Winstar Resources: Undervalued Oil and Gas Junior in Tunisia

I typically avoid international producers because with so many domestic companies to pick from, there is no need to look elsewhere. However, given North American natural gas prices and oil price differentials, some diversification is not a bad idea if the right parameters are in place. Now that the whole sector is on sale, it might be worth keeping an eye on a few international stocks that are currently trading at very attractive metrics. Winstar Resources fits the profile perfectly as it has a low share float, sells its production for top dollars, has no debt and is trading at very attractive metrics.

Winstar WIX.TO 0.00 [0.00] holds 5 operated onshore concessions in Tunisia; Chouech Essaida, Ech Chouech, Sanrhar and Zinnia concessions at 100% WI and Sabria at 45% WI totaling ~144,000 net acres. In the first half of March 2012 the company produced between 2,300-2,500 boe/d with a 30% weighting to natural gas which sells at more than $14/mcf! That’s right, that’s 7 times the YTD AECO average of a toonie and some change.  Tunisia is a net importer of natural gas primarily used for power generation. On the oil side, WIX produces high quality light sweet oil at 41° API, Zarzaitine grade crude from its concessions that it sells at a slight premium to Brent grade crude (38° API). That’s not to forget that Brent Oil has traded at a significant premium to WTI Oil for the past months.

winstar resources tunisia

Before getting carried away with the realized price for natural gas, Winstar’s production faces limited natural gas infrastructure in southern Tunisia. Its CS1 boomer well (tested at 3,379 boe/d) has to be choked back to ~700-800 boe/d because there’s only 1 small old pipeline and facility to absorb the gas. In the short term, sales volumes are dependent on 1 buyer and they are at the mercy of 1 small facility that suffers regularly from downtime. The new Southern Tunisia Pipeline, a high pressure NG pipeline under construction which becomes operational in 2014 will provide the capacity to carry all their production north.  In the meantime, the facility owner is improving reliability by investing in the facility now that it is justified by increasing natural gas volumes.

Let’s shed some light on the attractive metrics with a somewhat conservative scenario since I like to give my estimates a chance to get beaten. In our 2012 scenario, WIX will produce an average of 2,300 boe/d (30% natural gas), the low end of the range but a record for annual average production and a healthy increase to 2011’s 1,650 boe/d. I am accounting for outages to their natural gas facility every other month which reduces their natural gas sales and lowers their average production.

BTI Price Deck

  • $110 Realized price per oil barrel
  • $14/mcf realized price for natural gas

The price deck is lower than what the company is currently realizing in its sales and our scenario assumes that the work program for 2012 only replaces declines and adds 0 boes in new production. The scenario results in ~$45 million in cash flow and the company exiting the year with a positive working capital of $17 million after a $28 million capex.  With ~$1.27 CFPS and a share price of $2.40, the company right now is trading at less than 2.0x CF multiple. This means that using a cheap CF multiple of 3.0x results in a target share price of $3.80 which still falls short of the Net Asset Value of $6.27/share.

Winstar is primarily focused on Tunisia but it also holds a 60% working interest in Satu Mare, a 765,000 gross acres concession in Romania. 1 of the first 2 exploratory wells drilled by the company was successful testing at 1.8MMCF of natural gas. Diversification wise, Romania is a wise move but nothing to get too excited about for now because it will take the company months to put that well on production pending an exploitation permit, building a compressor facility and tying the well in. Furthermore, natural gas prices are regulated so the company will probably realize around $5-$6/mcf which is still good coin compared to North American prices. Romania is more like a 2013 story when phase 2 begins.

Political Risk

Now that the jasmine revolt is behind us in Tunisia, the possibility for another uprising in my opinion is remote. The popular uprising toppled a dictatorial regime in January of 2011 and a new government emerged through democratic elections back in October of 2011. If there’s one thing Tunisians learned during this revolt it would be: instability keeps tourists away. Tourism contributes about 6.5% GDP and is the biggest foreign currency-earner. Tunisia is suffering from high unemployment right now and the tourism sector is just recovering after hitting a low of 4.5M visitors in 2011 versus 7M visitors in 2010.

Tunisians will not risk exasperating the fragile recovery in tourism with another uprising. Sure, they can protest all they want for unemployment and aside from causing delays in rig movements on the ground; I do not foresee further instability. The government in place is a coalition of parties and the people are “nationalized” ie no tribalism to undermine the central governing body such as in Libya which makes political reforms easier to carry.

Does that mean operating in Tunisia is risk free? Absolutely not, there are no guarantees against black swan events such as a Kirchner moment.


Aside from the Q1 report due by mid-May there are no catalysts on the horizon before Q3 when 2 wells will be re-completed and a 3rd spud.  Only 42% of the shares are accessible by retail investors, 5% are held by insiders and 53% by 2 funds which makes the stock a thin trader i.e. the share price can be moved up or down with 10,000 shares. With no major catalysts until Q3, thin trading can easily result in lower prices than what it is currently trading at which may be considered an opportunity for someone looking to get in for the long run.

The company is on track for record production and record cash flow in 2012 providing production remains stable and commodity prices remain constant. With no debt and more than enough internally generated cash flow to fund development and exploration, I feel very comfortable easing into the stock  with a small position at $2.40 in one of my accounts. While I do not know where the bottom is, I love to start buying when everyone is complaining about valuation in the energy sector.

Are you an investor in WIX? What is your opinion?

18 comments to Winstar Resources: Undervalued Oil and Gas Junior in Tunisia

  • W.C.

    I owned WIX a while back when they were drilling a well and made some cash on the speculation run up but it tanked because they were hoping for oil and hit gas if I recall correctly.

    Great article (as usual) on WIX and might look to get back in should it get into the $2 range or below. I doubt it but you never know.

    You ever think about getting into MMT??? Very cheap considering they also get a premium to brent pricing and are making tons of cash. Very cheap due to the risk of operating in Nigeria but woth the risk IMO.



    • Mich

      WC, that’s the well I mentioned above, their boomer CS1 well.
      I only picked up a small number of shares @$2.40 and I would not be surprised to see $2 at which point I would pick up more. You know how investors overdo their selling, it’s always a possibility and an opportunity.

      Never really looked deep into MMT, I have to confess that it’s because of the risk that I perceive for operating in Nigeria. I should probably get over this point and take a closer look at it.


  • Hey, I just wanted to mention that I’ve decided to leave Questrade over the recent breakdown of their web trader platform. I waited patiently for weeks as the market has plummeted, and today I finally go to market to make a trade and the dumbass platform won’t even take my orders to market. So I am sitting there waiting while nothing happens; in the meantime, they say you should call in your trade and they will waive the call-in surcharge. Problem is that no one answers the call. I sat on hold waiting for someone to come on the line.

    • Mich

      I don’t blame you PWD, I also transferred my accounts over to my bank to centralize everything in one place. if my Bank is offering me discount pricing, what is the extra that Questrade is offering me? At least with my bank I can seamlessly transfer money across accounts.

      • Well, they offer the cheapest trades, unless you want to make a market or at the money trade. Then they ding you with extra charges. They also cost a lot less to assign puts, which is one of my major trades. But then if you can’t trade, it is all theoretical isn’t it. You didn’t do the trade so it doesn’t matter what the commission is, it never happened. Sorry for hijacking this thread. But I had to let off some steam.

        • Mich

          Totally hear you PWD, there’s more to Questrade for you than what I saw so I understand you. You’re always welcome to let off steam over here :)

        • Still not sure my orders are going to market today and the live chat doesn’t work today either. I had a negative experience with an order being rejected because of insufficient margin. Turns out I sent an order to sell 1000 puts (equals 100,000 shares)–a bit rich for my account. But then I was thinking this could be an MF Global situation. In any case, I have an appointment with TD waterhouse to go back to them. I now have a Certificate of Loss of Nationality, and Jim Flaherty has said that Canada will not collect FBAR fines; thus, I should be safe at TD Waterhouse again, and I can go back to their clearly more robust and vigorous platform.

          • Mich

            Glad to hear you have an alternative ready! it’s really frustrating to go through these glitches and this is the biggest mistake discount brokers can commit because they will lose clients fast.

        • Finally got through to the Live Chat at Questrade and they saying that orders are making it to market today. I was tricked by the Market Maker (@MSX), whose bid wants to match mine at $2.55 or pullback, but as soon as I pull back to $2.60, the market maker puts in a bid for $2.55.

  • That is indeed unusual for you to venture abroad, Mich. But natural gas seems to be a good bet in Europe. Much more fungible than gas in NA.

    • Mich

      Indeed 101, NG is in high demand elsewhere particularly in Europe but also in other places like Turkey and Tunisia. It’s not a dirty word over there :)

  • When facing a country with geo-political risk, the premium for investing must also be very high. You could also ask, what happens if the Wild Rose party wins or doesn’t win in the Alberta elections? I personally would rather take the Alberta election risk rather than the Africa risk. I’ve been to Africa. No thinks.

    It’s like asking the question: should I take six figures to teach high school in Saudi Arabia? Well, not such a bad salary for what you do, but then you could end up sitting in a prison for two years for some trumped up charge just because you tried to help people who were hurt by a car bomb. Again, no thanks.

    • Mich

      Pete, I really can’t counter your logic at all especially when I am heavily invested in Canadian energy companies. I took a small position in WIX based on the case study I did above, I think this might be profitable if we avoid a European meltdown.

      Talk about risk and reward by looking at AOI, is that a nice chart or what? :)

  • I am hoping that NG will be used in America someday to fuel most of the vehicles. Billionaire Pickens has invested heavily in NG. I don’t know if it is the oil lobby to blame for lack of progress in promoting NG in the States.

    • Mich

      Hi Shilpan,

      I have no doubt NG will play an important part in the US energy landscape but it will take time to happen. In my opinion, NG will remain sluggish until exports come online.

  • […] kind of stock that rises and falls pretty quickly because of its illiquidity. I’ve written about Winstar Resources (TSX-WIX) before, it’s a boring company with free cash flow and no debt operating in […]

  • […] I missed selling the run as I did not have an order in to capture a nice 25%. But when it comes to Winstar Resources, I am really not in a hurry to sell especially that their work program begins this […]

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