Stock Trades: Sold TriOil Resources, Bought Terra Energy

Today, I sold 1,000 shares of TriOil Resources (TSXV:TOL) at $2.98.

In at $2.95, out at $2.98, profit= +0.34% after commissions.

I also bought 12,500 shares of Terra Energy (TSX:TT) at $0.27.

Trade Commentary 

This is not profit taking on TriOil, this is simply rotating money into Terra Energy which so far has returned me more than 30% today (on paper). The stock soared following a news release announcing asset sales for $80 million which leaves them with under $10 million in debt if my calculations are correct. That’s a far cry from the $94.5 million they carried at the end of Q2.

Terra Energy was first mentioned by fellow investor Lee Roth. My colleague Peter Norris followed-up by contributing the post Terra Energy – Unlocking Value from an Asset Rich Junior which highlighted the high risk high reward opportunity. With today’s announcement, the risk has been greatly reduced which is why I jumped in. Big thanks to Peter and congratulations to those that held and bought in the teens.

Now that the debt has been almost eliminated it’s time to enjoy some number crunching on Terra. Let’s start with EV/BOED where the company is trading right now at less than $10k/BOED based at a share price of $0.35, 5,000 boe/d of production and $10 million in debt.

That is obviously VERY cheap, there’s an easy double from here simply by doubling the EV/BOED. Even the WORST NG weighted company in my listing (WDN.TO) is trading at ~$17,000/BOED!

However, that is not the number I trust the most, I need precise operating costs going forward for 2013 to accurately evaluate the upside potential. I will update this post when I get more information.

[Update] Q3 confirmed what I suspected all along, their high operating costs result in horrible netbacks. At $3.30 per mcf, TT will barely realize $5/barrel in profit. In my opinion, ~$0.35 per share would be a fair value at 3.5x CFPS. I will certainly be looking to exit around that mark.

The next catalyst for the stock price is announcing the closing of all dispositions.

Where do you think the stock will be in December?

30 comments to Stock Trades: Sold TriOil Resources, Bought Terra Energy

  • Peter

    Talked to the Company. They can’t disclose which properties were sold yet until the purchase & sale agreements are signed. Stated that the bids are all from larger entities with no issue over financing. Hope to close the transactions prior to the December 15th deadline. Also said that their production is pretty much totally intact (5000 boed) & the land sales will not have much effect on reserves as well (at Dec 31 2011 these were at 34 million boe P&P). Looks great!

    • Mich

      That’s very positive regarding the the buyers being larger entities. I’m still wary of their netbacks, VPF would not confirm opex per boe for 2013 until the deal closes. Then they will release their official guidance, this could cap the stock.

  • Lee Roth

    Mich,

    I think I deserve the credits here as I have been the first who pointed out Terra and how grossly cheap it is. I have also posted two articles which talk about Terra’s gross undervaluation as below:

    In addition, please compare TT.TO with PPY.V

    PPY.V (Painted Pony) has VERY SIMILAR production like TT.TO (both around 5000-5500 boepd) with the same nat gas portion (83% nat gas). However:

    1) TT.TO will be DEBT FREE because it has ALREADY sold a minor asset few weeks ago and the debt is $87M currently. The company says that the current asset sales exceed $80M so the debt will be PAID OFF completely.

    PPY.V (Painted Pony) is NOT debt free.

    2) That being said, the DEBT FREE TT.TO has a market cap of $35M currently which means a 7,000 $/boepd valuation !!

    PPY.V has a 130,000 $/boepd valuation !!

    3) TT.TO has still 350,000 net acres high prospective land while PPY.V has only 1/3 of this land!

    4) CQE.TO, AAV.TO, PMT.TO have all valuation of 40,000 $/boepd and higher! Apply this on TT.TO to see that TT.TO should be at least $200M CURRENTLY. This is C$2.

    Cheers,
    Lee

    • Mich

      Lee,

      credit is given where it is due, you were first to mention TT back in May according to my records. (updated the post above)

      ALL of the numbers that you mentioned below don’t mean a thing. Here’s my question to you, what is the profit per barrel for TT.TO?

      Also there’s no guarantee the company will use all the money on debt, they might keep some working capital on hand to fund drilling.

      So I disagree on the $2 valuation until you provide me with their profit per barrel :)

      Cheers,

  • Lee Roth

    Needless to mention that TT.TO trades for C$1 per Mboe (!!!!!) 2P Reserves currently at 35 cents on a per Mboe valuation.

    $1/Mboe 2P Reserves!!!

    CRAZY.

  • Lee Roth

    Thank you for this significant update on me! Now I feel much better !

    C$2 is the MINIMUM valuation.

    If you apply a decent per 2P Reserves valuation, it goes up to C$3 per share !

    The numbers speak volumes here either on a per flowing barrel or on a per Mboe valuation !

    Best,
    Lee

    • Mich

      Glad you feel better :)

      $2 is pie in the sky, that’s not how it works my friend. If the production is not profitable, no one will buy it at the price you’re thinking of.

      Cheers,

      Mich

  • Lee Roth

    Terra’s land (Peace River and Montney) is oil and oil liquids rich and you know it.

    Terra will hit oil and liquids targets from now on so it will be definitely profitable.

    Either way, whatever applies on TT now applies to ANY OTHER PEER like Painted Pony (PPY.), CQE.TO, PMT.TO, AAV.TO etc.

    If the other nat gas weighted companies lose money, TT will lose money too.

    fyi, PAINTED PONY LOSES MONEY !!!!

  • Mich

    Lee, we don’t even know what land they have left. I suggest you wait before comparing to other companies. We agree to disagree I guess, I will discuss this further in the coming weeks once we get more info.

    Cheers,

  • [...] Beating The Index continued his quest to…well… beat the index with a few trades this week. [...]

  • JC

    TT is now trading at .28. Don’t you think that the market is sensing that the deal will fall through the crack? It seemed a bit too early to be concern with the lacking of announcement because the deal line is still a month away.

    • Mich

      JC, the company is cheap for a reason. To put it bluntly, their netbacks are CRAP.
      Closing the sale is the next catalyst so we’re in the waiting period. I don’t see anything interesting beyond that unless their guidance is wow for 2013.

  • JC

    I guess the strategy for this stock, sell on good news and run.

  • Peter

    So I have rejigged my bare bones, simplistic valuation for this Company using 2 major assumptions. I have assumed that they have sold most of the Alberta undeveloped land package and not the Montney and I assume these deals close.

    Valuation comes to $1.29 even valuing most of the remaining land at $50/acre & the Montney only at $250/acre. As well, I have only valued the NG production at $10k/flowing boe to account for its low cash flow metrics below $3.50mcf.

    With low debt and an improving NG pricing scenario moving into 2013 there is significant potential for this Company to be worth more. For instance, I have heard that an option could be to combine TT’s Montney (100 net sections) with the Montney lands of CE (45 net sections) and Cdn Spirit (40 net sections) thus putting together a large land base that becomes much more attractive to a major LNG consortium. At any rate, the asset value that could be realized by shareholders from a market cap of $30MM, could be quite astounding…

    Terra Energy Simplistic Liquidation Value

    Shares Outstanding 101,700,000

    Production Value Multiple
    Value Producing Assets on Flowing Basis per flowing boe/bbl Valuation

    Dry Gas Production (boe) 4,300 $10,000 $43,000,000
    Oil & Liquids (bbls) 700 $45,000 $31,500,000
    Valuation Flowing $74,500,000

    Value per Boe
    Reserve Valuation (boe) 33,945,000
    2011 Reserve Report GLJ Proven & Probable (10% discount) 50% of NAV $103,644,000
    Per Boe Metric (boe) 33,945,000 $5.00 $169,725,000
    Average of 2 Reserve Valuations $136,684,500

    Value of Production (50% Flowing Basis/50% Reserve Valuation) $105,592,250

    Land Valuation

    Montney (11.9 Tcf net of OGIP) Net Acreage Value per Acre Montney Land Value
    Montney Gas/NGL 101,000 $250 $25,250,000
    Montney Condensate 38,000 $50 $1,900,000
    Total Montney Acreage Value $27,150,000

    Additional Undeveloped Land Value
    200,000 acres
    Net Acreage Value per Acre Total Value
    Alberta & BC Land Position 200,000 $50.00 $10,000,000

    Less Bank Debt & Negative Working Capital $12,000,000

    Total Valuation Terra Energy $130,742,250

    Valuation Per TT Share $1.29

    • Mich

      That’s a fair assessment Peter. However, their production netbacks SUCK and right now they’re being valued at that.

      NAV and potential take out values are all theoretical until a sale goes down. Maybe when the dispositions close, the market will revalue the stock higher on lower risk.

      Right now, in my opinion, around $0.35 is fair until further guidance is provided.

  • Peter

    That’s why I value it at $10k flow boe and heavily discount land and reserve values. Right size ops & g&a to get costs down and a stronger NG price and this will change such that the valuation has upside. We will see.

    • Mich

      Using EV/BOED as a stand alone is dangerous. In any case, we agree there is clearly upside on this one, the question is how much ?:) Looking forward to them closing on their sales!

  • Peter

    By the way, great article on gurufocus on Equal today. This is substantially cleaned up now…

    http://www.gurufocus.com/news/198519/equal-energy-still-undervalued-with-several-nearterm-catalysts

  • BR11

    Peter or Mich – Is the $22mm + $56mm option from Crew Energy the deal that was announced last month or is this in addition to the previously mentioned sale?

    • Mich

      BR11, it doesn’t matter who’s buying or selling. The key point here is that this is a confirmation of the previously announced disposition. It will be closing in 2 parts.

      This is NOT a new sale, it’s the same one!

      Cheers,

  • JC

    There is some huge volume today at .23. Is that just some block trade changing hand or something is cooking?

    • Mich

      I haven’t been following TT as of late JC. The volume is interesting today, wonder if it’s reflecting positive development behind the scenes.

  • Peter

    One week to the Crew option expiry. In Crew’s latest presentation, released last week, they refer to the lands they have under option currently with Terra as land they control. It seems quite likely that CR will exercise the option & TT’s balance sheet will be very strong once again. Hopefully they can continue to sell other undeveloped land, increase production with low cost recompletes and continue to drive both production & G&A costs down. At 20K EV/boed & no value to undeveloped land TT would be worth $0.70. (production 4,500boed, debt $15mm).

  • Mich

    Thank for the update Peter, I haven’t been up to date with TT at all. More focused on the international players these days.

    What would their debt be pro-forma after closing down the sale?

  • Peter

    After the sale it would be around $15 million.

  • Peter

    Terra’s enterprise value is now about $50 million. For this one gets 4,500 boed of production and an undeveloped land base of net 350,000 acres. I value the production (80% natural gas & 20% liquids) at about $80million – should be able to produce about $20 million in cash flow. I value undeveloped land at about $100/acre so $35mm. So I still think TT is worth $0.90 – $1.00 share under pretty conservative valuations. Unfortunately the environment for both oil & NG companies is absolutely attrocious – so could be a long while before this is realized.

    CALGARY, ALBERTA–(Marketwired – June 4, 2013) – Terra Energy Corp. (TSX:TT) (“Terra” or the “Company”) is pleased to announce that Crew Energy Inc. (“Crew”) has exercised the option to purchase the balance of Terra’s Montney assets in northeast British Columbia for a purchase price of $36 million.

    On February 28, 2013, the Company granted Crew an option to acquire the balance of its unconventional Montney assets located in northeast British Columbia for a purchase price of $36 million, subject to typical industry adjustments, by way of a combination of cash or common shares of Crew, with a minimum cash component of $10 million. The option contained restrictions on assignment and had to be exercised by Crew on or before June 3, 2013, with a closing to occur on or before July 9, 2013.

    On June 3, 2013, Crew elected to exercise its option to purchase the balance of Terra’s Montney assets. The companies have also entered into a fully executed purchase and sale agreement in respect of this sale. Crew will have until 10 days prior to closing in order to notify Terra of the combination of cash and shares comprising the purchase price, providing that the purchase price includes a minimum cash component of $10 million.

    Terra intends to utilize the net proceeds from this sale to further reduce its indebtedness. Terra’s production and cash flow will remain unchanged as a result of this sale as the assets included in this transaction have no current production attributed to them.

    Terra is a junior oil and gas corporation engaged in the exploration for, and development and production of, natural gas and oil in Western Canada. Terra’s common shares trade on the Toronto Stock Exchange under the symbol ‘TT’.

  • Peter

    TT has about 1,200 boed of production that should be easy to bring online with not too much initial cost.

    http://www.terraenergy.ca/documents/2013AGMPresentationFINAL.pdf
    Sale
    Significant inventory of new projects as a result of 18 months of capital
    constraint:

    • Over one hundred projects

    • Mainly maintenance related but also including well tie‐ins, recompletions, waterfloods and
    development drilling

    • Project completion to be ranked in order of lowest risk and shortest payback

    Estimated Additional production shut in ~600 boe/d:

    • ~ 500 boe shut in production (majority natural gas)
    • ~ 100 boe shut in production (Stoddart oil)

    Three tie‐in projects to add estimated additional ~600 boe/d:

    Complete sale of third phase of Montney to Crew Energy for $36 million and
    reduce total indebtedness
    Complete short term optimization projects focusing on projects requiring low
    capital with short payback periods and high liquids content
    Continue with the sale of non‐core assets, focusing on disposition of nonproducing
    assets
    Search out new sources of capital, including joint ventures, private equity,
    farmouts, etc.
    Main Heading
    Further guidance to be released at month end Julyg

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