boepd, in February, when the price of oil was $12 per barrel lower than today.

Boulder had drilled more wells and had more production than Striker, and it's area is considered more de-risked than Striker's. We are betting that the appropriate discount is closer to 25% than 50%.

We think Striker could announce a corporate sale in the near term, and we think it could achieve $2 per share in the sale, or under $30,000 per boepd. We think that if there is no sale, the stock could rise anyway over time as it is well governed, has a strong balance sheet, and trades at a discount to peers and to the recent Boulder sale.

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.

Catalyst

Sale of the company for $2+ per share

Re-rating of the stock over time if no sale

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