In the aftermath of the recent substantial down move in oil and commodity prices, as a value investor you may be searching for investments in commodity related stocks with limited downside and substantial potential upside. What if you could buy a company for less than half of its asset value? Better yet, what if you could buy a company for half its asset value AFTER it monetized an asset, was trading near a 0 enterprise value, and was on track to sell another asset worth at least half of its current market cap? And what if that company had new management installed by shareholder activists, committed to realizing value for shareholders?
Well, you can. The company is Mopolo Energy (MPO AU). They have approximately 250 million shares outstanding, and are trading at $0.79 per share (AUD, which is close to par with USD and CAD). Molopo recently sold an asset for $188 million, and had $20 million net cash on their balance sheet in their latest filing - net of tax and transaction liabilities they are currently holding over $160m in cash and marketable securities. Plus, they have substantial additional assets that are likely worth in excess of their $200 million market cap, one of which is currently for sale and could net over $150 million to the company. Sometimes the best investment ideas are the simplest. Molopo is simply mispriced, with very high upside potential and inherently limited downside due to the large cash position and the asset value.
These assets include Australian coal bed methane (CBM), to the tune of 328 bcf of 2P reserves, which I conservatively mark at $0.50/mcf, or $164 million to the company (historic transactions have been at an average price of $1.85/mcf, and the lowest recent transaction has been at $0.92/mcf). They also include 52,000 acres of Saskatchewan Bakken, which I conservatively mark at $1000/acre (recent transactions have been as high as $5,000/acre). And over 17,000 net acres of Permian Wolfcamp acreage (right in the middle of Approach Resource's oil field). Wolfcamp acreage in the area has sold for over $3,000/acre in recent state lease sales. Molopo also has assorted other assets which provide further optionality, but for the purposes of this analysis, we can mark them at $0 as we are already near 2x the current market cap and these other assets are more complex and have less tangible value.
In other words, Molopo has nearly $160 million net cash and liquid securities after taxes on their balance sheet. And they have at least $150 million of CBM, $50 million of Bakken acreage and $50 million of Wolfcamp acreage. They are worth $410 million on the basis of this asset valuation analysis and are currently trading for $200 million.
It is worth mentioning the company's plan going forward. There are many possibilities, including a dividend, stock buyback, or simply continuing divestitures and reinvesting capital at high rates of return, like they did in the recently divested Canadian Spearfish play. Management has indicated they intend to pursue a combination of late stage asset sales (the CBM), stock buybacks, acquiring new early stage assets, and developing existing early stage assets such as the Bakken and the Wolfcamp. Management has also said they intend to dual-list the stock, either in Canada or the US, which when combined with the sale of its Australian CBM asset, will simplify the story and allow US and Canadian investors to more easily access the stock and value the company more in line with its asset value and impressive track record.
The CEO has proven himself to be a proficient acquirer of early stage oil and gas assets, so despite not pursuing optimal capital allocation, there is potential for Molopo's asset value to grow over time. However, my preference would be an aggressive stock buyback at current stock price levels, as this would amplify the impact of the sale of the CBM asset and any value creation by management. This could be an attractive opportunity for an activist investor to get involved and to help management see the light, so to speak.
In support of the valuation estimate for Molopo's Australian CBM asset, please see the table below, assembled from press releases, public filings, and public company presentations. Also, keep in mind that in the aftermath of the tragic earthquake in Japan, valuations of CBM assets in Australia in close proximity to LNG projects that could supply Japan have likely risen substantially, possibly to the levels last seen in 2008. These transactions seem to indicate average value of $1.85 per 2P reserve and $0.80 per 3P reserve. At the lowest recent transaction price, $0.92 per 2P or $0.56 per 3P, Molopo's asset value would be in the range of $302 million to $442 million. For the purposes of the analysis above and to be conservative, I used ½ of the lower number. There are not many independent companies in the area remaining with reserves like Molopo's, as most have been acquired in the spate of transactions referenced below.
Transaction value (A$m)
Sale of Queensland CBM for over $100 million
Well results in the Bakken and the Wolfcamp
Acquisition/discovery of additional unconventional oil shale plays