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Q: Hi Guys,
I'm looking at a couple of smaller oil and gas companies and wanted to get your thoughts. i3 Energy and Gear Energy. Both of them got into a little trouble this year when they implemented a unstainable dividend. Their dividends have been dropped to a sustainable level, but both of their share prices took a pretty good hit for that. However it looks like they have good cash flow, both are paying down debt, and they seem to have pretty good land packages. I was thinking with all the cash floating around the oil patch right now, both would be pretty good takeout targets. Curious on your thoughts and if they would be a good hold.
Thanks,
Asked by john on October 24, 2023
5I RESEARCH ANSWER:
We would largely agree.
Momemtum is negative, and both wil likely see tax loss selling, but both are very cheap, still offer high yields after the adjustments, and both have solid balance sheets and land positions. GXE's debt is about 0.3X cash flow. ITE's is also about 0.3X. GXE has already set up a strategic review which could lead to a possible sale. It also has substantial tax pools as an extra asset for a buyer.
For ITE the buying pool may be smaller, with it based in the UK. Also the shares are tightly held, with four entities holding about 60% of the stock. We are sure they would likely object to a takeover after a 47% decline in the stock this year. But, it is 4X earnings, and all things considered very cheap.
"Having said that the recent presentation was very good"
Majid was not able to understand the question asked by the audience. He was asked "how many years of reserve life (RLI) does the company have" (the answer is 22 on 2P basis), and he starting waxing lyrical about how reserve auditors won't give credit for reserves not expected to be drilled within 5 years.
He should have just sad TWENTY TWO!
Instead, he mentions a non-descript "Decades of reserves".
GGG wrote " what did they present? same old ****"
I did glean some new info
1) Simonette is considered as the place the growth will come from, but it's capex heavy. Simonette can bring 30K bbl/d of production but will need $90M capex
2) Clearwater is still very much an exploration play.
3) They have pivoted to drilling oil wells in Q4, but in shallow plays in Wapiti
4) He seemed bullish on CAD nat gas due to LNG Canada coming online in the next 2 years.
5) Dividend HAS to be paid.
On the last one, I remain confounded by the reasoning. Is there some legal contract signed by whoever provided the capital to break into Canada that binds them to a dividend, or they afraid those investors threating to take the ball home if no dividend?
If the latter, let's assume we're speaking of Polus. They have already advertised 236M shares are for sale as a block, and have been for 2 years. Would Polus thinking be that people who may buy them would have to compensate them for the loss of the dividend streams (which I am assuming will be there for a while)?
" I expect a hostile bid."
or, I3 makes a bid to buy something.
Stas, we're talking about that portion of variability in price that relates to the business itself, not the commodity.
I've given up on the commodity. It's a 6 D scam. This is a game for superpowers to play, not you or I or I3.
"It's like owning a development plot but not having the funds "
Gee, if only the London capital that wants the pounds of dividend flesh rain or shine, would be convinced that it's better to plow that divvy into Simonette, than getting fat off of it and getting a heart attack.
"In fact there is NOTHING new in this presentations - besides some updated production data."
I am trying to find the presentation from June to look at the breakeven pricing. It seems that's somewhat changed.
WTI $76.6
AECO $2.75
It's just a guess, but I think they'll max out on the debt and bid for these assets.
https://boereport.com/2023/11/30/sinopec-canada-non-core-property-divestiture-5/
"I have no problem with the sp dropping in line with commodity prices."
Oh, good. Because natural gas in North America is about to go negative (again).
"a t/o offer is the only way to realize some value here, however i'd be willing to bet mgt are side-stepping this at every corner to keep their cushy salaries and options."
This would assume a board of directors captured by the management. Management has only 2/6 board seats (Majid & Heath)
BOARD STRUCTURE
The Board currently comprises two Executive Directors (being the Chief Executive Officer and the President i3 Energy Canada) and four Non-Executive Directors (including the Chairperson).
Ms. Linda Beal, Mr. Richard Ames, Mr. Neill Carson and Mr. John Festival (these being the four Non-Executive Directors) are, in the opinion of the Board, independent in character and judgment.
The composition of the Board is reviewed regularly and strengthened as appropriate in response to the Company’s changing requirements. Appropriate training and an induction programme is undertaken for all Directors on appointment and subsequently as necessary, taking into account existing qualifications and experience. The Board has bi-monthly Board meetings, including physical meetings at least once per year which also include an annual strategy day. At these meetings, the Board reviews the Company’s long-term strategic direction and financial plans. All necessary information is supplied to the Directors on a timely basis to enable them to discharge their duties effectively. Certain matters are reserved for consideration by the Board whilst other matters are delegated to Board committees.
"What-if analysis run at WTI $60/b and US natural gas at $2.50/mmbtu A summary of our hypothetical “Car Crash” commodity price scenario analysis is outlined in Table 1, which provides increased confidence, we believe, in i3 Energy’s capacity to fund its dividend under adverse conditions. "
What most of us do not appreciate here, and the company is not doing a job at promoting, is that I3 truly has low decline assets. In a 'car crash' oil price scenario, as WH Ireland puts it, all the company has to do is lower capex from GBP 32M to GBP 8M to keep the dividend, and continue to pay the amortization of the loan. The corporate decline rate of 17% is truly low. I was reading up on a mid-cap Canadian player, and my largest holding, and was stunned to hear that a decline rate below 25% for them would be stellar.
"Whilst i3e has lost 25% in the last month or so SHG has gained 20%. Their EV:EBITDA/NOI multiples are virtually the same now. Biggest difference is mgt's commitment to driving value for shareholders. Keep in mind i3e is a far 'safer' bet given geography, commodity mix, and production diversification / number of wells. And it's now paying close to a 10% annual dividend yield.
Says a lot about Majid and the mgt team."
Atrocious! 600K GBP/year and an LTIP while I keep getting poorer.
"There is going to be a raise. Price doesn't lie. Look at the charts for sigmaroc or Jadestone energy, you can see when the phone call went out."
Looking like the 'call' was made on Nov 7 if i am interpreting the charts correctly.
"currently the BOD will be more concerned about their jobs than the share price."
I don't know who needs to hear this, but the Chairman of the BOD is nigh a billionaire.
"Strange how the directors haven’t brought any more shares considering we were told the company was undervalued at 14p. Makes me wonder if their working on a deal with another company and can’t buy."
That is my hope as well. Despite Tony's many protestations, this BOD and management have failed to achieve synergies.
Disparate assets, and insufficient cash flow to make good one the good ones.
It may be quite a complex deal involving UK and a portion of assets in Canada. It may take longer than usual.
"hopefully we’ll all get a nice little Christmas present"
Is this what investing is all about? Hoping for 'presents'?
"That’s Aim for you."
Indeed. There is quite the cognitive dissonance of this company being simultaneously listed in the 'senior' exchange in Canada, and the "junior" one in the UK. There is a junior one in Canada called TSX-Venture, where 70% of the listed names have negative working capital, and most end up as shells.
Schachter is a Calgary veteran analyst, gone quite a bit bearish over the past 2 years, who seems to be warming up.
Schachter has a well attended annual conference, and a newsletter.
Is there really a need to go Londinium?
Can someone explain this to me?
https://x.com/JosefSchachter/status/1724890834347475426?s=20
"Hopefully some major shareholders are going to push for a mgt shake-up or sale. They can't be happy with their investment in this company right now."
And what if the major shareholders got their shares for free, and are happy to collect a dividend regardless of size and frequency?