Here's Why You Should Put This Energy Producer on Your Buying Radar

Nathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the largest land holders in the Cardium play in Canada is Angle Energy (TSX: NGL). Angle has a significant undrilled inventory on the Cardium formation which is its dominant asset and has provided it with exceptional light oil growth since late 2011. Can you afford to overlook Angle Energy? To find this, you need to dig deeper in this underfollowed company. 

What? 

The performance of the TSX/S&P Venture Exchange index has been shameful since 2011 as it has lost more than half its value. This index is down from 2,000 to 860 today, while:

1. Almost every stock market in the world is up significantly over the past two years.

2. Both Edmonton Par and AECO prices have risen significantly since last summer.

The TSX/S&P Venture Exchange index is made up of mostly small cap energy stocks. The stock performance of the majority of Canadian oil and gas producers look similar to the performance of the Venture index.

However, Buffett has said that the markets have a tendency to overshoot at both ends. The Canadian market has clearly overshot to the downside, and this is why several Canadian companies have become acquisition targets for several Asian and US-based giants lately. After all, a value investor like myself enjoys going bottom fishing in the Canadian energy patch. 

So what? 

Angle's stock has dropped down to $3.30 today. However, Angle's net asset value is calculated to be approximately $5.70 per diluted share, based on the current net debt.

Moreover, Angle's enterprise value stands at $481 million. The production is 10,850 barrels of oil equivalent per day, or boepd, (56% oil and liquids) and the proved reserves are 32.7 million barrels of oil equivalent, or MMboe, (55% oil and liquids), resulting in $44,330/boepd and $14.71/boe of proved reserves.

Both key ratios are very low compared to the typical trading multiples of its peers as shown at the table below:

 

Company

EV

($  million)

Production

(boepd)

Proved Reserves

(MMboe)

Per  Boepd

Per Boe

Synergy Resources

535

2,256

(55% oil/liquids)

13.63

(~49% oil/liquids)

$237,150

$39.25

RMP Energy

560

6,727

(55% oil/liquids)

14.86

(50% oil/liquids)

$83,250

$37.69

Penn Virginia

1,400

19,000

(~60%  oil/liquids)

125.5

(~45%  oil/liquids)

$73,700

$11.16

SM Energy

6,000

115,000

(~50% oil/liquids)

293

(~53% oil/liquids)

$52,200

$20.48

 
 
Synergy Resources (NYSEMKT: SYRG) is obviously one of the most overvalued companies in the energy patch. The company trades well above its book value and carries staggering key metrics. The company's operations are in the Denver-Julesburg Basin.
 
Synergy holds 230,000 net acres, spread out in Colorado, Wyoming, Nevada and Kansas but its acreage is largely unproven because all of the company's production to date comes only from wells in the Wattenberg Field. The company has been developing its acreage vertically for some years now and is a new entrant in the world of the horizontal wells. In March 2012, it participated in its first horizontal well which was drilled by Noble Energy. 

RMP Energy (TSX: RMP) targets the Montney formation in West Central Alberta. Its horizontal Montney oil wells have produced good IP-30 rates, despite some disappointing results that came out of the company's property at South Ante Creek in West Alberta, which showed a lack of commercial quantities of hydrocarbons.
 
With 2013 CapEx of $127 million, RMP's drilling program will focus on the development of its Montney light oil resource play. Based on the budgeted capital expenditures, average daily production for fiscal 2013 is projected to be approximately 6,250 boepd (60% oil and liquids). 

Penn Virginia (NYSE: PVA) is a heavily leveraged company that has expanded significantly its acreage in the Eagle Ford shale in Texas which has become its primary operating area after the recent acquisition of oil-weighted assets from Magnum Hunter. Penn Virginia also owns properties in the Mid-Continent, Mississippi, and the Marcellus Shale which isn't its top-notch acreage currently because it is heavily natural gas weighted. 

SM Energy (NYSE: SM) has a diversified portfolio of assets extending from the Williston Basin of North Dakota to the Basins of Texas, targeting primarily the Bakken/Three Forks, the Eagle Ford, and the Mississippian lime formations. Moody's SM Energy's Corporate Family Rating to Ba2 from Ba3. Moody's also upgraded the company's existing senior notes to Ba3 from B1. Several analysts have also upgraded shares of SM Energy lately, raising their price targets and their ratings on the stock. 

Now what? 
 
Angle's management owns 8.1% of outstanding shares. So, the management look committed to building shareholder value by taking the following initiatives:
 
1. They recently initiated a review of strategic alternatives to unlock the company's value. The options include a sale or merger.
 
2. They will keep conducting Angle's projects with strong cost controls or reductions in both capital and operating costs per well. Angle will utilize pad drilling whenever possible, which provides the best cost structure per well and will focus development in its core properties where both capital and operating cost controls are most effective.
 
3. They will continue the transition to light oil thanks to the development of the Cardium base. They expect higher quarterly cash flow and stronger operating netbacks by year end along with 2013 exit production of approximately 12,500 boepd (~60% oil and liquids).
 
4. They will keep working on the balance sheet. They recently reduced the net debt to approximately $215 millionachieving a net debt to funds from operations ratio under 2.0 (annualized).
 
5. Angle owns ~70,000 net acres in the Duvernay formation, which are approximate to Encana's Duvernay acreage. In late 2012, PetroChina gained a 49.9% interest in Encana's 445,000 acres in the Duvernay play for total consideration of $2.18 billion. Apparently, this might be the ace up Angle's sleeve, helping the company grow further in the future. 

Foolish bottom line 
 
Technically, Angle is a laggard. Fundamentally, Angle has a number of tools to meet its objective and unlock its underlying value. When it does so and its valuation reflects its fundamentals better, the investors will be rewarded very handsomely.
 

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Nathan Kirykos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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