Description

Travolta killed Mr. Bojangles

Bob Taylor started making acoustic guitars in San Diego just as the folk era in popular music was ending and the disco era was beginning.  That was a terrible time to start making acoustic guitars! Disco music has little need for strumming. Years later Bob Taylor reminisced that growing a business was easier during those uncertain times because there was little competition - now Taylor Guitars are respected guitars sold in stores all over the world.  Taylor is giving Martin and Gibson (the century-old guitar makers) a run for their money. Disappearing like Dylan during the disco age - the hot money is gone from the Canadian oil patch. There are only a few junior oil & gas explorers remaining in Canada - and they’re all struggling to find oil, shunning gas. Investors are exhausted and capital is scarce.  I’m pounding the table! Now is the time to be inspired by Bob Taylor and invest in an empire-building, natural gas true believer - MIKE ROSE!

So, Tourmaline is a natural gas E&P in Canada run by Mike Rose.  Mike has built 2 companies from nothing and sold them at a nice premium.  The returns for shareholders were exceptional. He sold his last company to Shell.  He bought the same assets back from Shell after natural gas prices collapsed. Shell accepted 10 million shares of Tourmaline as partial payment.   This is his third company with mostly the same staff and even the same phone number as prior two companies. Mike remains heavily invested in this and he has been buying stock on the open market recently.  He has demonstrated shareholder friendly behavior in the past. He’s an empire builder but unlike other empire builders he has demonstrated something rare - he will gladly walk away when the price is right as he did twice in the past.  To say he is “connected” is an understatement as his father-in-law was Clay Riddell (RIP), a legendary oil man in Canada.

Reserve reports and reservoir engineers have done the heavy lifting for my DCF.  Suffice it to say, Tourmaline is cheap and it has never been cheaper. This is literally a 50 cent dollar.  

Current share price is below IPO price of $21, yet reserves have grown by 700%, cashflow 400% (despite lower commodity prices), and production by 600%.

Current share price is less than half of what it was 2 years ago when Tourmaline was written up on VIC.

Mike Rose’s prior two companies were taken out at premiums to reserve values.  Normally his companies trade at ~50% premium to reserves.

“Behind every beautiful thing, there's some kind of pain.”  Bob Dylan.

How much cheaper can it get?  Let’s look at the extreme downside

The problem right now is gas is stranded in Alberta, Canada due to pipeline constraints.  What happens if Alberta never exports another mcf of gas? A draconian solvency analysis: Tourmaline’s balance sheet is so so good that before the banks & bankruptcy courts can shut down Tourmaline, they’ll take 90% of Tourmaline’s competition out first.  If 90% of production is removed from Alberta the people of Canada will literally freeze. After a few frozen bodies natural gas prices should align themselves with production costs. 25% of existing natural gas production in Alberta is consumed in Alberta (even after they shutoff the oil sands consumption) and Tourmaline is on higher ground than 90% of the companies producing natural gas. Realistically, natural gas demand is growing everywhere in North America (and the world) despite solar, wind, etc. as an easy way to replace coal.  In a terrible environment where they can’t figure out how to get this gas out of Canada, the market will cleanse the overproduction - Tourmaline will be left standing.

A better way to analyze leverage is to study debt related to the present value of their reserves.   There are only 2 companies with less leverage in this regard - and they have their own problems. Tourmaline has the high ground and is also one of the lowest cost producers of natural gas in North America - that makes for quite a moat.

What are some of the reasons this discount will go away? (organized from near-term/weak to long-term/strong):

(1) Timely point of entrance,  Seasonality from Factset:

Lame technical analysis says “Sell in May and go away!”

(2)  Mike Rose has recently increased his ownership by open market purchases of the stock.

When the company IPO’d Mike Rose owned about 10 million shares.  As the green line indicates, he kept that count steady until the end of 2014 when he took his ownership level up to 13 million.  At the end of 2018, he just upped his ownership to 17 million shares.

(3) Pipelines and LNG Terminals - Natural gas costs ~10x as much in Japan.   Beijing is switching from coal to natural gas. Numerous presentations talk about the worldwide benefit of getting the gas out.  It is only a matter of time. Shell is incentivized to move more natural gas out of Canada and given they own 10 million Tourmaline shares, they’d probably like to move Tourmaline’s gas.  See Royal Dutch Shell’s main investor presentation where they envision the LNG expansion. The news media is full of information and forecasts about pipeline and LNG activity in Canada.

(4)  Growth/Relative Valuation

Tourmaline is on track executing their 5 year plan where they envision a debt free 10% fcf yield in less than 5 years from now using current, depressed commodity prices.   See investor presentation details. This is their own projection. Tourmaline usually sandbags their forecasts.

What is most astounding is the relative valuation.  Tourmaline is growing faster, has lower operating costs and less leverage, yet it trades at similar multiple to comps:

Risks:

In the near term, selling natural gas in Canada is tough.  Their hedges are hard to figure out and constantly moving. There are so many supply & demand factors that others address better than myself (and are eventually dead wrong about... ).  I prefer to camp out in something like this that is undeniably cheap and defensive. This is a rare opportunity to buy quality assets & quality management at a discount.

Catalyst

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Pricing parity