Micro-Cap E&Ps With Less Risky Businesses [Halliburton Company, Chesapeake Energy Corporation, Baker Hughes Incorporated]

PJ: Yes, but I don’t like to guess the weather. Another factor that could drive demand is that several petrochemical plants and liquefied natural gas facilities (some of the biggest end-users of natural gas) are slated to begin production over the next couple of years. We talked about how the margins for gas have improved relative to oil, but those margins could further improve if gas prices move higher. Natural gas has some good pricing momentum behind it.

TER: What are your 2015 and 2016 price forecasts for gas?

PJ: They’re $4.16 per thousand cubic feet ($4.16/Mcf) for 2015 and $4.50/Mcf for 2016.

TER: If investors are doing their due diligence on micro-cap equities and come across companies with working capital issues, should they consider that a red flag?

PJ: It is a red flag, and I would put those companies down as speculative buys. I had one company modeled as having a negative cash position within a couple of months; my speculative buy assumed the company received a capital infusion. I think that is normal for micro-cap companies. The company doesn’t have accounts receivable per se, yet has general and administrative expenses. It’s not uncommon to have a working capital deficit.

TER: You recently upgraded your rating on an oil services name. Please tell us about that.

PJ: ENSERVCO Corp. (ENSV:NYSE.MKT) is a relatively small company that provides frack water heating, hot oiling and acidizing services to the E&P universe. I like that the company is increasing its exposure to these defensive types of services. We’re in a questionable environment for oil prices. Drillers are being squeezed and rig counts are going down, but even in a down market drillers need someone to pump hot oil down a well to dislodge paraffin buildup or to acidize a well to stimulate production. ENSERVCO has done a good job gaining market share in its existing markets, as well as with making small acquisitions and growing organically into new markets.

TER: It recently made a small purchase of 12 hot oiling trucks. How is that material to its top line, if not its bottom line?

PJ: ENSERVCO pointed to about $6 million ($6M) of revenue potential related to that purchase, and that’s what triggered my upgrade. The stock recently went down to levels where an upgrade made sense. This is an example of a company being able to develop relationships with much smaller companies so that it can make acquisitions to grow its business.

TER: What is your rating?

PJ: It’s a Buy-rated company. I have a $2.85/share price target.

TER: What names have you recently launched coverage on?

PJ: I launched coverage on Taipan Resources Inc. (TPN:TSX.V), which operates in Kenya. I have a Speculative Buy rating on the company given that it doesn’t have reserves at this point; it has “prospective resources.”

“Micro-cap companies have been overlooked in the shale play revolution happening over the past couple of years.”

What I like about the resource is that the first well, which will go down in December, will test a structure that’s identical to several geological structures that have proven to be 100+ million barrel (100 MMbbl) discoveries over the past few years. In fact, the company’s exploration manager found 1.75 billion barrels in a similar geological structure.

TER: Though Kenya is one of the more established countries in Africa, it is not an established oil production jurisdiction like South Africa or even Egypt. Is the risk of Kenya worth the reward?

PJ: I haven’t seen a lot of civil unrest, especially in the exploration areas. People automatically chalk up every country in Africa as being dangerous, but not every country is Sudan. Taipan is a Speculative Buy: It’s a risky name and it’s going to be years until any success becomes commercial. Tullow Oil Plc (TLW:LSE) is the main player in this East Africa rift play, and Tullow has discovered enough oil to justify the construction of infrastructure, which is estimated at $4.5 billion ($4.5B). And Kenya and Uganda are working together to commercialize the resource there.

The other thing I want to point out is that Premier Oil Plc (PMO:LSE), a large company based in the United Kingdom with a market cap of about $1.9B, paid $30.5M for a 55% interest in the well that’s going to be tested in December—and it’s allowing Taipan to operate the well. That investment speaks volumes about Premier’s belief in Taipan’s prospects in Kenya.

TER: Certainly, Chinese state-owned enterprises have bought a lot of oil and gas assets in Africa. Is there a chance of that happening in this case?

PJ: Chinese firms have traditionally come in after these plays get up and running. That has happened offshore in Brazil, in the Gulf of Mexico, and in the Eagle Ford shale. If China comes in, it would probably be farther down the road.

TER: What is your price target on Taipan?

PJ: It’s $1.10/share.

TER: Are there other stories you’d like to share with us?

PJ: Miller Energy Resources (MILL:NYSE; MILL:NASDAQ) is a stock that’s been killed, yet its production has come up. And the company has made significant management changes, which should satisfy frustrated investors.

“I expect further consolidation in the oilfield services sector, in an effort to compete with the new Halliburton.”

Miller hired Carl Geisler, former managing director of investments for Harbinger Group Inc., as CEO. At the same time, it’s retained former CEO Scott Boruff’s deal-making expertise. Miller has done a great job of consolidating assets, acquiring assets, finding new reserves and developing resources. Production should continue to climb. In the latest quarter, Miller produced 3,300 barrels of oil equivalent a day (3,300 boe/d). Company guidance suggests that Miller will exit the fiscal year, which ends in April, at 6,000 boe/d. We calculate its net asset value per share at more than $7.50. Its midstream and rig assets alone have been appraised at $175M, and that does not include the value of its reserves. This company has the defensiveness of having real midstream assets that are strategic in nature, meaning that they’re the only production facility in the regions where Miller operates, and it doesn’t have to rely on the oil price to maintain the entire net asset value.

Pages: 1 2 3

Leave a Reply

Your email address will not be published. Required fields are marked *