Altura Ups the Ante with a Recapitalization

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Disclosure: The following represents my opinions only. I am long AAV.TO, ARX.TO, ATU.V, BIR.TO, CMMC.TO, TAO.V, TOU.TO, and YGR.TO (Image credit to Amol Tyagi on Unsplash)

With a textbook correction in a lot of energy and materials stocks now complete (knock on wood), I’ve been looking around for opportunities in new and old names alike. Stocks like Arc Resources (ARX.TO, last at $9.01) and Copper Mountain (CMMC.TO, last at $3.26) had pretty much straight-line corrections to their 200 day moving averages, even piercing them briefly, with RSI levels getting into the mid-to-low 20’s in the process… and I could say the same about a lot of names in the resource sector. For now, those recent lows are the levels that I’ll keep an eye on in the weeks and months ahead, since they “should” set the low water mark if the primary uptrends of these sectors/stocks are to remain intact. During their corrections, a lot of resource stocks went from what I would consider “low fair value” to something more resembling “cheap”. That’s what market digestion/consolidation feels like — the idea is that it creates good entry points for new money as early big-gainers take profits, thus setting the stage for the next leg higher as long as market winds are still favourable. With that in mind, I think it makes sense from a fundamental standpoint (in terms of trading multiples/free cash flow yields) that support came into the resource stocks where it did. Now it’s all about the road ahead and the market’s view on monetary policy, government policy, and the economy. Tapering of the Fed’s insatiable asset purchasing program is a given at this point, but now all eyes are on interest rates. Powell has signalled that the timing of liftoff for interest rates will be subject to more stringent tests, so as not to repeat past mistakes of moving too soon. For now, that means that market interest appears to be back for commodities, and maybe even gold, going into Q4.

I can’t predict the prices of copper or oil any better than the next guy, but both appear to have underlying dynamics that suggest to me that neither commodity is in a short-term spike. For copper, it’s the electrification/green energy theme, while for oil, it’s the mantra of asset divestiture by the majors, debt repayment, share buybacks, and return of capital to shareholders — as opposed to production growth at all costs. It’s been so long since there has been relatively broad interest in commodities that it’s almost hard to remember what it feels like when things really get rolling… and while there was a nice wake-up-and-smell-the-coffee run in the energy and mining stocks, I’ve yet to see any signs of sector euphoria, with a large swath of, liquid, free-cash-flowing businesses trading at rock-bottom multiples (and very high free cash flow yields) relative to their historical ranges. In a nutshell, I smell value out there, so as long as copper and oil prices don’t implode, I think I’m good to play in the commodity sandbox with an eye towards quality and special situations. Lithium, nickel, and uranium are all on the list of “things I still want to have exposure to” and I’m sticking with the same names as I have before.

Advantage Energy (AAV.TO, last at $5.25) is finding new highs lately as its Entropy subsidiary (90% owned) readies for a capital raise that will peg a value on it for the first time. For those who are interested in seeing what Entropy “could” be worth, trying googling Aker Carbon Capture ASA. That company recently raised ~$100mm overseas at a $1.2B valuation despite having only $9 million in revenue… and, as I understand it, Entropy’s technology appears to be far superior on paper. Point being, the implied option value of Entropy that is embedded within Advantage remains attractive, especially in light of what natural gas prices have done recently. Natural gas prices have been on a tear, which is making a lot of the gas leveraged stocks look cheap. ARX, BIR, and TOU round out my favourite gas-levered stories, with an honourable mention to fairly-gassy YGR, which I still think will starting turning some heads once its Q3 report comes out in late October.

Lastly, Altura (ATU.V, last at $0.19) became a new “special situation” for me yesterday. I’ve always liked Altura for its 400 million barrel OOIP Leduc-Woodbend pool just outside of Leduc, Alberta, but it’s hard to get the market interested in a 1,000 boepd producer, even if it is profitable and hasn’t issued a single share since its inception. ATU’s Leduc-Woodbend wells are getting longer again, with more fracs, and are seeing better economics as a result. ATU’s latest iteration has wells boasting triple digit IRRs and payouts of around 9-10 months. But right now, those are just details, because a new management team is rolling into ATU, led by none other than Anthony (Tony) Marino, who was most recently CEO of Vermillion Energy. Mr. Marino’s connections within the industry, both domestically and internationally, would be about as good as they come, so when he says that the goal is to build a 100,000 boepd producer over the next 5 years through targeted acquisitions in the $100-500 million range, I think it’s probably wise to pay attention. I have seen this kind of recapitalization story play out multiple times in the past and I’m always happy to play alongside a new team bringing fresh money and ideas to the table. The last time I saw this situation was about a year ago, when Abby Badwi and his team joined Tag Oil (TAO.V, last at $0.37) when the stock could be had for 17-18 cents.

I’d argue that ATU has virtually zero promote value in it right now, but I don’t expect that will be the case forever. In its new form, ATU will still have a very nice piece of business on its hands at Leduc Woodbend — and that’s an asset that will benefit from a bigger balance sheet — but this now becomes a story of acquisitions when it comes to the sizzle factor. To be clear, ATU can still (and will) drill wells with 9-10 month payouts at Leduc Woodbend while Mr. Marino hunts for new business abroad. These are exactly the kinds of setups I look for in junior energy stocks. Before yesterday, ATU was a very clean business with low debt and sustainable cash flow; a great vessel for capital deployment, but it was light on capital with which to grow aggressively. Now ATU has both fresh capital and an action plan, and I’m riding along at the same price as the new insiders. I think it’s really hard to ask for more than that when it comes to talking about stocks that trade for less than two dimes. It’s really not a lot more complicated than that for me. I sincerely doubt that the new team has decided to come into Altura in order to clip salaries without making any money on their new investment, and now I can take comfort in owning a well-positioned business while I wait for the future acquisitions to surface. ATU is expected to make an initial asset purchase before the end of the year which should/would be the next big catalyst for the story. In a nutshell, I’m a happy ATU holder and have added significantly to my position on the back of the recent news. As a friend recently said to me, “Sometimes the asset that you are buying a company for isn’t even in the company yet”.

To be sure, my mindset on Altura requires a leap of faith, but it’s not a big leap for me at this point. ATU trades at less than half of the implied value of Leduc Woodbend based on the company’s recently completed sale of a 12.5% interest in the asset for cash proceeds of $7 million. Using that figure — and absolutely zero imagination — ATU’s remaining 87.5% interest in Leduc Woodbend is worth $49 million on its own, relative to a current enterprise value of just over $20 million. ATU expects to close its recapitalization plan in early October. Between now and then, I expect that the following for ATU will continue to grow as it searches for that elusive (and often lucrative) transition from obscurity to the mainstream. Time will tell.

Happy hunting.