Stock Trade Commentary
Open Range Energy recently completed its corporate reorganization by splitting into 2 entities:
Poseidon Concepts PSN.TO 11.56 [0.00]: A high yield energy services business with robust growth in view.
Open Range Energy ONR.TO 2.09 [0.00]: An oil and gas E&P company with a strategic land position in Alberta’s Deep Basin.
On November 4, the 2 stocks began trading on the TSX where investors exited the new ONR in droves driving the price down to a low of $2.01. I believe the new ONR was literally dumped (free shares anyways) by investors for 2 main reasons: dividend oriented investors bought in the original ONR for its services side and/or because the new ONR is 90% NG weighted.
Besides the seasonal bump in NG prices, why would I start a small position in a 90% weighted NG company? The answer is simple: economics. ONR’s all in costs (operating, transportation, G&A, interest) has been trending lower and settled at a LOW $1.34/mcfe in Q2. For comparison purposes it is only second to Peyto Exploration’s $0.76/mcfe which is the lowest cost natural gas producer in the WCSB.
Yes, I know that natural gas is not sexy and that it will be sitting in the gutter until export terminals come into play. Except that at this point, if you tell me that a company is selling matchsticks at $3.45 with a production cost of $1.34 per stick, I’m investing in this match stick manufacturer. The whole point here is that ONR is among the lowest cost producers which make current AECO prices very profitable.
Open Range is currently producing 4,500 boe/d and is on track to exit the year at 6,200 boe/d potentially hitting or even exceeding the 10,000 boe/d mark by the end of 2012. This high growth is possible thanks to its quality assets; in my opinion, the deep basin is the Cadillac of all plays in Western Canada thanks to its multi-zone liquids rich opportunities. The company’s main focus will be on the Wilrich formation at its Ansell/Sundance property where 5 (3.8 net) out of its 8 HZ well program for H2-2011 will be drilled.
The new ONR is starting out with about $15-$20MM in debt out of a $75MM line of credit. If take the company’s 2011 exit production of 6,200 boe/d and project net debt at $30MM, based on 74.8MM shares outstanding the company is trading at a low $30k per flowing BOE which in my opinion is fair for 2011 but totally discounts the aggressive growth in 2012 production. I am looking forward to the seasonal bump in NG prices and to the market’s outlook once it revalues ONR based on its 2012 exit production.
Are you holding the new ONR? What do you think?