Why Reliable Energy is a “no-go” right now

Why Reliable Energy is a “no-go” right now
If you have Reliable Energy (TSXV:REL) in your portfolio, now might be the time to get rid of it. Thankfully if you got in early enough, you might see some profit (roughly 2.5% – I know, not much. But it’s something.)

Recent Developments

A recent announcement by Reliable Energy confirmed that it would be acquired by Crescent Point Energy (CPG). This is what investors had been gunning for – the 12% that CPG owned in Reliable made it attractive to guys like me. We knew that sooner or later CPG would acquire a larger stake in Reliable. I have made money (or at least, not lost money) though my buying and selling of Reliable countless times in the past year.

This final trade didn’t register the profits that I had hoped for. In fact, it is pretty minuscule when I think about how much it was selling for last year (above $0.50). Regardless, I can at least rest assured that I didn’t make a loss on the trade.

Why you should drop Reliable Energy

Some readers might think that dropping Reliable at $0.35 is a bit premature. However, I believe that Reliable’s share price has already hit its peak. The only way that it could go higher is if a white knight swoops in with a higher bid, or other interested parties start a bidding war. Is this likely? I don’t think so.

In fact, looking at recent developments, I think you’d be lucky to get even $0.36 cents.

Here is why:

  • $80M for 1,000 bopd excluding debt comes out to $80k/boed which is decent for high decline light oil production.
  • The land in Montana ended up a dud and thus it is getting “transferred” to CPG for free, basically.

Could they have gotten more? Yes, perhaps.

If only management knew how to extract more from their contiguous land base.Reliable has been a very frustrating company, a lot like SKW. They’re both penny stocks with horrible share structures.

I’ve been disappointed time and again as Management continued to over-promise and under-deliver. It’s like they got stuck on a fast moving treadmill trying to keep up production above 1,000 bopd. We saw how that turned out.

The last time they reported hitting the 1,100 bopd milestone was when? Something like November?

Their wheels spun, but no movement forward

Today, CPG mentioned that Reliable has production of approximately 1,000 boe/d. That’s tiny! It’s super risky, and usually investors would require a huge premium for it.

All this means that the company essentially burned rubber while standing still, actually it lost production. Proof of this? Note their ballooning debt, which was projected to stand at $14M at the end of 2011, is now a whopping 20M – which CPG will be taking over. Wait any longer and that debt amount could go up even more, knocking down the potential sale price.

Back on topic – all of that CF and new debt resulted in what in the end? Nothing much.

The fact that the company had a large float (just like SKW) that limited its financing options and prepared the terrain for CPG to move in for the kill. Based on all of the above I do not expect any bidding wars or a bona fide offer, so allow me to borrow my stand from the Shark Tank:

For that reason, I’m out!

Alternatives

A keen investor might still be on the hunt for a similar pre-existing business that is trading quite cheap. If you want to get excited about the upside from frac tanks the look to STRAD. Besides PSN,  they have the best pre existing infastructructure to build, market and distribute their tanks quickly once they roll out.

Now, you could decide to skip all the issues of tiny boe/d, by going for big oil companies. In my opinion, I find that big companies have limited growth prospects. I therefore prefer riskier small ones, where the upside can be many, many times higher.

Final Thoughts

The advantage of the current sale of Reliable is that most investors will get out with most of their intial investment intact. Right now, I am basically at square one and would have done better to have invested in CPG in the first place. But I continue to like CPG – the cadillac of light oil players (my CPG is currently up 56% plus dividend) and may just accept the shares as opposed to selling out of my position early.The ability to get out of a junior with your money is ok. The ones that make it big hopefully make up for the rest.