The Canadian company Pan Orient Energy - very similar to its compatriot Africa Oil, featured here a few weeks ago - is this month’s (very) exotic idea.
A warning to start with: we recall that these ideas are completely outside the investment process of 4-Traders. As our regular readers know, the 4-Traders investment methodology privileges big market capitalizations with a strong growth that are propelled by a positive momentum.
We share these ideas for the sheer pleasure of analysis and their unorthodox nature, rather than in an ‘investment advice’ context. They are thus reserved for savvy speculators who understand what they are getting themselves into.
Pan Orient Energy, as its name partially indicates, is an oil exploration and production company focused on the Far East, in this case, Thailand and Indonesia. Just like Africa Oil, the company shows a solid financial situation and a profile that is quite original in the industry.
You can find a full presentation of its activities here. In addition to the annual report, we can use the former as support to value the company via a careful sum of the parts.
So, with a capital of 55 million shares - on a diluted basis - that means there is per share:
(1) 0.58 CAD of cash.
(2) 0.25 CAD of proven and probable reserves in Thailand - equivalent to half a million of barrels and equivalents - with a proven history of production and development.
(3) 123 million barrels of estimated exploitable reserves in the heart of the East Jabung oilfield in Indonesia. This oilfield is developed in partnership with Talisman Energy, the armed wing of the exploration and production of Repsol, featured in detail here last month.
(4) 141 million barrels in assumed exploitable reserves in the Canadian oil sands.
(5) 0.18 CAD in debts and receivables.
Counting only the cash, the proven reserves in Thailand, and the debts, the net value comes down to 0.65 CAD per share. Compared to a price of 1.20 CAD per share - at the moment this article is being written - it seems thus that the market attributes only 0.55 CAD per share to the Indonesian and Canadian reserves, or a ridiculous amount of just 30.2 million CAD for those 264 million barrels that are still in the pipeline, or 0.08 USD per barrel!
As a reference, the big players traditionally renew their reserves at prices that lie between 5 and 20 USD per barrel. The price varies depending on the quality of the oilfield and the existing infrastructures (pipelines, port terminals, etc.), as well as the risk related to the concerned geography.
The exploitation of the Canadian oil sands is known to be difficult and expensive. We have no idea of the quality of the Canadian oilfield, and no tangible clue to sketch a valuation: therefore, let’s keep things simple and count this asset as zero.
While it’s also impossible for an amateur to get an idea about the quality of the East Jabung oilfield, we’ve got an interesting indication about its potential here: the involvement of Talisman, which has acquired 51% of the license.
The geologists from Talisman know more about this business than we do: despite the undeniable risks - both economic and political - it is a priori reasonable to assume that they don’t invest in this oilfield blindly. This is thus an interesting sign of confidence, just like the involvement of Maersk Oil with Africa Oil in Kenya.
Furthermore, we know that Talisman/Repsol is going to dig a third prospective well to evaluate the quality of the Indonesian oil field by the end of the year. The achievement - or failure - of the investment thesis is thus a binary - and very near - one: if the petrol gushes, the mining concession will leap in value and the share price of Pan Orient with it; if, on the other hand, the drilling doesn’t lead to anything other than a so-called dry hole, the hopes set on Indonesia will be gone.
The shares of Pan Orient are thus, like those of Africa Oil, an authentic, old-school lottery ticket: what we’ve got here is a well-capitalised company, that a priori has interesting assets in geographies where only very few investors dare to venture and whose shares provide a ‘times five or nothing’ kind of optionality.
According to the author, Pan Orient and Africa Oil are a ‘Graham & Dodd’ type of idea - after the authors of Security Analysis and professors of Warren Buffett at Columbia - and of much less quality than for instance Era Group or Diamond Offshore.
The assets of Era Group and Diamond Offshore were known, the discounts were clearly quantifiable and the probability of a turnaround of the cycle was high - the latter have by the way materialized, since both shares in question have doubled since we featured them here.
It remains interesting however to keep today's idea on the radar.
Translated from the original article.
Article published on 07/09/2018 | 18:59