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What You’ll Learn
- Criteria I used to find VAALCO
- VAALCO performance and numbers
- Why I think there is an opportunity with VAALCO
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VAALCO Energy (EGY) is a tiny independent energy company with a small market cap of around 51M.
It specializes in oil producing properties in Gabon, West Africa, and Angola. Specifically, activities include production, development, exploration, and acquisition of oil and natural gas properties.
EGY manages exploration as an operator in Gabon, Equatorial Guinea, and West Africa.
The main idea is that its intrinsic value linked with oil prices. For each $5/barrel improvement in oil prices, it increases annualized cash flow by ~$6MM per management’s public guidance.
On December 31, 2016, VAALCO had 2.6M Barrel of Oil Equivalent (BOE) of proved reserves related to their property in offshore Gabon Africa. Their U.S. property ownership and interest are in North Texas and Montana which is not a relevant oil producer.
Small tidbit is that VAALCO was incorporated in 1985 and has 104 employees. Despite the tiny market cap, it’s been around and it is a legitimate business.
Enterprise Value Metrics and Insider Activity
The enterprise and market value for VAALCO (EGY) dropped 89% since 2012 and 84% from 2014.
In contrast, the company reported an exceptional TTM financial performance with a reasonable and improving balance sheet.
- TTM EV/Operating Income = 2.49
- EV/Gross Profit = 1.21
- EV/EBITDA = 1.86
- EV/Sales = .62
These measures support the deep relative and historical bargain price thesis.
These numbers as well as other reasons is making EGY attractive to quality longer-term value institutional ownership.
Further evidence of the market’s overreaction to the downside is the declining inconsequential short balance (1.20% short float) coupled with modest positive insider activity with no sales.
Insider transaction summary:
- April 2017 50,000 shares or total of $47,000 purchased for $.94 per share
- The fiscal year 2016 recorded 60,000 shares purchased for an average price of $1.08
- During 2015 159,317 shares purchased for an average price of $1.68, a total of $267,219
If the favorable TTM results continue, Vaalco Energy offers at an extreme discount to current operating performance and proven reserves.
What will be the result?
A higher stock price.
To see the continued improvements, Vaalco just published their June’s lifting results at 629,246 oil barrels (bbls).
These bullish production results have not been exceeded since 9/25/2015.
Current Valuation Metrics
Industry Valuation Analysis
Here’s how I found EGY.
Relative industry valuation analysis started with 413 companies in the Oil Gas Exploration / Production industry.
The list cut to 45 by filtering for a market capitalization between 10M and 300M.
Then, removing per share price less than .50 and OTCPK exchange listed companies.
This list of 45 first analyzed for insider transactions and institutional ownership.
EGY, PQ, GST, and AREX are the only companies with 2017 positive insider activity.
I went further looking at the number shares purchased to total shares outstanding as a measure of conviction.
EGY ranked second most favorable behind PQ. Further, institutional activity for the quarter ending 03/31/17 and total ownership analyzed for the 45 companies.
The best results are shown for EGY.
PQ placed second for value institutions adding to existing EGY position during the quarter ending 03/31/17.
Specifically, for EGY the Tieton Capital Group a small value investment firm added 1,102,610 shares to increase its ownership to 2,244,631 shares.
LONE STAR Value Management, Wilen Investment Management, and Renaissance Technologies also adding to existing position during the most recent reported quarter.
The table below compares the group of 45 competitors to Vaalco (EGY). It highlights EGY’s valuation advantages.
Risks with VAALCO
In a commodity type business, you’re only as smart as your dumbest competitor – Warren Buffett
- Declining oil prices is always a possibility with multiple competing sources.
- Reverts to its unprofitable negative cash flow impacting access to financing.
- Unexpected operational accidents. Litigation and disagreement with local African governments.
- A strong production update published in June’s lifting results, 629,246 Bbls. These bullish results not exceeded since 9/25/2015.
- Furthermore, strong reserves reported at December 31, 2016. VAALCO had 2.6 MMBOE of proved reserves related to offshore property at Gabon Africa.
- An experienced small team has years specializing in African oil production. Management’s public commentary and investor presentations show a deep, detailed understanding of the operational and financial levers needed to drive its stock’s value higher.
- The recent strong operating and financial results show an improved company versus multiple negative quarters fighting lower oil prices and operational challenges.
- Clean capital structure with the financial strength this quarter to secure access to $4.2 million of added funds for financial flexibility and help execute strategy.
- The strong financial results over the TTM if followed by another one or two quarters will move the stock price significantly higher.
- No real institutional coverage. But, “National Securities reaffirmed a “neutral” rating and issued a $2.00 target price on shares of Vaalco Energy in a report on Wednesday, March 15th, 2017″.
- Reversion to the historical and industry mean valuation
Shadowstock is long EGY.
This article was originally published on ShadowStock and is reprinted here with permission.
About the Author
Shadowstock’s goal is simple. The persistent pursuit to uncover and share the best ignored investment ideas in the tradition of Graham and Dodd. My academic experience includes a degree in both Accounting and Investment Finance from Baruch College, New York City. Professional experience covers responsibility for financial systems development/management coupled with financial controllership and analysis at Fortune 500 companies. Health issue forced me to leave. My investment posts are nonprofit.
"There Are No Bad Assets Just Bad Prices"
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