(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 IKM.V).
Ikkuma's Thanksgiving Present
I find myself with some free time on this slow Thanksgiving Day. Markets are quiet and volumes are light, and in the middle of an empty room, IKM made quite an announcement today if you were listening. Shockingly, the share price is actually down as I type this. Ikkuma just released the some of the most material news of the company's history and yet the shares are down 8 cents (to 84 cents) on light-to-moderate volume. Sell-the-news effect perhaps? Tax loss sellers from yesteryear outnumbering buyers? Who knows, but given the IKM value proposition and the potential upside that they just slapped onto the table, this has to be one of the most head-scratching market reactions that I have seen in quite some time.
I'll make my case very simply. IKM has a PDP NPV10 of $1.24 per share. That is the value of the existing already-producing assets if you just bought them today and ran them to zero without adding any more development capex. IKM already trades at more than a 30% discount to that value, which is the gold standard in "core" E&P valuations. Additionally, IKM's production and reserves are gas... and for those who haven't noticed, gas demand is at an all time high and supply just isn't keeping up. Sure, storage levels are high, but the percentage change relative to the 5-yr average storage level is peanuts compared to the percentage change in gas demand over the last few years. In light of that you would expect storage levels to be "record" high, because they have to back up even more "record" demand, year after year. But alas, I'm not here to make a gas-bull case, I'm just saying that you get a free call-option on gas in IKM... and if you're paying attention to the gas market, the bias is clearly to the upside as we are on track for a "normal" winter according to long range forecasts.
So what was the news anyway? IKM issued a press release today stating that the company has tested 50-degree API oil (i.e., the light sweet oil that you always want to find with a drill bit) at rates in the 100-200 bopd range from a new Cardium oil pool discovery in the Foothills of Alberta. This is the same Cardium reservoir that has built many a company in Alberta, but this Cardium has one major difference... it is naturally fractured. And in the Foothills, you can get some big flow rates out of fractured intervals. Why should anyone care? Well for one, IKM suggests they may have 150 locations in this new oil pool and the press release today covers only the early clean up of the very first horizontal well into the play. Even at this early stage, I saw a chart today that put IKM's new well into the top quartile of all Cardium wells. And with the oil gods as my witness, your first well into a new play isn't going to be your best (or cheapest) one. Needless to say, I'm looking forward to the completion of the second well (already drilled, just waiting on completion), which has a 40% longer horizontal section and is expected to be completed with 50% more frack stages. If I use Stolberg metrics as a guide, IKM is looking at some 30-60 million barrels of potential here; and these wells are projected to have very attractive risked internal rates of return (IRRs) of 85%.
And what has the market done today with this news? IKM has sold off 8 cents! This is a Thanksgiving present if I have ever seen one. Not only do I get to have IKM at a 30% discount to the value of the wells and reserves that are already in production (and the infrastructure that goes with them), but I pay nothing for this new Cardium oil pool discovery that appears to be 30 to 60 million barrels staring me in the face.
I'd say the outlook for IKM is pretty good once the turkey hangover wears off because IKM just released some very good looking news on a play that could change the face of the company. In my mind, the stock should trade at least to its PDP NAV of $1.24 on the back of this announcement, because if the next well tests at 2 or 3 times the rate released today (and that is not at all a stretch), IKM is going to be moving up Big Time.
Don't just take my word for it, go through the company's corporate slide deck linked here. IKM is in the backwaters right now, but I think it's one well away from bringing in a wave of buyers who will take the stock much, much higher.