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?