(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long HI.V, IKM.V, CPI.TO, SDX.V, POE.V, VLE.TO, AAV.TO).
Earlier this year I'd highlighted a number of companies with potential catalysts early in 2017. Given that it's March, it's probably not a bad idea to revisit some of those names to see what, if anything, has changed. As a general comment, the energy sector has been tough no matter where you're invested, but most small-cap Canadian energy stocks are being avoided like the plague with only the absolute best-in-breed holding up in a relative sense. Small-cap mining and gold stocks have been an equally challenged space, but a nimble and/or lucky investor/speculator has been able to do okay... the animal spirits in the sector seem to be alive and well. While action in gold, zinc, and copper feels "fragile", key support levels in the metals and the stocks are doing their best to hold up which has helped keep the dream alive so far in the resource sector.
Ikkuma Resources (IKM.V) has reported results from 2 wells at the company's new Foothills Cardium play. Neither of the wells has excited the market or IKM's share price, but a third well should be completed by now and a fourth may already be underway if my sources are right. I remain convinced that this new oil play is the future of the company and in the meantime I feel that I can fall back on a company that trades at a cheap fundamental valuation. Reserves values may change YoY due to price deck revisions, but at 70 cents I can see little reason for anyone holding IKM to sell it here and new buyers might even start getting interested if the stock gets into the low 60's, which marked last year's lows. Completion equipment and crews are bottlenecked out west this year, so IKM may not have new Cardium results until after break-up, but one good well here could get people excited.
Condor Petroleum (CPI.TO) poked its head over $2 for a brief moment back in January, but since then the has chart been looking more like the flight profile of a tired pelican with a mouthful of fish. The good news with that analogy is that the bird is carrying a big load of fish, but the bad news is that it may take time for the bird to rest up and maybe even digest a little before it takes flight again. After Condor had some issues with wax build-up in pipes and valves during testing of the Poyraz appraisal well(s), the company has been waiting on equipment and chemicals that will allow them to mitigate the wax issue on a continuous basis. While gas pay on logs is usually pretty easy to identify (especially when you have known gas zones in the same field that have been tested previously), reserves auditors have clear guidelines that they have to follow... and if there is no tested gas in new zones/fault blocks, they probably can't assign reserves.
So my current thinking with respect to Condor's lack of ability to make new highs (despite a clearly material increase in the potential size of the Poyraz field) is that the company may not be able to book the incremental reserves volumes associated with the expanded field area as of the December 31, 2016 cut-off date. While I'd argue that this is a formality (and something that would be easily rectified by a mid-year reserves update after successful tests of the new zones in the field once the wax treatment equipment arrives), the market may be gearing up for a lacklustre reserves update. Should that turn out to be the case, Condor could present a very attractive entry point if holders of the stock lose patience. Given how lightly followed the company is, I'm not sure that anyone is even really paying attention, but in any case I plan to have my net out if someone decides they are going to abandon ship. Condor's results have indicated that Poyraz may be much, much larger than previously thought and the timing of the associated reserves increase does not impact my view of its potential magnitude. Sure I'd like to see a good test once the wax issue has been mitigated, but I suspect I would have to pay for that information... in the meantime I can wait for opportunities when Mr. Market is in a brief fit of depression.
SDX Energy (SDX.V) made an interesting acquisition of Circle Oil's assets in Morocco and Egypt in late January and the stock has been one of the best energy performers that I follow. SDX closed today at 77 cents with is 40% higher than it was back at the beginning of January. The company has a lower risk profile going into the South Disouq exploration well (SD-1X) now than it did previously (simply as a result of there being more production to fall back on should the exploration well not pan out) and investors shouldn't have to wait too long for results. If the well isn't drilling already, it should be any day based on company guidance and I can't see the shallow-ish SD-1X well taking more than a couple/few weeks to drill. With nearly 187 million shares out now, SDX's upside leverage to the SD-1X target is reduced, but so is the downside, so I'm not complaining. It'll be interesting to see what the company turns up in that exploration well as it could still move the stock price. The target is in a decent neighbourhood for making gas discoveries, but it's still high risk. I'd argue that not much is priced in for the exploration potential, so downside "should" be limited if it misses.
Pan Orient (POE.V) is getting very close to showtime on the Ayu-1 well that is being drilled into the Anggun prospect where Repsol is the operator. This is a big target and it's high risk. It should spud within the next 2-3 weeks based on prior company guidance. POE has roughly $1/share in cash, a nice-looking low-SOR (steam oil ratio) SAGD asset at Sawn Lake, and a bit of production in Thailand to fall back on, but if this well misses POE may get quite a haircut. The stock is up roughly 15% since early January and optimism is in the air. As always, the drill bit (aka the Truth Stick) will tell the tale, but these are the wells that you get out of bed for in this sector. It's high-risk high reward at its best. Roll them dice... a hit on the AYU-1 well could be worth several dollars per share to POE's 49% interest if the initial results are good enough.
Valeura Energy (VLE.TO) has closed its "best-deal-I've-seen-in-a-long-time" TBNG acquisition (effectively doubling the size of its business for about US$3 million net of concurrent transactions with Statoil) and should be sitting with a cash balance in the $15-20 million range (and no debt) if my guesstimate is right. The market is still waiting for Statoil to spud the deep well at Banarli, which is expected to happen in Q2. This will bring the BCGA discussion back into play and might bring interest back to the Valeura story. Overall energy markets and Turkish geopolitical developments will continue to be a factor. In my eyes, people can say what they want about Turkish "country risk", but I've followed the Valeura team since their last venture in Libya, so Turkey seems pretty tame to me. Turkey also has a population of around 80 million people, is dependent on imports for 99% of its gas needs, and shows continued growth in gas demand. Valeura should publish reserves and some kind of Q1 update/outlook soon. A BCGA in Turkey would be very strategic asset in one of very few countries that are at the crossroads between Europe and Asia, so this is a story that needs to be followed by international energy investors... just in case. In the meantime, Valeura has plenty of shallow inventory to drill and no longer suffers from the implied "partner drag" of years past.
And finally, despite showing some signs of life late in 2016, the gas trade never really materialized this winter as weather was generally warm out east and inventories stayed healthy. Long time Hydra favourite Advantage Oil and Gas (AAV.TO) shares are down about $1 since the beginning of the year, but the company continues to fire on all cylinders. I remain convinced that AAV will take its shareholders all the way to Dividendland after its next phase of Glacier production expansion is complete in 2018. In my mind, AAV's current $8 share price is kind of in no man's land in terms of being cheap or expensive, but I think AAV offers a very attractive risk-reward in the long term, so the share price on any given day doesn't bother me much. I think AAV is a $12-15 stock two years out unless something terrible has happened to the gas market.
The secret bonus stock for those who have read all the way to bottom this time is Highland Copper (HI on the TSX Venture). This is a pre-production copper asset package in Michigan with a large established resource and a history of past production. Highland has been putting this project together for years now and for those who are bullish on copper, this could be the next "Made in USA" copper mine. Usually the words "mining" and "innovation" don't appear in the same sentence, but in Highland's case I think that innovation may be part of what drives this mining story. Highland's deposits are stratiform copper deposits... think of them almost like coal seams, perhaps a couple metres thick, but very continuous. It seems that Highland's deposits may be well suited to Caterpillar's new "Rock Straight" mining system, which could bring production costs down significantly and would bring Highland into the "Tier 1" producer range in terms of cash costs. Well-renowned G Mining is preparing Highland's feasibility study (Highland is currently raising the money for that) and the players and backers look real to me. Osisko Gold Royalties is a big holder of the stock, which is a good vote of confidence after they converted a loan into stock and a royalty. This is obviously junior and high risk (if the 15c share price didn't indicate that already), but watching the YouTube video of the Rock Straight system replaces at least some of my trepidation with optimism of how there may be a better way to mine this deposit...