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From Agora financials
Don’t Miss These Two Stocks
March 12, 2010
“It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.”
– Amos Tversky, pioneer in cognitive science
UPDATES: CNQ, GPOR
Dear Capital & Crisis Reader,
Last week, I was in Baltimore for our editorial meetings. It’s always good to meet with my fellow editors and hear what everybody is thinking.
Baltimore is an old industrial city which industry has mostly left. An old power plant building — impressive in many ways — now houses a Hard Rock Cafe, ESPN Zone and large Barnes & Noble bookstore. An old sewage plant, also an impressive piece of architecture that dates to the early 1900s, is now a museum. The old headquarters of the B&O Railroad is now the hotel where I stayed.
I wonder about all those restaurants and hotels and museums. Nobody seems to make much of anything anymore. The city is hollowed out in some ways. And that reflects what’s happened in many of the industrial centers of America — in Cleveland, Buffalo, Pittsburgh, Detroit and other cites.
In some ways, these cities have been a bear market for the last 50 years. It unfolded slowly and took decades to undo the prosperity that made these cities once among the most prosperous of American cities.
It reminds me of what Fred Schwed said about the Great Depression in his 1950 book The Pleasure Was All Mine: The Journal of an Undisappointed Man. “The Great Depression, if you care to remember,” Schwed wrote, “was as dull as it was dreadful.”
Here is a passage from the book about the Depression that I found particularly memorable:
“Imperceptibly, the time came — when we in the family didn’t quite know it was happening, and then later when we didn’t quite realize it had happened — that my father, who for so long had so rarely lost, now so rarely won. Like so many another American family head, he fought a rear-guard action against the financial facts, which was certainly gallant, less certainly wise…
“When a family income is badly bruised, there is a choice of two things for the family to do. One is Pop’s choice, which is to go along as though nothing happened because things are going to get better. The other is the coward’s choice, or my choice, which is to give up the battle promptly and start saving money.”
How many Americans continue to fight a rear-guard action against the financial facts? How many people go on as if nothing has happened?
I was walking around Fell’s Point in Baltimore with Byron King, editor of Outstanding Investments, and we talked a lot about this reduction in American manufacturing capacity. There are a couple of ways to look at it. On the one hand, we wondered about the long-term health of an economy so dependent on other people making stuff for us in return for little pieces of green paper we print virtually at will.
On the other hand, there are still many fine American (and Canadian) companies doing great work making needed things. There are still companies with great hard-to-reproduce assets that will do well in the years ahead. Prosperity has simply fluttered off and found new nests. It no longer calls the same old cities home, but roosts in different places.
In that spirit, both of the oil stocks below are loaded with assets that make them compelling buys. Read over these updates carefully, because the upside in these stocks is still large…
*** Canadian Natural Resources
Canadian Natural (CNQ:nyse) is our oil and gas company in Canada. It reported good results last week. Oil production was up 18% from the same quarter a year ago. The company continues to generate a lot of cash and still has a huge inventory of projects to fuel further growth.
One of the reasons I liked CNQ was because of the management team, which acts like owners — because they are owners. One of my favorite charts on CNQ is this one, which shows the dollar amount management has invested in the company:
Owners tend to make better long-term decisions for a business than renters, the same way it works in real estate. So CNQ is good with managing its capital intelligently. It’s hard to quibble with its track record. The company has boosted cash flow per share at a 17% annual clip since 1999. The company continues to be a low-cost producer. And it continues to beef up reserves and production, as this next chart shows.
For 2010, the management expects to generate nearly $7 billion in cash flows — or nearly $13 per share. That’s a 12% increase on a 7% increase in production. And of that, about $2-2.6 billion will be free cash flow. The first priority for excess cash flow is to pay down debt, building more equity in the company in the same way paying down your mortgage does. In 2009, debt fell $3.3 billion, to $9.7 billion. (Keep in mind CNQ has a $40 billion market cap.) So the debt level here is fine.
There is a lot to this company, and there is still a tremendous amount of value here. Net asset value easily exceeds $100 per share, in my view. Therefore, a buy up to $75 is a conservative purchase. As I write, the stock is $73 per share — so that window is closing.
We’ve owned CNQ since February 2007. Since then, it’s up 46%, handing us an annualized return of 13%. The S&P 500 has fallen 21% over that same time span. CNQ has been an excellent investment, and there is more to come. I view it as a core oil and gas holding.
CNQ is a buy up to $75 per share.
*** Gulfport Energy
We own another wonderful oil and gas investment in Gulfport Energy (GPOR:nasdaq), though Dame Fortune has been less kind to the share price. Gulfport hails from Louisiana. In much the same way as with CNQ, we have an owner — Charles Davidson, who owns 36% of the company — and a team that has made many wise moves. The first evidence I would cite is that GPOR never had to do any dilutive offerings of any kind during the depth of the past crisis. It continued to generate cash and maintain a strong balance sheet.
We got good results on GPOR this week, and the stock rallied again on the news. It seems the best advertisement for GPOR shares is its results. But the market is like a 2-year-old and needs constant reminders of the story here.
The big story beyond exceptional low-cost operations that will generate a lot of free cash flow in 2010 is its interest in Grizzly Oil Sands. GPOR owns 131,000 net acres of oil sands leases. Management gave an excellent idea of what this could be worth in its last quarterly presentation.
UTS just sold a 50% interest in its 16,000 net acres to Imperial Oil and Exxon for $14,000 an acre. There was no production here — it’s just the raw acreage. GPOR owns 11,228 net acres adjacent to UTS’ acreage. Just this alone would be worth $158 million — and that’s only 9% of GPOR’s total oil sands acreage! (Remember, GPOR owns 131,000 net acres.)
Keep in mind that the market values GPOR at only $530 million (equity and debt). So in theory, GPOR’s oil sands acreage alone is worth $1.7 billion at that multiple — about three times the value of total company, excluding the actual producing assets!
GPOR also shared another transaction in which PetroChina bought a 60% interest in Athabasca oil sands projects at $10,000 an acre. Again, GPOR owns 38,000 acres right next to this. At $10,000, GPOR’s acreage here is worth $380 million. And this is only 29% of its total 131,000 acres.
Any way you slice it, GPOR is cheap. The oil sands investment alone makes it a buy. The ongoing operations you get are cheap, too. These operations are low cost, producing oil at cash costs around $20 a barrel. The company also has a large resource base of 30 million barrels of just proved and probable reserves — and this excludes the oil sands stuff.
The consensus earnings estimate on GPOR, which it always seems to top, is $1.80 for 2010. At $11 per share, it goes for six times 2010 estimated earnings — and you get all that upside in oil sands for nothing. So that’s another way to look at it.
Gulfport is a buy. Someday, the market will catch on to the value here, and then it will trade for three times today’s price. Patience will win out. GPOR is a buy.
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