PSB Monthly Issue September 2015
Does History Repeat It Self?
For This Company History Means Profits!
Once again, we’re digging into the archives and pulling out pure GOLD!
Back in November 2008, the world was a mess.
We wrote about two companies…
Primedia, which was subsequently bought out, but not before we saw a 514% gain. The other company was in oil and gas exploration.
This Oil & Gas company really caught my eye… Why? Because at the time we recommended it, oil prices were down big.
As a matter of fact, oil prices were down 55% from the high.
AND…
Demand for oil was being adjusted downward because one of the world’s largest economies was entering a recession. Yes, that’s the US recession / near depression in 2008 and 2009.
Yet…
When we looked at the global picture, there were other countries, like China and India, who were ramping up oil demand.
The funny thing… we’re seeing the exact same setup in the markets today.
Just consider oil prices…
Today, oil prices are now down 51%.
And another major economy – CHINA – is in a recession. And the US is continuing to grow and demand more oil. (A cosmic irony that seven years later the roles would be reversed!)
Introducing VAALCO Energy (EGY)
Back in our original writeup, we pointed out that the company had been producing oil since 1988 and was focusing on the last area of MAJOR growth potential… the African countries.
They have some amazing properties that are producing gobs of oil.
But instead of focusing on the production, I want to highlight something that jumped out at me in their quarterly report.
In their Quarterly report, the company announced…
“Reduced production expense per barrel of oil equivalent (BOE) 27% to $19.07 in the second quarter of 2015 from $26.07 per BOE…”
In plain English, it means they’re reducing their overall costs of production… and even if oil prices continue to slide… they’re going to make money!
Last time we recommended EGY, the stock almost doubled… climbing 98%!
But this time’s different.
The stock is down 80%… in the last 12 months.
I think the selloff is overdone, and here’s why.
First, EGY can produce oil at a profit over $20 a barrel. So that means even if prices continue to fall, they will still pump oil and gas and generate revenue.
Second, EGY’s management team has been around for a while and they’ve seen this before. I have no doubt they’ll be able to survive this downturn.
Third, just to show you how savvy management is, they recently put in place a share buyback strategy… it will allow them to buy up to 10% of the business! At these depressed prices, that kind of buying will help put in a floor… and more importantly, it speaks to management’s comfort with their cash position.
Fourth… CASH.
Cash is the key reason I love this company. If you look at their financials, they have $61 million in cash… and a $65 million credit facility. Their debt… short term liabilities is about $60 million and they only have $15 million in long term debt.
It tells me they’re not at risk of being squeezed by their creditors like many other smaller E&P companies.
While financially the company looks great, let’s dig into some risks…
Investment Risks
Now this trade idea isn’t without its risks.
If I’m wrong about the direction of oil prices, all bets are off the table. Remember, the market can stay crazy longer than you can stay solvent.
Check out their 10-K for a list of everything that could go wrong…
Potential Returns of 500% or More
Despite the risks, I think from this level EGY could see a 500% pop or more in the next 18 – 24 months. So I’d jump in now and look at it as a long term hold.
Action Recommendation
Buy Vaalco Energy Inc. (EGY) up to $1.95 per share.
Recent price is $1.73.
Don’t forget your position sizing and stop-loss rules.
Position Updates
We published a detailed update a few weeks ago exiting a number of positions. If you didn’t see that update, check out the August Portfolio Update to get all the details.
Category: PSB Monthly Issues
