TPS Trade Alert – November 13, 2013
November 13, 2013
Recommendation:
Buy TransAtlantic Petroleum (AMEX: TAT) up to $0.96 per share.
Trade Rationale:
The price of crude oil may be going down, but that doesn’t mean oil and gas drillers aren’t worth investing in right now. In fact, one could argue that now’s a great opportunity to buy smaller drillers while they’re cheap.
Here’s the deal…
I believe the US may be slowly moving away from crude oil as its primary source of fuel. The cheapness and abundance of natural gas is making the transition possible.
However, oil is going to be needed for multiple applications for a long, long time. And don’t forget, plenty of emerging markets are rapidly growing consumers of oil.
Plus, most oil drillers are also natural gas producers. Even if oil consumption slows globally, we’re only going to be seeing more and more demand for natural gas.
As such, small drillers could be very undervalued at current levels. And that’s whyTransAtlantic Petroleum (AMEX: TAT) makes a compelling investment at its current price.
TAT is an oil and natural gas producer based in Texas. However, the company’s roughly 3.9 million acres of developed and undeveloped oil and natural gas properties are located in Turkey and Bulgaria.
There are several reasons to believe TAT is headed in the right direction.
First off, unlike other highly speculative small drillers, TAT has proven production. The company has current production of 4,700 Boe/d (barrels of oil equivalent – a way to lump gas and oil into one easily comparable number).
More importantly, the company will be increasing production to 5,000 Boe/d by the end of the year. In fact, the company’s increasing drilling activities by 500%.
And that’s not all…
Capital has already been deployed on the company’s most favorable projects. Keep in mind, exploring for, drilling, and producing from wells is very expensive. That TAT already has made the investment means the company shouldn’t have to pile onto its debt levels, like many of its competitors.
That being said, let’s take a closer look at the financials…
The company generated $33.3 million in third quarter revenues, down slightly from the $34.8 million a year ago. However, revenues were 5% higher than the $31.8 million in revenues in the second quarter.
The drop in revenues is related to the price of natural gas being lower than at this time last year. Revenues are expected to increase with the added drilling activities over the second half of this year.
Meanwhile, the company showed a net loss of $4.8 million from continuing operations compared to net income of $500k last year at this time. The big difference in income comes almost entirely from unrealized commodity derivative losses, which should basically be ignored.
TAT has roughly $12 million in cash compared to just under $40 million in debt. That’s not a bad situation for a driller to be in considering standard debt levels across the industry.
And don’t forget, the company’s capital has already been deployed on the most favorable projects. Moreover, TAT has $36 million available in credit if necessary.
Here’s the best part…
Analyst project TAT to be profitable next year, and grow earnings by an impressive 60%. Yet, the shares are trading at just 10x projected earnings. Small oil and gas drillers often trade at over 20x earnings.
In other words, TAT could easily double over the next several months.
As such, now’s a great time to add shares of TransAtlantic Petroleum to your portfolio.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | TransAtlantic Petroleum |
| Ticker: | TAT |
| Recent Price: | $0.80 |
| Market Cap: | $297 million |
| Avg. Daily Volume: | 370,008 shares |
Chart:
Category: TPS Trade Alert
