Description

The last time IPCO was written on VIC is August 2022 writeup by Stevedean which I encourage you to read. In this writeup I will update on the company’s progress over the past year and will provide more details on how management thinks about capital allocation. 

While a relatively new company, IPCO has built an impressive track record of delivering strong financial and operating results in the industry famous for consistent destruction of capital:

Since going public IPCO share price compounded at 21% in SEK (17% in CAD) vs XLE Index returning 4%/year (price return only).

The biggest changes over the past year has been the company's decision to proceed with the development of the Blackrod Phase 1 project as well as the acquisition of Cor4 (owns oil producing assets). Below I will go through three strategic pillars of value creation at IPCO: contingent resource development; M&A and stakeholder returns.

Blackrod Phase 1 project

Blackrod is the largest development project in the history of IPCO. The company got Blackrod asset in 2018 as part of Blackpearl Resources acquisition. 

IPCO plans to develop Blackrod in several phases. First oil of the Phase 1 development is estimated to be in late 2026, with forecast production of 30,000 boepd by 2028. Completion of the Phase 1 will increase oil production at IPCO from 50,000 boepd to over 65,000 boepd (net increase is 15,000 boepd due to expected production decline at current wells). The project has a total cost of $850m; the investment project breaks even at $59/bbl oil with a variable cost of production at $17-18 per barrel. 

Why will the Blackrod project be successful? 

• Blackrod project is operated by the same team with the same concept as Onion Lake Thermal (a 14,000 boepd heavy oil thermal project currently operated by IPCO), but is 10x bigger;

• The subsurface risk is very low: there are wells at Blackrod which had produced oil from this reservoir for 12 years;

• Strong operational and capital allocation track record of the current management team. 

The decision to proceed with Blackrod project changes FCF profile of the company for the next 5 years: at $75/bbl oil IPCO will produce $700m of FCF ($1,400m at $95/bbl oil). As long as Net debt/EBITDA is below 1.0x, 40% of FCF will be returned to shareholders via buybacks.

Cor4 acquisition

In February 2023 IPCO announced the acquisition of Cor4 Oil Corp for USD 62mn. Cor4 owns 16 MMboe of 2P reserves adjacent to company’s Suffield property in Alberta, Canada and is expected to produce 4,000 boepd in 2023 out of total 2023 production guidance of 48-50k boepd. This small acquisition is the most recent indication of management’s willingness to act quickly when the right M&A opportunity presents itself. According to the CEO, they were able to do the deal quickly because the company “could write the check tomorrow” (e.g. had cash on hand) which was an important argument for the seller. Management remains open to other M&A deals with the primary interest in mature oil producing assets. 

Return of capital

IPCO management team has a strong track record of value creating, opportunistic share buybacks. Between IPO and the end of January 2023 buybacks created c. $300m of value for shareholders (e.g. the average price of repurchased shares was below the current stock price). 

The current buyback program was started in December 2022 with the goal to buy back up to 7% of shares. Since the beginning of 2023 and till mid-April IPCO repurchased 4.9m of shares for the total of c. $50mn and has reduced the share count by almost 4%. See below management’s historical track record with buybacks:

Below is an example of how management thinks about allocating capital between share buybacks and M&A (CEO Mike Nicholson in Feb 2020):

We'll definitely still be opportunistic with respect to M&A, but… with our stock trading at $0.30 on the dollar, it becomes increasingly challenging to find an asset that adds as much value to the assets that we own… Unless we can find value-accretive acquisitions then certainly, share buybacks and shareholder returns will be taking a priority.

Another quote from CFO Christophe Nerguararian on how management thinks about M&A and raising capital (Feb 2023):

I think from our past experience with Lundin Energy, for instance, we've learned that you want to raise money or talk to your banks when you don't need them. It's probably easier and faster. So that's why we issued bonds exactly almost to the day a year ago. So we always maintain those discussions with the banks who helped us issue the bonds or with our Canadian banks, typically, we have this CAD 75 million revolving facility, which we've not used. We know because we talk to them all the time. So we know that there is some willingness to further support us.

So it's -- we're always considering whether we want to further strengthen the balance sheet, given that we're underlevered for 2 reasons, essentially, either as a sort of a hedge if oil prices were to go significantly below where they are today in the context of the CapEx spend for Blackrod but also in the context that we are very credible as a buyer if we can demonstrate to the seller that we are -- we can act very quickly, and we have the money to act on an M&A decision. I won't go into too much details, but over the history of M&A, we've rarely been the highest bidder, but we've always been a funded bidder, and that makes the conversation much more fluid with sellers.

The latest example of raising debt that the company did not need at the time is a $300m bond issued in January 2022. CEO Mike Nicholson:

We are very pleased to be launching IPC’s first USD 300 million bond issue today, accessing the debt capital markets at a favorable time. We strongly believe that the winners in the next phase of the energy transition in the upstream oil and gas industry will be those companies that are able to access diverse sources of funding. Whilst we do not have an imminent acquisition, we believe that being able to demonstrate to sellers that IPC has the financial strength on its balance sheet, will enable IPC to access a greater universe of opportunities whilst differentiating us from our peers in terms of certainty of being able to close transactions.

One year later IPCO used part of that cash to acquire Cor4.

Valuation

At SEK 102/share the stock is currently trading at a 60% discount to Net Asset Value of 2P reserves (SEK 270/share) without getting any credit for: (1) contingent resources and (2) management’s track record of value-creating M&A. 

I think partnering with such an exceptional and well-aligned (insiders own 30% of shares) management team at a wide discount to NAV presents an attractive opportunity. 

Catalyst

Continued strong execution

Progress on Blackrod Phase 1 project