7/04/2017

VAALCO Energy: Ugly and Ignored Attributes Creates an Undervalued Opportunity



VAALCO Energy (EGY) is a tiny independent energy company with a ~ 53M market capitalization. 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. Therefore, its intrinsic value linked with oil prices. Being that, each $5/barrel improvement in oil price increases annualized cash flow by ~$6MM per management's public guidance. At December 31, 2016, VAALCO had 2.6 MMBOE of proved reserves related to their property in offshore Gabon Africa. Their U.S. property ownership and interest are in North Texas and Montana, now its not a relevant oil producer. VAALCO incorporated in 1985 with 104 employees.

The enterprise and market value for VAALCO (EGY) dropped 89% since 2012, 84% from 2014. In contrast, an exceptional TTM financial performance reported with a reasonable and improving balance sheet. Enterprise value to operating income over the TTM is 2.49, EV/OI = 2.49, EV/GP = 1.21, EV/EBITDA = 1.86, and EV/Sales = .62. These measures support the deep relative and historical bargain price thesis. For these reasons and others EGY now attracts 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. Then, the future stock price moves much higher.

Vaalco just published their June’s lifting results, 629,246 Bbls. These bullish production results have not been exceeded since 9/25/2015. click to view historical liftings detail.
























The table below highlights and comments on historical 2012 to current deep and mean reverting valuation discounts.































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:

"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.


Opportunities:

A strong production update published in June's lifting results, 629,246 Bbls. These bullish results not exceeded since 9/25/2015. click to view historical liftings detail. 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

Long: EGY

4 comments:

Fred said...

Thx John, great post (again)!

With a lower oil price, it'll be more diffcult to keep up with the excellent Q1 results (despite the puts).
However, if they turn 3-4 profitable quarters, this stock deserves a higher valuation.

Fred said...
This comment has been removed by the author.
ShadowStock said...

Fred, I agree with your comments on the impact of lower oil prices and the potential for a much higher stock price even after 1 or 2 quarters of positive results. Note the positive June liftings announced Friday. http://www.vaalco.com/liftings/


These posts take days finding time to complete. Then I watch the stock move higher, frustrating. Thanks again for taking the time to comment and compliment!

Fred said...

Strange stock... again a very good quarter, currently trading at 8 times the half year earnings, so in 2 quarters probably at a p/e of 4, and what happens? A decline of 6%...

We'll have to wait a bit longer then...