Earlier this week, I decided to increase my position in Winstar Resources WIX.TO 2.50 [+0.05]. ??I picked up 1,500 shares at $2.32 which is right around my cost for the shares I already hold. The trade is directly related to the acquisition of Winstar by Kulczyk Oil Ventures (KOV) I posted about a few days ago.
I’ve been sitting on the fence vis-a-vis our domestic producers; the only trades initiated or completed in the past few months are related to NFK and DXE. I’m only interested in other international trading opportunities and WIX appears, at least to me, to be a decent shot for low risk/low return.
Basically, I’m expecting anywhere between 10%-30% return from here in the next 2 months which is not bad given the risk profile of this trade. I’m realistic with my target but I could be wrong and my risk assessment could be totally off.
Why 2 months? Simply because this is the time frame required to close the acquisition and get the new KOV??entity listed on the TSX. By then the price of Brent Oil might drop substantially below $100 and that’s totally fine because the company’s production is natural gas weighted. KOV sells its gas for more than $14/mcf in Tunisia and ~$12/mcf in Ukraine.
Can the deal fall through? Of course it can, but I think it’s highly unlikely. That’s because 54.2% of the shares (management + institutional holders) have committed to vote in??favor??of the deal. It will be quite easy to reach the 66-2/3% threshold required to approve the transaction. The remaining risks are your usual regulatory, geopolitical etc
Here’s a snapshot of the combined entity:
- Outstanding shares: ~75M (after 10:1 Rollback)
- Production: 4,760 boed (~25% oil, ~75% gas)
- Debt: < $10M
- Estimated NAV: $450M-$500M according to KOV IR or $6.00-$6.50/share
- EV/BOED: ~$51,000 /boe based on trading at $3.11 per share
The company is cash flow positive and has very little debt so I see limited downside with a decent upside from buying WIX at $2.32. I can ask for cash and whatever amount I get in cash automatically realizes ~10% in profit at $2.50 per share. Or I can wait for the new KOV for a potential 30% return. The KOV shares last closed at 1.32 Zloty ($0.42 CAD) in Warsaw on April 30 in line with the 1.28 Zloty used to come out with the $3.11/share WIX valuation from the news release.
For now, there seems to be a bunch of investors exiting at $2.30 and thats expected. The question is will the new KOV shares trade above $3.00 on the TSX come June? I have no idea but I am willing to play the odds. At $3.00 per KOV share, that’s trading at ~50% of NAV (well we all know NAV??doesnt??mean much these days).
The 2 low risk exploration wells in Brunei might turn out to be interesting, thats a free call on 60 million BOE. Its??amusing??how the company presentation (November 2012) uses low-risk and exploration in the same sentence!
Many things can change come June but the plan right now is to wait it out.??I also might have missed some important pieces of the puzzle.
On the domestic front, Spring Breakup is upon us! add to that the summer doldrums, dropping oil prices and what have you. Spyglass Resources SGL.TO 1.99 [+0.01] is getting decimated just like RPL and PRY. Blame the debt again? The new company is not even getting a chance to prove whether it can execute or not.
The upcoming Q1 on May 14 will be a non-event since it will reflect Paces operations for the period but management will be coming out of blackout. This will be their chance to show how confident they are in Spyglass by voting with their money. Hopefully, SGL wont be trading at $1.25 by then!
The interesting thing with SGL is that its production is half/half oil and gas so a drop in the price of oil can be mitigated with resilient natural gas prices should they hold throughout this summer (NG prices are already ahead of what they budgeted for). The weather is key again here, a hot summer could see NG prices close in on $4/mcf for AECO.
??Do you see any opportunities in this market?