Introduction
I would like to bring investors' attention to Chinook Energy (GM:CNKEF), which is an E&P company that is currently flying under the radar. Similarly to Boeing's Chinook helicopter which is propelled by two engines, Chinook Energy is comprised of two growth drivers. The first one is located in Canada and the second one is located in Tunisia.
I'll conduct a thorough analysis below to prove why Chinook is trading at a dirt cheap valuation on every conceivable key metric. Chinook currently stands at $0.82 and is trading at a 50% discount to its book value, at a tremendous discount (270% - 400%) to its Net Asset Value (NAV) and at a huge discount (75% - 160%) to its peers.
The Hybrid Nature Of The Asset Base
As mentioned above, Chinook's assets are located in Western Canada and Tunisia.
1) Tunisia: The company has a land base of ~1.5 million net undeveloped acres onshore and offshore Tunisia (4 concessions and 4 exploration permits) as illustrated below:
(click to enlarge)
It must be noted here that Chinook has recently been successful in applying North American drilling and completion technology into Tunisia with the first multi-stage hydraulically fractured horizontal well.
Although Tunisia has several proven hydrocarbon basins, it is vastly under-explored, having on average ~10 wells per year. To better understand how underexplored Tunisia is, we can compare Alberta to Tunisia. Alberta is approximately double the size of Tunisia. The number of wells in Alberta and Tunisia are ~500,000 and ~1,200 respectively. The wells per square km in Alberta and Tunisia are ~1.32 km2/well and ~136 km2/well respectively, as shown below:
(click to enlarge)
However, Tunisia is well-developed compared to the other African countries, with readily accessible infrastructure and services. The country also offers attractive PSC terms in order to gain the interest of the foreign investors.
2) Canada: Chinook has over 450,000 net undeveloped acres in Western Canada, targeting primarily the Montney and Dunvegan formations as illustrated below:
(click to enlarge)
A Profitable Company With A Strong Balance Sheet
Firstly, Chinook trades well below its book value with PBV=0.5x, and the value seekers will definitely like it. Furthermore, Chinook maintains a strong balance sheet. The strength of this balance sheet is emphasized by a particularly low net debt-to-equity ratio of 0.18x and a very low net debt to cash flow ratio of 0.7x.
As of September 2013, the company's net debt was $65 million and the company plans to reduce it further by year end. Chinook has a $115 million Canadian credit facility and $46.5 million of availability on an international credit facility.
In Q3 2013, Chinook produced 10,180 boepd (46% oil/liquids). Chinook produced 8,367 boe/d (31% oil and liquids) in Canada and 1,813 boepd (88% oil) in Tunisia, thanks to the development of the Bir Ben Tartar concession where Chinook receives premium Brent pricing.
Chinook is a profitable company and makes money both in Canada and in Tunisia. The company had an eye-catching turnaround and earned $12.8 million for the first nine months of 2013 from losses of $54.3 million for the nine months of 2012.
Chinook's Canadian activity continues to increase its profitability with a year-to-date operating netback of $17.92/boe, a 65% increase from $10.85/boe in the same period of 2012. Chinook's focus on replacing the declining natural gas production with continued oil development supports a path towards continued improvement in the operating netbacks. Meanwhile, Chinook's production generated $77/bbl operating netback YTD 2013 in Tunisia, thanks to the premium Brent pricing.
Fully Funded Business Plan For 2014
The Canadian growth is 100% dedicated to Montney and Dunvegan formations in the Grand Prairie area, where Chinook owns >200,000 net acres of undeveloped land and has a large inventory of development locations:
(click to enlarge)
Chinook has ownership in six established Dunvegan oil pools in the Grand Prairie Area. The majority of the company's Canadian capital program has been focused here, with 15 (8 net) Hz wells drilled to date. 87 (gross) additional Hz locations have been identified, with an initial 17 wells planned for 2014. The results from this area are very oily. The cumulative IP30 rate from those 8 net wells was 2,025 boe/d, and current net production is 1,291 boe/d (80% oil).
Regarding the company's Montney acreage, numerous wells have been licensed and drilled recently offsetting Chinook's lands with reported rates >1000 boe/d with high liquids. According to the company, the recent area land sale activity has seen prices up to $15,000/Ha.
(click to enlarge)
Chinook has approved an initial capital budget for 2014 of $85 million, of which $49 million is allocated to Canada (Montney, Dunvegan) and $36 million to Tunisia. In Tunisia, Chinook will continue the development on its high netback Bir Ben Tartar concession.
What matters most is that Chinook is fully funded for 2013 & 2014. The company has a cash flow based capital program with ability to use existing bank lines to accelerate Canadian development in 2014, if needed.
The company is planning to spend 100% of its Canadian CapEx for 2014 to oil opportunities in order to increase its oil weighting in western Canada.
Grossly Undervalued Per NAV
1) According to the company, the after tax net asset value at December 31, 2012, is $3.11 per basic share based on the net present value of proved and probable reserves, discounted at 10% after tax and after deducting year-end total net debt and adding an estimated value of $100 per acre for its 357,745 acres of undeveloped land in Canada, as illustrated below:
(click to enlarge)
It is apparent that $100/acre is a ridiculously low value because the company's undeveloped acreage is surrounded by producing properties that belong to other companies.
At the time of writing, Chinook trades at $0.82, and Net Asset Value per share represents an upside of ~280% for the potential investors.
It must also be noted that on a before tax basis, with a similar 10% discount rate, the net asset value is $4.21 per basic share, according to the company. This represents an upside of ~400% for the potential investors.
2) Now I'll calculate Chinook's NAV with a slightly different way. I will assume that the company's undeveloped acreage (no reserves assigned into it) has absolutely zero value currently. This is quite theoretical of course, because the company's acreage (developed and undeveloped) is close to producing properties that belong either to Chinook or other companies like NuVista Energy (GM:NUVSF), Paramount Resources (OTCPK:PRMRF), Encana (ECA) and Sinopec-Daylight. However, I make this assumption intentionally to prove Chinook's gross undervaluation at the worst case scenario.
Chinook's NPV-10 (after tax) is ~$703 million. As of September 2013, Chinook has a working capital surplus of $11 million and ~$76 million long-term debt, as shown below:
2P Reserves (MMboe) | 51.65 |
2P Reserves Discounted At 10% ($ million) (After-Tax) | 703 |
Undeveloped Land ($ million) (Lowest Estimate) | - |
Working Capital ($ million) | 11 |
Long-Term Debt ($ million) | ~(76) |
Shares Outstanding | 214,187,681 |
Net Asset Value Per Share (Lowest Estimate) | $2.98 |
At the time of writing, Chinook trades at $0.82, and Net Asset Value per share represents an upside of ~270% for the potential investors.
I must point out here that this NAV was calculated based on an "After Tax" basis and the extremely conservative assumption that the company's undeveloped acreage has zero value.
Grossly Undervalued Compared To The Peers
As mentioned above, Chinook's assets are located in Canada and Tunisia. In this paragraph, I'll calculate Chinook's fair value based on its peers. To calculate this as precisely as possible, I will find junior or intermediate E&P companies with producing properties both in North America and in countries with geopolitical risk from North America, Africa or the Middle East. I will use companies that operate in a region where the business and political risk is higher than average to better simulate Tunisia's geopolitical risk.
For my calculations, I will also need Chinook's EBITDA. Chinook will have EBITDA for 2013 at approximately $105 million. The Canadian and Tunisian production represent 81% and 19% of the total production respectively. Moreover, the Canadian and Tunisian operations contribute 62% and 38% of the total operating revenue respectively, according to the company.
After all, it is safe to estimate that Chinook's Canadian and Tunisian operations generate approximately 60% and 40% of the total EBITDA respectively. In other words, Chinook's Canadian operations generate EBITDA of $63 million and the Tunisian operations generate EBITDA of $42 million.
1) Peers With Producing Properties in North America: In Canada, Chinook holds 19.07 MMboe of proved reserves (34% oil/liquids) and produced 8,367 boepd (31% oil/liquids) in Q3 2013.
So Chinook's Canadian production is heavily weighing to 10,000 boepd which is the threshold for a company to be categorized as an intermediate producer.
This is why, I'll compare Chinook with intermediate companies that operate in North America, and have a natural gas-weighted production with the oil/liquids portion being almost equal to Chinook's.
For this purpose, I choose Bill Barrett (BBG), Comstock Resources (CRK), Bellatrix Exploration (BXE) and NuVista Energy.
A) Per EV/Production: Let's check out the table with the first key metric:
Company | EV ($ million) | Production (boepd) | EV/Production ($/boepd) |
NuVista Energy | 990 | 18,532 (31% oil/liquids) | 53,421 |
Bellatrix Exploration (*) | 1,220 | 21,852 (28% oil/liquids) | 55,830 |
Comstock Resources | 1,480 | 31,600 (22% oil) | 46,835 |
Bill Barrett (**) | 2,170 | 29,151 (39% oil/liquids) | 74,440 |
(*): Angle Energy's acquisition of Oct 2013 is not included because it has not closed yet.
(**): Pro-Forma after West Tavaputs Asset Sale.
Based on the data above, I get:
Average (NuVista, Bellatrix, Comstock, Barrett) | |
$/boepd | 57,632 |
Based on the aforementioned average metric, Chinook's Canadian operations should have an Enterprise Value of:
$57,632/boepd X 8,367 boepd = $482 million.
B) Per EV/Proved Reserves: Now let's check out the table below:
Company | EV ($ million) | Proved Reserves (MMboe) | EV/Proved Reserves ($/boe) |
NuVista Energy | 990 | 59.2 (29% oil/liquids) | 16.72 |
Bellatrix Exploration (*) | 1,220 | 55.49 (33% oil/liquids) | 21.99 |
Comstock Resources | 1,480 | 91.8 (21% oil) | 16.12 |
Bill Barrett (**) | 2,170 | 129.16 (36% oil/liquids) | 16.81 |
(*): Angle Energy's acquisition of Oct 2013 is not included because it has not closed yet.
(**): Pro-Forma after West Tavaputs Asset Sale.
Based on the data above, I get:
Average (NuVista, Bellatrix, Comstock, Barrett) | |
$/boe | 17.91 |
Based on the aforementioned average metric, Chinook's Canadian operations should have an Enterprise Value of:
$17.91/boe X 19.07 MMboe = $342 million.
C) Per EV/EBITDA: Let's check out the table with the third key metric:
Company | EV ($ million) | EBITDA ($ million) | EV/EBITDA |
NuVista Energy | 990 | 80 | 12.38 |
Bellatrix Exploration (*) | 1,220 | 125 | 9.76 |
Comstock Resources | 1,480 | 320 | 4.63 |
Bill Barrett (**) | 2,170 | 340 | 6.38 |
(*): Angle Energy's acquisition of Oct 2013 is not included because it has not closed yet.
(**): Pro-Forma after West Tavaputs Asset Sale.
Based on the data above, I get:
Average (NuVista, Bellatrix, Comstock, Barrett) | |
EV/EBITDA | 8.29 |
As mentioned above, Chinook's Canadian operations generate EBITDA of approximately $63 million, so Chinook's Canadian operations should have an Enterprise Value of:
8.29 X $63 million = $522 million.
D) After all, I sum up the aforementioned results at the table below:
EV - A ($ million) | EV - B ($ million) | EV - C ($ million) | Average EV (Canadian Operations) ($ million) |
482 | 342 | 522 | 449 |
The numbers speak for themselves once again. So Chinook's average enterprise value only for its Canadian operations should be at $449 million.
If a strict investor discounts this average value by a meaty 30% to better reflect the metrics of a junior producer, the final result will be $314 million.
Nevertheless, Chinook's current enterprise value that includes both the Canadian and the Tunisian operations is only $240 million.
2) Peers With Producing Properties in Africa, South America, Middle East: In Tunisia, Chinook holds 20.45 MMboe of Proved and Probable reserves (94% light oil/liquids), and produces 1,812 boepd (88% light oil).
Chinook's Tunisian production indicates that Chinook is a junior oil-weighted producer in Tunisia. So I'll compare Chinook with other junior and intermediate oil-weighted producers that operate in countries where the geopolitical risk is above average.
After all, I choose Americas Petrogas (OTCPK:APEOF), Mart Resources (OTCPK:MAUXF), DNO International (OTCPK:DTNOF) and Genel Energy (OTCPK:GEGYF).
Americas Petrogas is a junior oil-weighted producer with producing properties in Argentina which is the riskiest country of South America.
Mart Resources is another junior oil-weighted producer with producing properties in Nigeria where the geopolitical risk is higher than Tunisia.
DNO International is an intermediate oil-weighted producer that has exploration and producing properties in the Kurdistan Region of Iraq, the Republic of Yemen, the Sultanate of Oman, the United Arab Emirates, Tunisia and Somaliland. In Tunisia, DNO holds both onshore and offshore properties. It must also be noted that DNO International owns a 30% interest in the Hammamet Offshore License operated by Chinook Energy. DNO International has proven and probable reserves of 520.3 MMboe with 90% of the reserves in the Kurdistan region of Iraq. DNO also gets more than 70% of its production from the Kurdistan region of Iraq.
Genel Energy is an intermediate oil-weighted producer with producing assets in Kurdistan and exploration assets in Morocco, Ethiopia, Somaliland, Côte d'Ivoire and Malta. The company is the largest independent oil producer and the largest holder of reserves in the Kurdistan Region of Iraq with 2 producing assets, 2 appraisal assets and four exploration assets.
A) Per EV/Production: Let's check out the table with the first key metric:
Company | EV ($ million) | Production (boepd) | EV/Production ($/boepd) |
Americas Petrogas | 305 | 2,065 (100% light oil) | 147,700 |
Mart Resources | 440 | 5,483 (100% light oil) | 80,248 |
DNO International | 3,470 | 52,780 (95% oil/liquids) | 65,745 |
Genel Energy | 3,000 | 53,000 (100% oil) | 56,604 |
Based on the data above, I get:
Average (Americas, Mart, DNO, Genel) | |
$/boepd | 87,574 |
Based on the aforementioned average metric, Chinook's Tunisian operations should have an Enterprise Value of:
$87,574/boepd X 1,812 boepd = $159 million.
B) Per EV/Proved & Probable Reserves: Now let's check out the table below:
Company | EV ($ million) | Proved & Probable (2P) Reserves (MMboe) | EV/2P Reserves ($/boe) |
Americas Petrogas | 305 | 10.4 (41% light oil) | 29.33 |
Mart Resources | 440 | 19.3 (100% light oil) | 22.8 |
DNO International | 3,470 | 520.3 (95% oil/liquids) | 6.67 |
Genel Energy | 3,000 | 445 (100% oil) | 6.74 |
Based on the data above, I get:
Average (Americas, Mart, DNO, Genel) | |
$/boe | 16.39 |
Based on the aforementioned average metric, Chinook's Tunisian operations should have an Enterprise Value of:
$16.39/boe X 20.45 MMboe = $335 million.
C) Per EV/EBITDA: Let's check out the table with the third key metric:
Company | EV ($ million) | EBITDA ($ million) | EV/EBITDA |
Americas Petrogas | 305 | 35 | 8.71 |
Mart Resources | 440 | 73 | 6.03 |
DNO International | 3,470 | 350 | 9.91 |
Genel Energy | 3,000 | 280 | 10.71 |
Based on the data above, I get:
Average (Americas, Mart, DNO, Genel) | |
EV/EBITDA | 8.84 |
As mentioned above, Chinook's Tunisian operations generate EBITDA of approximately $42 million, so Chinook's Tunisian operations should have an Enterprise Value of:
8.84 X $42 million = $371 million.
D) After all, I sum up the aforementioned results at the table below:
EV - A ($ million) | EV - B ($ million) | EV - C ($ million) | Average EV (Tunisian Operations) ($ million) |
159 | 335 | 371 | 288 |
So, Chinook's average enterprise value only for the Tunisian operations is $288 million.
If a strict investor discounts this result by a generous 30% because two of the four aforementioned comparables are intermediate producers, the final result will be $202 million.
Meanwhile, Chinook's current enterprise value that includes both the Canadian and the Tunisian operations is just $240 million.
3) Chinook's Total Fair Value Based on the Peer Group: After all, I sum up all the aforementioned results about Chinook Energy's enterprise value in Canada and Tunisia at the table below:
Average EV (Canadian Operations) ($ million) | 449 |
Average EV (Tunisian Operations) ($ million) | 288 |
Total Average EV ($ million) | 737 |
Net Debt ($ million) | (65) |
Shares Outstanding | 214,187,681 |
Price ($) Per Share | 3.14 |
If the total average EV of $737 million is discounted by a rich 30% (as indicated separately at the two paragraphs above), due to the fact that some of the comparables above are intermediate producers, the final result will be:
737 x 30% = $221 million.
737 - 221 = $516 million.
516 - 65 (Net Debt) = $451 million.
451 : 214,187,861 shares = $2.11/share.
At the time of writing, Chinook trades at $0.82, and the price of $2.11 per share represents an upside of ~160% for the potential investors.
If the total average EV of $737 million is discounted by an overly rich 50%, due to the fact that some of the comparables above are intermediate producers, the final result will be:
737 X 50% = $369 million.
737 - 369 = $369 million.
369 - 65 (Net Debt) = $304 million.
304 : 214,187,861 shares = $1.42/share.
At the time of writing, Chinook trades at $0.82, and the price of $1.42 per share represents an upside of ~75% for the potential investors.
Chinook's Advantages Versus Its Peers
Chinook is not only grossly undervalued versus its aforementioned peers but also carries two major advantages compared to most of them. Actually, the following two advantages should give Chinook a premium in comparison to the average valuation of the peer group:
1) Chinook is profitable in Canada: Chinook is profitable in Canada despite the fact that its Canadian operations are natural gas weighted.
On the contrary, the other North American natural gas weighted companies above like Bill Barrett, Comstock Resources and NuVista Energy have significant losses for the first nine months of 2013.
For the first nine months of 2013, Bill Barrett has lost approximately $185 million, Comstock Resources has lost approximately $75 million (excluding the one-time earnings from the discontinued operations), and NuVista Energy has lost almost $14 million.
Actually, Comstock Resources has been losing money over the last 4 years, Bill Barrett was marginally profitable in 2012 and NuVista Energy incurred huge losses in 2012. In other words, none of these peers has a track record of profitability or an exceptional operational performance to deserve any premium compared to Chinook's Canadian operations.
On top of that, this streak of losses does not seem to change for any of these three companies (Bill Barrett, Comstock Resources, NuVista Energy), and all of them will lose money in 2013 too.
2) Tunisia is an oasis compared to Kurdistan, Argentina or Nigeria: Tunisia has still some political instability but the tensions have declined and the worst is behind us. The political instability peaked in 2012 and has waned a lot since then. Now the country is in a transitional period until the elections of 2014.
The thing is Tunisia is an oasis compared to Kurdistan where DNO International and Genel Energy operate. Kurdistan is one of the riskiest countries worldwide and there is no question about that.
Tunisia is not Argentina where Americas Petrogas operates, because Tunisia has never nationalized the assets of any international company. Meanwhile, Argentina has nationalized the assets of 5 international companies thus far. The nationalization of YPF was just the peak of the iceberg, but Argentina has also nationalized some of the assets of Petrobras Argentina (PZE), Azabache Energy (OTCPK:AZBCF), Tecpetrol and Argenta.
Additionally, the Argentine government is taking very strict punitive actions against foreign owned or controlled companies. In 2012, the Argentine government announced that Spain's Telefonica SA (TEF), which operates the Movistar cellular phone network, would be heavily fined for a service disruption that left 16 million customers without phone and data services for several hours. According to Telefonica, this outage was due to a software glitch and they have already offered compensation to the affected customers. However, the Argentine government reiterated that the fine would be imposed regardless of any compensation already paid.
Additionally, Tunisia is a much more stable country than Nigeria where the civil unrest and the riots for religious or political reasons are frequent.
Major Recent Deals In Countries Riskier Than Tunisia
The M&A activity in the energy sector remains vibrant even in countries with higher risk than Tunisia (i.e. Kurdistan and Egypt) as shown by the latest major deals below:
1) In August 2013, Apache (APA) sold a 33% stake in its Egypt oil and gas business for $3.1 billion to state-owned Chinese oil giant Sinopec Group. Net production from Apache's Egypt operations was approximately 130,000 boepd (~63% oil).
2) In November 2013, Exxon Mobil (XOM) sold part of its stake in a massive Iraqi oilfield to PetroChina and Indonesia's Pertamina.
After all, if Chinook wants to make a JV or sell its heavily oil-weighted Tunisian assets and focus on its Canadian operations, it will most likely find more than one suitors who are willing to pay a decent price to say the least. Actually, a bidding war for Chinook's Tunisian assets will not surprise me at all.
Major Recent Montney Deals in Canada
The M&A activity remains vibrant in Canada too. So Chinook's Canadian acreage (primarily Montney and Dunvegan) can always become an acquisition target for another company that wants to expand to a country with a proven political and economic stability. The latest major deals related to Montney are below:
1) In 2012, Petronas acquired Progress Energy that had 820,000 acres in the Montney shale-gas area.
2) In late 2012, Exxon Mobil acquired Celtic Exploration that owned 545,000 net acres in the Montney shale and 104,000 acres in the Duvernay.
3) A few weeks ago, Talisman (TLM) sold some of its Montney assets to Progress Energy Canada for $1.4 billion. The sale involves a total acreage of 127,000 with Talisman still retaining 48,000 acres of prospective Montney land.
High Insiders Ownership
Another good thing is that Chinook's public float is relatively small. In other words, Chinook is not owned by weak hands. As shown at the company's presentation, the management team and the company's directors own 9.3% (Fully Diluted), Alberta Investment Management Corporation owns 38%, four institutions own 20%, and the public float is 36%.
Reasons For The Market Mispricing
The company's dramatic price decline effective 2011 is primarily attributed to the perfect combination of the following three reasons:
1) As we all know, the natural gas glut thanks to horizontal drilling and hydraulic fracturing resulted in a significant price decline for the natural gas effective 2011.
Chinook's core production is in Canada and is natural gas weighted. So Chinook's stock was hit because the price for the company's main product started to decline steeply effective 2011.
Chinook was not alone of course. As illustrated at the charts below, all the aforementioned natural gas weighted junior and intermediate producers (Canadian or US-based does not matter) took a big hit effective 2011.
To start, this is NuVista Energy's chart:
(click to enlarge)
This is Bill Barrett's chart:
(click to enlarge)
This is Comstock Resources' chart:
(click to enlarge)
This is the chart from Bellatrix Exploration which is another Canadian natural gas-weighted producer:
(click to enlarge)
Bellatrix's stock dropped from $6 in 2011 down to $3 in 2012.
Let's see now some more examples with natural gas-weighted companies from Canada and the US.
Advantage Oil and Gas (AAV) is a Canadian company with a 90% natural gas weighted production. This is its chart:
(click to enlarge)
This is Penn Virginia (PVA), a US-based company which was also natural gas weighted until early 2013:
(click to enlarge)
This is the chart from Carrizo Oil and Gas (CRZO) which is also another US-based natural gas-weighted producer. The stock dropped from $40 down to $20 in early 2013.
(click to enlarge)
This is the chart from Unit (UNT), a US-based natural gas-weighted producer whose price dropped from $60 in 2011 down to $34 in 2012:
(click to enlarge)
This is the chart from Chesapeake Energy (CHK), another natural gas-weighted US-based company whose stock dropped from $35 in 2011 down to $16 in 2013, as shown below:
(click to enlarge)
This is an indicative sample of charts with Canadian and US-based natural gas weighted companies, whose prices have declined steeply since 2011, due to the correction of the nat gas price in North America.
2) Tunisia was the birthplace of Arab Spring. All started in early 2011, and the Tunisian revolution inspired citizens across the region. So the social unrest and violence spread out to Libya and Egypt too.
The protests and the political instability in Tunisia and its neighboring Libya and Egypt lasted during the entire 2012 and early 2013. This is how Chinook described the situation in Tunisia in early 2013:
"The operating environment in Tunisia has become more complicated and the necessity to increase security at the Company's operations has risen since late last year. The number of local land use concerns continues to rise and the precedents to resolve them are nonexistent or ineffective in many cases. There are ongoing efforts to resolve the issues and streamline the process but until material commitments and progress are evident, the Company is unable to achieve the economies or timeline that had been planned."
The unrest in Egypt is what made Apache sell its properties in Egypt in August 2013, as linked above.
3) Due to the significant (and sustained as it proved to be) decline of the nat gas price effective 2011, Chinook's management took the decision in 2011 to reposition the company by selling non-core assets with natural gas-weighted production, and replace them with oil-weighted production.
This asset sale process generated proceeds of approximately $161 million (through 30 transactions) until H2 2012, when Chinook engaged FirstEnergy Capital Corp. and Macquarie Capital Markets Canada Ltd. to market certain of the company's remaining non-core Canadian assets. Those remaining non-core assets represented approximately 5,500 boepd of production. That was big because it was 58% of Chinook's Canadian production of 9,500 boepd (as of Q4 2012).
However, Chinook has made a masterful move and improved dramatically the effectiveness of its Canadian operations through this process. Despite the fact that Chinook has sold such a big part of its Q4 2012 production, the company has simultaneously acquired oil-weighted production and has also focused on its oil-weighted core properties.
As a result, Chinook is a profitable company on a sequential basis in 2013 ($12.3 million earnings for the nine months of 2013), and Chinook's Canadian production stands currently at 8,367 boepd which is just 12% lower than its production in Q4 2012.
It must be noted here that production from Canadian operations increased by 4% from Q2 2013, with a 15% increase in oil production to 1,853 barrels per day from 1,606 barrels per day in Q2 2013.
So Chinook's Canadian production declined in 2013 compared to 2012, but it is clear that Chinook has managed to replace the biggest part of the sold natural gas-weighted production with oil-weighted production from its core areas in less than one year.
To wrap things up, Chinook's stock was affected negatively by all these three aforementioned reasons which took place simultaneously effective 2011.
On top of the aforementioned reasons, there are two additional reasons that have also affected negatively Chinook's stock since 2011:
1) Chinook has very low awareness. An investor cannot find a detailed and fundamental analysis about this company in any online financial publication as of today.
2) The hybrid nature of Chinook's asset base. The objective evaluation of such an asset base is also getting more difficult because these assets are too far apart, being located in two countries with quite different characteristics, Canada and Tunisia.
Actually, Chinook reminds me of Equal Energy (EQU) which was also grossly undervalued in 2012 due primarily to the hybrid nature of its asset base. Back in 2012, Equal Energy had producing assets both in Canada and in the US.
Equal's stock was hovering at $2.5 in May 2012 when the company initiated its first strategic review process. Therefore, Equal sold its Canadian along with some of its US assets to focus exclusively on its properties in Oklahoma. As a result, the stock appreciated a lot, and the "new" Equal Energy received a number of expressions of interest for a potential transaction in early 2013. So the company initiated a second strategic process in 2013 that has not ended yet.
The thing is that Equal's stock has risen from $2.5 to $5.4, primarily thanks to this transformation that started in late 2012.
(click to enlarge)
On top of that, Equal's stock has strong potential for further appreciation in case the ongoing second strategic process ends successfully.
I recommended Equal Energy at $4.5 in August 2013, and my article is here.
Catalysts
There are several catalysts that can push Chinook's price much higher, bringing its valuation in line with peers. These catalysts are mentioned in the company's Q3 2013 report too. I quote:
"Our focus for 2014 will be on increasing our oil weighting in western Canada. Our Canadian capital program will be directed almost exclusively toward oil opportunities along with continued non-core asset rationalization and a focus on improving capital and operating efficiencies. In Tunisia, we will continue to appraise and develop our BBT concession along with pursuing various strategic initiatives intended to improve a low market valuation relative to our Canadian peers which can be attributed to the hybrid nature of our asset base. The strength of our balance sheet will enable us to pursue additional acquisition opportunities in our core area of Grande Prairie in what is continuing to be an exciting and opportunistic asset market".
In May 2013, Chinook also noted that:
"In addition to focusing on organic growth in the Company's core areas of Grande Prairie and Tunisia, efforts to bolster value will include the assessment of acquisitions in Chinook's core operating areas, dispositions of non-core assets, prospective business combinations or the split of the Company's domestic and international businesses."
So it is clear that:
1) Both in Canada and in Tunisia, Chinook is determined to pursue various strategic initiatives during 2014 intended to improve its low market valuation relative to its peers. These initiatives include:
A) Split and sale of the Tunisian assets.
B) Joint Ventures for the huge Tunisian properties that cover ~1.5 million net acres, or the Canadian properties that cover 450,000 net acres.
For instance, Bellatrix Exploration was at $5 in June 2013. Bellatrix has completed three JV since June 2013 with Grafton Energy, Daewoo and Troika, and its stock has risen a lot since June 2013 as shown below:
(click to enlarge)
C) Presentations to funds and institutions that will raise the awareness.
D) All of the above.
2) Chinook is going to pursue additional acquisition opportunities in its core area of Grande Prairie during 2014. Thanks to its low debt and the strength of its balance sheet, Chinook has significant liquidity that allows it to acquire oil-weighted properties from distressed sellers and increase the oil/liquids portion of its Canadian production.
If Chinook divests its Tunisian assets whose average value is approximately $288 million as shown above, it can expand significantly its oil-weighted acquisition plan in Canada by more than doubling the size of its Canadian operations.
3) Due to their dirty cheap current valuation, Chinook's properties in Tunisia or Canada can become an acquisition target at any time. Although this is speculative, Chinook's Tunisian partners are the Italian giant Eni (E), the Austrian giant OMV (GM:OMVJF) and the Norwegian DNO International which is in the process to diversify its international portfolio that is heavily weighted towards Kurdistan.
Canada's energy sector has also attracted several international E&P companies since 2012, and Repsol might be the next one. The Spanish oil and gas giant is currently hunting for a North American energy company, as it seeks to increase its investments in politically stable countries and participate in the shale boom, after the recent nationalization of its stake in YPF by the Argentinean government.
Risks
1) The stability, security or business climate in Tunisia have not completely stabilized yet as there continues to be an ongoing dialogue about transitioning to an interim government that would govern until elections can be held in 2014. The effectiveness and efficiency of the bureaucracy, and a problematic fiscal situation in Tunisia, are likely to continue at least until a new government is able to set a course and provide enough stability to attract new capital for the numerous good opportunities existing in many parts of the economy, including oil and gas.
Nevertheless, it must be pointed out that the tensions in Chinook's area of operations have been lessening. As shown at the company's Q3 2013 report, Chinook have had no interruptions due to social unrest or demonstrations. So things can only get better compared to the mess of 2011-2012.
It helps much that Chinook's core operations are distant from the conflict zones. The increased stability in Chinook's operating region and the company remains confident that its full 2014 drilling and facility construction program will proceed once all approvals are in place.
In the event Chinook experiences delays in its Tunisia program, the inventory of drill ready development opportunities in Canada allows the company to shift capital in 2014 to Canada which should serve to smooth out future forecast variances. So Chinook has a Plan B, if the turbulence in Tunisia returns back to 2011-early 2013 levels.
2) Chinook's drilling economics are strongly leveraged to the commodity price realizations. So, the commodity price sentiment becomes a substantial risk to stocks in the E&P sector, with Chinook being no exception. If oil price declines significantly and stays below $85/bbl (Edmonton Par) for a long period of time, Chinook may have to reduce its CapEx projections substantially.
My Takeaway
I believe that an investor needs to take a measured and pragmatic approach to investing by realizing all the facts than to be blinded by hype, speculation or political bias. The aforementioned voracious due diligence unfolds Chinook's bargain basement valuation and advantages versus its peer group, proving also why Chinook offers solid prospects for a fundamentally-driven price appreciation.
Barring a significant and sustained decline in oil and nat gas prices, the upside to Chinook's stock by 2014 can be tremendous, because it currently trades at just 50% its book value, at a staggering (270% - 400%) discount to its Net Asset Value and at a substantial (75% - 160%) discount to its peers. On top of that, Chinook is a profitable company while most of its competitors above have been losing money in 2013.
Disclosure: I am long GM:CNKEF, EQU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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