Hydra Capital Partners Inc.
Gooderham 'Flatiron' Building
49 Wellington St. E., Suite 500
Toronto, ON  M5E 1C9
(416) 642-7705
  • About Us
  • Hydra Partners
  • HYDRA BLOG

AAV - Time to Take Advantage?

11/21/2014

 
By: Malcolm Shaw


(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 AAV.TO and AAV.DB.H)


Advantage Oil and Gas (AAV.TO) has been a favourite Montney producer of mine for years. It’s a bit of an odd company in that it was an income trust that never really seemed to make the transition to being taken seriously by the “regular” equity crowd.  In the past, whenever I brought up the name with anyone, some of the most standard responses were: “It’s dry gas. Pass.” or “The reserves are overbooked.” or “They have too much debt.” This is not a name that's enjoyed a lot of "love" from the street. It's had a bit of a move lately, and I think it's for good reason...

Now, it’s true that AAV used to be debt heavy, but these days, that’s just not the case. Through a number of cost cutting measures, along with some corporate reorganization (i.e., the spinout of Longview a while back), AAV now sits with a healthy 1.4x debt/CF ratio, net of all debt and working capital. That’s fine by me. AAV expects to maintain that D/CF ratio for the foreseeable future and the company maintains an active hedging program to ensure (as much as anyone can ensure anything in the market) the stability and predictability of future cash flow during the production ramp up to 245 mmcfe/d by H1 2018. Given that  production was 132.5 mmcf/d as of Q3 2014, AAV is targeting nearly 100% production growth in about 3 years… all internally funded from bank lines and cash flow. Read that last sentence again. Very few companies can say that.


Advantage has executed as well as any team I have ever seen. A picture is worth a thousand words -- this one happens to be clipped from the company's corporate presentation:
Picture
Production is up, completion costs are down, reserves are up (to about 1.7 Tcf), 3-year F&D costs are just $1.06/mcfe. I'm serious when I say that people should really take the time to go through the AAV slide deck linked here (http://www.advantageog.com/wp-content/uploads/2014/09/2014-November-Investor-Presentation-FINAL-11.19.pdf).  It's quite worth the read.

Now, it's also true that AAV does have a pretty “dry” gas stream, but I’ve never been one to discriminate against a production stream because of the type of molecules in it – I’d prefer to focus on the profitability of that stream, which in Advantage’s case is highlighted by a cash flow netback equal to 80% of revenue. All of a sudden, the fact that it's dry gas somehow seems less relevant. Enough said. 
Picture


As for reserves, well, I just don’t see the “overbooked” argument. There has never been anything about AAV’s reserves that has had me thinking twice about the resource potential of the company’s flagship Glacier asset or its ability to see additional reserve growth. In my view, anyone looking at Glacier with experience in the sector will recognize it as a “Tier 1” asset, full stop. There’s no way to convince anyone of that in a short write-up like this… all I can do is point people towards the most recent corporate slide deck (linked above) so that they can form their own opinions.  It would appear that there are actually "TCFs" of additional potential.

Picture


Putting those historically dismissive comments aside, I think that people looking for premium gas exposure should read AAV’s most recent quarterly update (http://www.advantageog.com/wp-content/uploads/2014/09/Q3-2014-Press-Release.pdf) and really have a hard think about whether or not this might be a name worthy of a little more attention.  There are some interesting tidbits in there, not the least of which are the results from the company’s Middle Montney program, where one of their wells tested at 13 mmcf/d plus liquids and is still producing at a restricted rate of 5 mmcf/d plus liquids at 7600 kPa 8 months later...

I’ll finish my rant with the following slide, which is also taken from the AAV November 2014 slide deck linked above. By the winter of 2017-2018, AAV expects to be producing 245 mmcfe/d, which would generate $160 million in annual free cash flow at $3.65/mcf AECO.  At that point, AAV would almost certainly turn into a dividend payer. With those kinds of numbers, I think AAV has a lock on a $10-11+ share price 3 years out and, based the confidence instilled in me by management’s execution thus far, all I have to do it sit and wait.

I wish all my holdings were this straightforward...
Picture
Malcolm
11/22/2014 02:22:08 am

On Friday, AAV.TO closed at $5.79, which is right at the top of a trading channel that its been in since June. It's also within spitting distance of its 200 dma. I'm not sure that I'd chase the stock higher here, but if it does break above its 200 dma, that would certainly be a strong sign of confidence from the market.

Tiang Lampu Jalan & Taman link
1/12/2016 12:09:46 pm

I like your post, thank you so much


Comments are closed.

    Disclaimer

    This is not investment advice, nor is it a recommendation to buy or sell shares in the company/companies mentioned. The information contained herein is accurate to the best of the author's knowledge, but the presented information should be verified by any party using this information as part of any editorial or decision making process. Any views expressed here represent the author's opinion only, and as such readers should do their own research and come to their own conclusions if they are using the opinions contained herein as part of any larger due diligence process. Opinions are subject to change without notice. Prospective resources, financial projections, and extrapolated metrics are, by their nature, subjective and interpretation dependent. The author(s) and Hydra Capital is/are not responsible for any damages incurred by the use of the presented materials.

    ​
    Articles by Ticker
    • AAV
    Time to Take Advantage?
    AAV Continues to Drive Prod…
    Advantage is Best-in-Class
    ​November Update
    ​​
    March Update
    • ATU
    ​Room to Run: Altura Energy Sizes Up Leduc-Woodbend and It's a Biggie
    Altura Quietly Beats Expected ERH Type Curves at L-W
    • AU
    Gold in Finland: Aurion Investors Hop on the Boulder Train...
    This Picture from Aurion May Be Worth a Thousand Words
    If You Trip Over a Gold Deposit in the Forest Does It Make A Sound?
    Aurion Site Visit Report: An Embarrassment of Riches
    Aurion Hits Quartz Veining at Aamurusko: Assays Pending
    Smoke But No Fire (Yet) for Aurion at Aamurusko
    • CZX
    ​November Update / Intro
    CZX Drill Results Start to Roll In: 28.7m of 10.4% Zn-Pb...
    Got Zinc? CZX Delivers a "Massive" 58m Intercept
    • FOM
    Looking for Zinc Exposure?
    Foran Drilling Update
    No April Fool's Here

    No Wonder They Call It Big…
    Bigstone Infill - 31m/3.1% Cu
    November Update
    Time for Another Look at Foran
    • HI
    Introduction to Highland
    • LAC
    Lithium Americas and POSCO...
    • MMV
    Going for Big Gold in the Homestake Trend
    • POE
    Big Upside for a Small Price
    Anggun Resource Estimate
    POE to Test Akeh-1 Well
    November Update
    March Update
    Pan Orient Has a Little Oil, But Is It Enough?
    • PLU 
    Cheapest 100 mmlbs U3O8…
    Macusani Name Change
    Plateau Resource Estimate…
    Japan Restarts: PLU is as Cheap as Ever
    Plateau Could Take Investors to New Heights in 2016
    PLU PEA Brings Macusani Project Economics to a Whole New Level

    Something Old, Something New
    About Uranium and Unicorns
    Plateau Finds More Uranium, Talks Lithium
    PLU May Have a Lithium-Uranium Tiger by the Tail at Falchani
    • SDX
    Bottom Fishing for Big Gas
    Sea Dragon Proposed Merger
    November Update
    SDX Update / Acquisition
    March Update
    • TGL
    ​Time to Put Transglobe on the Radar
    Something Old, Something New
    ​
    TGL Now Trades at Under $5k Per Flowing Barrel
    Transglobe Q3 Update
    Transglobe Delivers a Trick Not a Treat
    • VLE
    Good Things... Small Packages
    Production on Track…
    VLE Reports Q4 2014
    VLE Reports FY 2014
    VLE Reports Q1 2015
    First Look at Banarli 3D
    Turkey-Russia Row Creates Opportunity for Gas Investors
    This Xmas Turkey is Full of Gas
    VLE Confirms Gas Discovery
    VLE Keeps Investors In Suspense
    ​VLE: Fear and Greed
    The Wait is Over... Sort of...
    Statoil is Coming to VLE's BBQ
    Just How Big is this Turkey?
    Statoil Goes Definitive at Banarli
    VLE Arranges 3-in-1 Deal: Statoil Relationship Deepens
    November Update
    March Update
    VLE is Going to Have a Busy 2017
    Valeura Sell-Off Stacks the Odds in Longs Favour
    Valeura Gives a Shot in the Arm to the Faithful
    And So It Begins: VLE Starts Testing at Yamalik-1
    Valeura Confirms Liquids-Rich BCGA Play with Test of First Zone
    Putting VLE's BGCA in Context
    ​
    VLE: The Big Picture
    ​
    VLE's Thrace Basin Discovery: Putting All the Pieces Together
    Valeura Scores a Hat Trick at Yamalik-1
    Gas is Good: Valeura Confirms BCGA with 4th Test
    ​
    On Valuing Valeura



    Commentary Pieces
    Oil and Gas - The Associated Relationship
    Associated Gas Volumes May Drop Due to Low Oil Prices
    Is the Crude Market Really Oversupplied?

    Archives

    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    May 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014

    RSS Feed

Web Hosting by Netfirms
✕