(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 CPI.TO)
Another Asymmetric Situation
A few weeks ago, I wrote a note on Pan Orient Energy (POE.V, note linked here) discussing its less-than-cash valuation and coincident free asset portfolio and exploration upside exposure. Given the state of the junior resource market, such opportunities are not unique, which makes for good hunting for a prudent speculator. I think it's amazing how the market can place huge premiums on upside options at some times, but literally gives away those options at others. Call it a product of funds flow, market malaise, disinterest, or whatever you like -- to me it's just a chance to get a look at exploration and/or asset upside at a bargain price. After all, in any commodity price environment, discovery is the great equalizer… if a company makes a material discovery, that value creation cannot be denied. Either the market will recognize the value, or industry will, but these days it's sometimes hard to fathom that between body blows as a resource investor.
While recent headlines have steered the market into the mindset that oil supply/demand fundamentals are "sloppy" (i.e., oversupplied), it's worth considering that global oil demand is expected to grow by around 1.3 million barrels per day this year, and by a further 1.3-1.4 million barrels per day next year… and there is no better stimulus for oil demand than a lower oil price. Personally, at $50 WTI and $56 Brent (or lower?), I have a very hard time believing that we aren't going to see some stress on the supply side of the equation over the next 12-24 months. When that supply side stress starts to show up amid what appears to be decent demand growth, being there with fresh development assets probably won't be a bad idea. After all, while everyone runs out of the burning building screaming, it never hurts to see what's being thrown out during the dash for the exits.
Condor Petroleum is a very similar situation to Pan Orient. It is cash rich, lightly followed, has a proven production base, a high-impact exploration portfolio, and no debt. With a market cap of $55 million versus a cash balance of $53 million, Condor shareholders pretty much get a free look at a play that any international oil investor should envy. The company's sole asset is its 100% interest in the 933,000 acre (3,777 square kilometre) Zharkamys West 1 block in western Kazakhstan where first commercial production is planned for later this year from the Shoba and Taskuduk discoveries. Together, Shoba and Taskuduk will probably produce something around 1,000-1,500 bopd and the fields represent the successful execution of the first phase of a three phase strategy. Phase one is to establish commercial production and export sales from shallow, low-risk targets (Condor expects to get Brent minus 3% on export sales); phase two is to pursue a higher-impact primary basin play (these are sedimentary basins that have literally "sunk" into, and are encapsulated by, an underlying salt layer); and phase three is to leverage learnings from prior phases into unlocking the sub-salt potential of the Zharkamys West 1 block. Mapped potential targeted in the "phase three" pre-salt play currently exceeds 1 billion barrels of prospective resources (an internal company estimate) which should highlight the fact that Condor is not playing for pennies here… and given the make-up of Condor's board - Sean Roosen is Chairman - the fact that Condor is ultimately looking to swing for the fences is perhaps not all that surprising. It's also worth pointing out that Eurasia Resource Holdings AG owns a little over 50% of Condor's stock; this is the same group that spawned Osisko Mining years ago.
I've followed Condor since well before its IPO in early 2011 and I believe the company has never offered the current level of asymmetric risk-reward. The company is on the cusp of commercial production at Shoba/Taskuduk, has covered roughly two-thirds of the Zharkamys West 1 block with high-quality 3D seismic, has made a proof-of-concept oil discovery in its high impact primary basin exploration play in the Kiyaktysai salt dome, and has a multitude of similar prospects in inventory. Just last week, Condor started drilling the KN-501 primary basin exploration well that is targeting 67 mmboe (unrisked mean internal prospective resource estimate) and the company continues to pursue the farm-out of the high impact pre-salt play.
With the 2015 capex program estimated at $14 million, Condor should end the year with something in the $35-40 million range in the bank, all else being equal. Even if KN-501 is a duster, that means that Condor will end the year with 10-12 cents per share in cash and have 1,000-1,500 bopd of production, plus nearly a million acres of prospective fairway in a play type that is often pursued in the Gulf of Mexico at 10x the cost on a per well basis (Condor's primary basin wells cost about $10 million to drill, while wells targeting similar geologic structures in the Gulf cost close to $100 million). Despite what the market is implying in Condor's share price, I can assure you that: (a) the value of 1,000-1,500 barrels of oil production is not zero, and (b) exploration portfolios with such good 3D seismic data quality and coverage do not grow on trees. In my mind, that's about as good as the odds ever get for a speculator who is looking (hoping) for multi-bagger upside and it is exactly why I have Condor in my basket of international oil exploration companies.
Of course there's country and regional risk… of course there's exploration risk… single asset risk, commercial risk, etc., but that's the nature of international oil exploration. You don't sit at the table if you're not willing to gamble. All I know is that the market's perception of risk is ephemeral and that the sentiment pendulum has swung deeply into the "I-don't-even-want-to-hear-about-it" camp. When I weigh out the odds, Condor seems like something to keep an eye on at the very least, and just to keep it interesting I've put on a small position ahead of KN-501 drill results which are expected in September.
Condor's corporate presentation materials can be found on the page linked below… For anyone that cares on the international oil exploration front, I think it's worth reviewing the slide deck during these dog days of summer while the consensus view is to drop everything to do with oil: http://www.condorpetroleum.com/investors/presentations.php