In the stock market, just about everything is speculative. Companies trade on countless metrics, with some analysts preferring trailing price-to-earnings ratio, others looking at forward P/E ratios, revenue projections, enterprise value and on and on. While fair valuation is certainly subjective for large caps, the case is even more volatile for small and microcaps due to the lack of analyst coverage to debate the matter.
Regardless, sometimes the math is quite simple to show a company is undervalued based upon quantifiable metrics. When Wall Street and Bay Street figure this out, there is almost certainly a correction in market cap to a more appropriate level.
Permex Petroleum (CSE: OIL) is a case of such under-appreciation and flat-out bad math. It also is arguable that the sell-off was owing to early investors liquidating and now out of stock, a situation that nearly always is followed by a correction as the buyers just waited-out the seller.
Permex is a junior oil and gas company that joined the public domain via IPO in May, raising just over $4.0 million through the sale of 8.14 million shares at 50 cents per share. The company captured investor attention for its assets and operations across the vaunted Permian Basin in west Texas and Delaware Sub-Basin in southeast New Mexico.
The Permian has been integral to the U.S. oil production recently swelling to 11.6 million barrels per day in the first week of November. That total exceeds production of both Russia and Saudi Arabia, as the U.S. looks to become less dependent on foreign oil, playing into the “America First” mantra of President Donald Trump.
In a phone conversation with Baystreet.ca, Permex CEO Mehran Ehsan said that he still sees many significant acquisition opportunities in the region that can be immediately accretive to corporate value as companies continue to rebalance their portfolios.
The formation of the company was by no means an accident. While companies were divesting assets during the years while oil prices were plunging to a low near $26 a barrel, Permex leadership was aggressively acquiring assets a rock-bottom prices. The result is a company now that has 72 producing oil and natural gas wells, more than 145 oil and gas well in its portfolio, 6,500 acres of “held by production” oil and gas assets in prolific and energy-friendly regions of the U.S. and 34 salt water disposal wells to keep operating expenses minimized.
Permex is following a playbook for success to produce oil and gas while developing its other assets and building a team of seasoned vets and partners. To that latter point, the company has partnered with Blackspear Capital related to Blackspear being responsible for developing part of the company’s 680-acre Oxy Yates property in Eddy County, New Mexico. Permex has a major in its corner too, with international oil and gas industry giant Occidental Petroleum Corp. (NYSE: OXY) holding a major working interest Permex’s 1,200-acre ODC San Andres Unit and W.J. “A” Taylor lease in Gaines County, Texas.
Permex and Occidental are in good company, with offset operators to the property including Devon Energy (NYSE: DVN), Hess Corporation (NYSE: HES), Fasken Oil, and Ranch Ltd.
Production for Permex presently stands at 240 barrels of oil equivalent per day, a solid rate that almost surely will continue to rise thanks to re-entry wells and stimulation programs that are underway. In fact, production is expected to rise to 400-500 barrels of oil equivalent per day perhaps as early as by the end of 2018 and increase to 3,000 by the end of 2019.
Leading this effort, an enhanced oil recovery waterflood program was begun this month for the purpose of increasing oil production within the Bullard Tannehill unit situated in Stonewall, Texas. Successful implementation of the waterflood will add to cash flow and support additional recovery programs and new drilling programs in 2019, according to Ehsan.
By The Numbers, You Do the Math
In valuing oil properties and companies, there are several metrics, which can be used individually or in aggregate. Most generally, the metrics are used cumulatively, but to speak to the undervalued nature of Permex, the point can be made by simply looking at the assets individually.
MKM Engineering completed an independent NI 51-101 technical report showing Proven and Probable oil and gas reserves across its properties at 9.0 million barrels of oil equivalent and a Net Present Value of Future Net Revenue discounted at 10% to US$150.0 million (CDN$197.3 million).
Permex has 36.0 million shares outstanding. Dividing the NPV by the shares equates to CDN$5.48 per share. Shares closed trading on October 8, 2018 at CDN$0.25 per share.
Even if you don’t think about the 2P oil and gas reserves, consider the value of Permex’s land position; it is a veritable land bank. The company scooped up its properties at an average of $2,000 per acre. Recent land auctions in the same area of Permex’s property in New Mexico, a highly prospective O&G region in the U.S., fetched up to $95,000 per acre. As for the company’s Texas assets, land is selling in the range of $17,500-$25,000 per acre.
Permex has 6,500 acres in its portfolio. Taking an ultra-conservative approach and using the $17,500 per acre figure and doing some simple math values the properties at US$113.75 million (CDN$149.6 million). Dividing this by the company’s 36 million outstanding shares equates to CDN$4.16 per share. Again, shares closed at 25 Canadian cents each on Thursday.
Another top-level, common value metric for valuing and comparing oil and gas companies is “price per flowing barrel” of production. Consider that Occidental last year paid $73,000 per flowing barrel of production to acquire assets from Hess Corp. in West Texas' and New Mexico's Permian Basin or that ATB Financial recently released a market value estimate per flowing barrel at CDN$62,500.
Conservatively using the 240 barrels of oil equivalent per day (BOEPD) being produced currently by Permex and the lower ATB estimate works out to CDN$15.0 million. Dividing that by the outstanding shares equals CDN$0.417 per share. Should the company make good on their increased production goals of 500 BOEPD in 2018 and 3,000 BOEPD in 2019, the values rise to CDN$0.868 per share and CDN$5.21 per share, respectively. As mentioned, shares of OIL closed at a Canadian quarter each this week.
More Fundamental Strength
Like the portfolio, the Permex leadership team certainly doesn’t look like it belongs to a company trading at a market cap $9.0 million market capitalization; it looks more like the team of a mid-tier producer. The company recently added Doug Urch to its Board of Directors. A Chartered Professional Accountant and a member of the Institute of Corporate Directors, Urch has over 35 years experience in the oil and gas industry that he brings to Permex.
Solidifying its books, Permex last month secured a US$5.0 million lending agreement with RC Morris Capital Management, qualifying for $2.0 million in an initial cash issuance. According to Ehsan, the company hasn’t even tapped into the available funding yet, an indication of just how financial-minded management is to efficiently allocate capital.
The recent price decline in shares of OIL seems more the result of some original investors moving out of the company. Once private and paying dividends, the transition into a small public company likely wasn’t for everyone. This sort of selling that artificially deflates a share price isn’t uncommon, as early investors check out in favor of new investors. What also isn’t uncommon is a sharp rebound in shares when the selling is concluded, which it looks like it is.
Now is it time for the rebound? The math certainly suggest that the time is ripe anyway.
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