Not just a bargain oil stock: “It’s cheap”

Point Loma Resources is an oil and gas exploration and production stock with a concentrated land base in west-central Alberta. Calgary-based Mackie Research Capital Corporation vice-president and analyst Bill Newman says of this bargain oil and gas stock: “Let’s get to the point, it’s cheap!”

Mackie Research vice-president and analyst Bill Newman opens coverage of Point Loma Resources Ltd. (TSXV—PLX) with a ‘buy’ recommendation and a one-year target share price of $1. He says the company is a highly undervalued stock that trades at a large discount compared to peers.

PLX is trading at an estimated 2017 enterprise value to debt adjusted cash flow (EV/DACF) multiple of just 1.9, versus the group median of 5.25.

The analyst expects a recommendation change for the stock as the company will likely demonstrate sustainable production growth, which in turn will lead to better awareness among investors.

Point Loma was first listed on the TSX Venture Exchange only in July 2016. It was originally founded as a private company in February 2013.

Penny oil and gas stock has strong management

Mr. Newman says PLX’s management team and directors are from highly successful oil and gas stock start-ups, including Painted Pony, Thunder Energy, Surge Energy and Ember Resources.

The company is led by Terry Meek, as president and CEO, who has 31 years of experience in the energy industry. The team of managers also holds about 10 per cent of the outstanding shares. The significant level of ownership aligns the interest of management with shareholders, says Mr. Newman.

Management claims the company holds an average of 78 per cent working and operating interest in a massive 162,233 acres of land concentrated in west-central Alberta. They have identified 67 bypassed pay opportunities for horizontal well locations, and an inventory of more than 400 followup locations.

Production in July 2016 was listed at 135 barrels of oil equivalent (BOE) per day, but that number has now increased to about 500 BOE per day (45 per cent oil and liquids).

The analyst is expecting production to increase further to more than 800 BOE per day in January 2017, and sometime during the first quarter of 2017, PLX will drill one Mannville formation horizontal well, taking production up to more than 1,000 BOE per day.

Mr. Newman also highlighted a “big upside” in the Jurassic-aged formation. Current trading-level investors get free options on company-controlled oil and gas pools of 110 million barrels and 30 billion cubic feet, respectively. The analyst states that PLX’s experienced management have identified bypassed pay opportunities in the Jurassic Rock Creek and Nordegg formations.

“In November 2016, PLX re-entered and tested the discovery well (at Nordegg) at an average rate of 230 BOE per day at 65 per cent oil. The well is expected to be placed on production before year-end.”

In conclusion, Mr. Newman reckons this oil and gas stock price will break out of its shell as the company reaches further production milestones in its short time in the jungle of the TSX Venture Exchange. The target price is equivalent to a five multiple of his estimated 2017 debt-adjusted cash flow.

Acquisition confirmed this bargain oil stock “is cheap”

Later in December, the company announced an agreement to acquire a private oil and gas company for total consideration of $500,000, set to be paid through the issuance of 1.25 million shares of PLX. The acquired assets are located within PLX’s core focus area in central Alberta.

At present, those assets produce 40 BOE per day, approximately 50 per cent of which is oil. Thus, the company will pay just $12,500 per flowing BOE daily. The acquisition was expected to close in January, 2017. Mr. Newman reiterated his target price and recommendation following the news.

He noted in a report on the deal that Point Loma Resources is also actively reviewing further acquisition opportunities within its core areas that could materially increase production, reserves and drilling location inventory.

Through acquisitions and organic growth, PLX’s management hope the company will grow to produce 10,000 BOE daily within four to five years.

 

This is an edited version of an article that was originally published for subscribers in the January 27, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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