TGISVP – One Last Yr-End Snapshot

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Donegal Investment Group, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, NTR plc, Petroneft Resources, REACT Energy, TGISVP, The Great Irish Share Valuation Project, US Oil & Gas, Zamano

Now we have 2014 closing prices, let’s begin the New Year with The Great Irish Share Valuation Project: As you survey your year-end portfolio (and ponder potential 2015 buys & sells), an updated Irish stock ranking might prove useful – in terms of current share price vs. my TGISVP target price (i.e. current Upside Potential).

Since completing my usual valuation phase (as of end-May), I’ve added just one new stock write-up (NTR plc) & updated three stock valuations – Petroneft Resources (PTR:LN), Prime Active Capital (PACC:ID) & Fyffes (FFY:ID) – therefore, please be aware target prices in this post are now up to 11 months old. So while intrinsic valuations mostly tend to change quite gradually, pay close attention to any subsequent news & results (and possible valuation implications) – and, notably, to the potential impact(s) of the H2-2014 collapse in the Brent/WTI oil price. [Though let’s not overestimate this factor…I’m always amused by muppets who fondly entertain the notion a gyrating oil price is somehow relevant to the actual prospects of their favourite (but hopeless) junior resource stock!?]. And while we’re at it, I should also highlight our Irish stock universe is now down to 77 listings, after four H2-2014 market exits:

– Kentz Corp (KENZ:LN) was taken out by SNC-Lavalin Group. This acquisition was already locked down by the time the oil price started to slide (Petroceltic International wasn’t so lucky…), so this ultimately turned out to be a beautifully timed deal (and at a beautiful price & premium) for KENZ shareholders.

– TVC Holdings (TVCH:ID) distributed its stake in UTV Media (UTV:LN) to shareholders, and delisted shortly thereafter to continue its residual wind-down in private.

– REACT Energy (REAC:LN) has been suspended, pending clarification of the company’s financial (i.e. funding) position. That’s a shame – REAC’s yet another potentially good/great business undermined by insufficient funding. [I did see upside potential for REAC, in asset terms, but warned ‘Of course, the big problem here still is funding’]. This is a common hand-to-mouth complaint for many small(er) companies, but unacceptable when it comes to public companies – it seems an obvious fiduciary duty for management to scale (back) operating & capital expenditure plans, if necessary, to match the funding their company actually has available.

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2014 – The Great Irish Share Valuation Project (Part II)

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Circle Oil, Dalradian Resources, IFG Group, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, Merrion Pharmaceuticals, Ovoca Gold, portfolio performance, Prime Active Capital, REACT Energy, TGISVP, The Great Irish Share Valuation Project, UTV Media

Continued from here. As usual, I encourage you also click on the 2012 & 2013 links for each company, to add some valuable colour/background. Now, let’s jump right in:

Company:   Circle Oil

Prior Post(s):   2012 & 2013

Ticker:   COP:LN

Price:   GBP 20.625p

Look at Circle Oil’s latest interims, what’s not to like? Revenue up 20%, EBITDA up 34%, and cash generated from operations (after working capital changes) up 69%. And if you annualize net profit, Circle’s trading on a 6.6 P/E! But it’s not as simple as that… Focusing on a P/E ratio’s a rather pointless (& misleading) exercise when it comes to junior resource companies. [Well, most don’t have any ‘E’ anyway!] Even if they’re fortunate enough to be producers, they’re often melting ice-cubes – i.e. they’re exploiting a (sometimes rapidly) depleting reserve base. Basically, they haven’t diversified enough, spent enough, and/or mastered the art of reserve replacement. That’s how the majors play the game, of course – but for the juniors, it’s much more of a lucky (& lumpy) game. This is one of the main issues Circle faces right now.

[Well, two other big issues: i) About 27% of its shareholder base remains a potential stock over-hang – Libya Oil Holdings owns 18%, while Kaupthing Bank owns 9% – not surprisingly, both stakes are essentially ‘frozen’! And: ii) Investors are still leery of the fact a majority of Circle’s production is in Egypt. Maybe a little unfairly, as the company doesn’t appear to have suffered any disruption/interference to date. But it does suffer from another long-standing Egyptian problem…getting paid! Fortunately, the situation’s stabilized somewhat, but Circle continues to have more than 6 mths of trade receivables outstanding].

At the current production rate, Circle’s only got about 6-7 yrs of reserves left. That’s not something you can tag with a P/E ratio! And despite a $42 M pa exploration/capex spend, it hasn’t managed to put new reserves on the board recently. OK, I’m probably being a little harsh here – despite this spend, the company’s actually generating positive free cash flow. Far better than most junior resource companies out there…OK, we all know 9 out of 10 juniors are rubbish anyway! Because of this reserve depletion, and COP’s current (relatively small) market cap, I’ll continue to value it on an asset basis.

As of mid-2013, net 2P reserves were down to 16.3 M boe. No allocation between proved & probable is provided, so let’s assume a 50:50 split & my usual $10 & $5 per boe (respective) in-the-ground valuations. There’s $30.6 M of cash on hand, and let’s include net trade receivables of 20.2 M. [That’s being kind – Egyptian receivables will likely remain a semi-permanent & illiquid asset]. We then offset 11.6 M of bank debt, and a 30 M convertible loan. [This may ultimately become equity, but the share price continues to trade below the loan’s conversion prices]. That gives us: