|Shares Out. (in M):||62||P/E||0.0x||0.0x|
|Market Cap (in $M):||158||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
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Sonde Resources (SOQ) has the kind of torrid history, uncertainty, asset value, strong management and insider buying that makes it a deep value investor’s dream stock, but yet is a company few have heard of in its current incarnation.
First, its history: Sonde is the old Canadian Superior Energy, which was written up on VIC in 2010 and rose almost 50% in the midst of a Value Investing Congress presentation in 2008. Canadian Superior was led by its President, Greg Noval, a notorious Canadian oil and gas promoter, who had a proclivity for exhibiting huge gas flares from discoveries to prospective investors. It had massive offshore gas discoveries in Trinidad, a promising exploration prospect in North Africa, and cash flow generating properties across Alberta.
Greg wasn’t satisfied with his significant ownership of Canadian Superior stock, so he set up a shell called Challenger and started shifting ownership of the Trinidad discoveries into Challenger, using money lent from Canadian Superior to Challenger to finance acquisitions and development of fields being sold to Challenger by Canadian Superior! Here is a link to an article written in the midst of this activity that can give you a sense for Greg Noval - http://www.globeadvisor.com/servlet/ArticleNews/story/gam/20060826/RO9COWBOY
Post Lehman, these shady deals collapsed, Challenger went into bankruptcy, activist investors kicked Greg out of Canadian Superior, and Canadian Superior ended up going through a restructuring of its own, which involved a $60 million private placement led by Clay Riddell, a Canadian oil and gas billionaire.
Since then, Jack Schank, former CEO of Samson Resources (recently acquired by KKR for $7.2 billion) has come on as CEO, the company has acquired 60,000 net acres of the emerging Duvernay oil play and 20,000 net acres of emerging oily Montney, the Trinidad asset was sold off to pay off all outstanding debt, LNG assets were divested and a major discovery was made on the exploration prospect in North Africa (70 million net recoverable barrels of oil were discovered in on part of the acreage block).
There are some complications around the location of North African block – it is licensed 50% from Tunisia and 50% from Libya, through a “Joint Oil” company – and these complications consumed much of management’s time and resources in 2011. These complications have largely been resolved, as announced in a press release on January 17th, and the company is moving forward seeking a joint venture partner or outright sale of the asset.
Uncertainty: Sonde’s path forward in North Africa not entirely clear. They could sell the North African asset outright or joint venture it - management recently publicly estimated a value of $2-6 per net recoverable barrel in a transaction. At over 70 million net barrels, that puts a $140 – 420 million sale valuation on the asset to SOQ. However, without knowing the path forward on the asset, the market appears hesitant to award it much value.
Sonde’s path in North America is similarly hazy. Sonde’s production finally stabilized in 2011 and began to increase (reached 3,226 boepd by the end of 2011, 33% oil) on the back of an active Manville horizontal oil development program, which has had mixed results and acceptable but not fantastic ~20% IRRs. This production plus Manville upside is worth a minimum of $30,000 per boepd, based on recent transactions, and potentially substantially more, implying a production value of approximately $100 million.
Beyond production and the Manville play, SOQ’s primary assets going forward are emerging unconventional oil plays - 60,000 net acres in the Duvernay oil play and 20,000 net acres in the Montney oil play. No wells have been drilled by Sonde yet, but in 2012 highly economic neighboring wells have been announced on nearby acreage in both plays (a Trilogy well in the Duvernay and an RMP well in the Montney).
Sonde intends to joint venture some or all of its Duvernay acreage and potentially also its Montney acreage. Duvernay has leased for as much as $5,000 per acre in Crown lease sales near parts of Sonde’s position, and Montney values range widely, but it is unclear what terms Sonde could get for a joint venture or what the current sale or development value of their acreage would be. Large nearby private transactions have priced Duvernay acreage at over $2,000 per acre, and since then additional positive well results have been announced. The simple math indicates a minimum $120 million outright sale value for the acreage and likely a value far in excess of that if the acreage were put into a joint venture and developed.
The uncertainty around both North Africa and Sonde’s Duvernay makes discussing or projecting Sonde’s future incredibly difficult. But it is still possible to calculate a base case intrinsic value of $140 mm for North Africa, $100 mm for onshore Alberta production and $120 mm for unconventional Canadian resource plays, or $360 mm total. And the market is valuing SOQ at a current $160 mm market cap (there is 0 net debt).
Management: Jack Shank is the CEO of Sonde, and has been running the company for a little over a year now. Previously, Jack was co-CEO of Samson Investment Company, which he helped grow into one of the most successful private E&P companies and which was recently sold to KKR for $7.2 billion. He was also a senior executive at Unocal, including a role as president of Unocal Canada for 3 years.
Jack is the real deal. It is very unusual for a small cap E&P company to have a CEO with credentials anywhere close to Jack’s. He chose to go to Sonde over getting a multi-hundred million dollar private equity blank check because he thought it had substantial embedded value and he could get a running start without the shackles of a private equity driven board.
Ram Energy recently traded to over 3x NAV because of the involvement of a similarly successful CEO, Floyd Wilson. SOQ should trade at NAV or higher due to the history of small cap E&P companies substantially outperforming with high quality management. Jack’s references check out and if there had previously been any doubt, the sale of Samson for a huge multiple of what it was worth prior to his involvement should be a good indication of his ability and track record.
Insider Buying: So here you have an undervalued company with meaningful upside and management with a long track record of value creation. With all this, SOQ gives you an added bonus – substantial recent insider purchases of stock. You can track recent purchases here - http://www.canadianinsider.com/node/7?menu_tickersearch=soq – and can look at Sedar for a more detailed record. Jack will tell you if you ask that he has trouble finding enough stock to buy when he isn’t in a black out period. There are some odd purchases and sales (sometimes within a few days of each other and immediately before material announcements) by the Riddell family, which management explains as the actions of a blind trust established by the Riddells that they have no control over. Their active account has been a net buyer of the stock recently.
Catalysts: What will take SOQ to the next level? A JV or sale of North Africa, bringing either hundreds of millions of dollars in the door to SOQ or into a subsidiary that SOQ will retain partial ownership of that will be deploying it in a large scale exploratory and development program.
In addition, the Duvernay continues to heat up as capex shifts from natural gas to oil drilling, and SOQ has acreage in the right zip codes. An outright sale or JV will help unlock value, may bring cash in the door, or will drive big production growth through the development of the asset.
As if that weren’t enough, the recent 1,620 bopd IP Montney well announced by RMP on acreage immediately adjacent to SOQ’s 20,000 net acres in Ante Creek increases the probability of success there. It is unclear if SOQ will fund its own exploratory wells there, or whether it will JV or sell, but regardless there is material upside in their Montney, especially compared to the size of the company.
Risks: How could this investment go wrong? The primary risk is that SOQ is an oil and gas company. Natural gas prices have cratered recently. If oil prices were to collapse, it would materially negatively impact the value of SOQ’s assets.
There is also deal risk – just because assets have sold recently for much higher values than discussed above does not mean there will necessarily be buyers at higher prices. Jack is a savvy businessman and dealmaker but there are no guarantees and Sonde could fail to sell/jv an asset or could sell an asset for less than should be reasonably expected for the asset. Particularly in North Africa, this is a risk because Sonde has drilling obligations that would be difficult to meet without outside funding. Absent an oil price collapse, however, it seems likely one or more deals gets done in the next few months.
There is also execution risk – something could go wrong with drilling operations, fracking, or production from existing wells. This seems unlikely but is possible and could create a meaningful liability.
A JV or sale of North Africa and/or Duvernay assets; discovery well(s) in the Montney oil shale
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