(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 TGL.TO)
I've highlighted Transglobe Energy (TGL.TO, last at C$1.38) here before -- last time I did the stock could be had for around two bucks. On Friday, I watched in awe as a sell program at Goldman took the stock down over 10% on the day on high volume, followed by some decent-sized MOC (market on close) trades. Today, I see that Transglobe has traded even more volume than Friday, a big chunk of which was through Canaccord, and the stock is up around 6% on the day at the time of writing. I typically won't highlight price or volume moves on a stock unless they are news related, but the trading action in Translglobe made me re-evalute my position as it's one of my worst performers this year that I still own. When I looked through the corporate presentation, I was shocked by many of the metrics, but one in particular stood out... TGL's "enterprise value per flowing barrel" (a.k.a., EV/boepd).
At its current price, TGL trades at an EV/boepd of US$4,750 (TGL also trades in the U.S. under the symbol TGA and reports its financials in USD). That's less than $5,000 per flowing barrel! Transglobe's current enterprise value is US$76 million and the company expects to produce an average of between 15,500 and 16,500 boepd this year. For those not familiar with energy sector metrics, EV/flowing barrel (i.e., EV/boepd) is probably one of the fastest ways to size up a company with a single number. As long as the reserve life and production profile are reasonable (which they are for TGL, which has an 8.6 year 2P RLI... maybe a little low, but there's good potential for reserve adds from the 2017 drill program) and you know what commodity (and what kind of margins) you're dealing with, EV/flowing barrel is a metric that will quickly identify whether a particular company may be "cheap" or "expensive". If you haven't already guessed, TGL screens as being very, very cheap (I can make the same argument on EV/DACF and EV/NAV as well).
For context, back in 2003 when I was still working in the oil industry, we used to benchmark at around $20,000/flowing barrel as a "fair" price to pay for acquiring production. Back then, the oil price was $25-30/barrel... soooooooo, TGL now trades at around a quarter of that 2003 benchmark level. I fully appreciate the fact that oil is out of favour right now, but TGL has entered silly-season at these prices and I think the volume that's traded over the last two days is a classic "flush out" low. That's when the last marginal seller of any size pukes out their stock in a given name thereby clearing the way for the market to properly value the company in question. You often see "relief rallies" following flush-out lows as the company is revalued to something more rational. TGL makes good money at $50 oil and the company states that it is cash flow positive down into the low-$40 range, which is about par for the course in its peer group. The peers however, trade with valuations anywhere from 4-10x the price on an EV/boepd basis, so I think there's a lot of room for price appreciation/revaluation.
Look, I have no idea when or if people will ever come back to the energy sector, but I doubled down on my TGL position at the $1.35 level because it's just too damn cheap here for me to ignore. I know that lots of energy stocks are cheap, but I challenge anyone to find me a company with a longer track record and as much potential upside (particularly via TGL's exploration concessions in the Western Desert) that trades as cheaply at TGL does right now. TGL has no debt problems, no receivable issues, no looming boogeymen that I am aware of, and yet it trades like a penny stock with the plague. Ross Clarkson was recently interviewed by U.K.-based Proactive Investors (link to it here) and while the platform may be promotional, Ross is far from it. Ross is one of the nicest CEO's I've ever met and he is fully invested in this company. This is not a fly-by-night oil operation... the company has been in business for over 20 years and I've witnessed the stock trading as high as C$20/share. I used to think TGL was cheap at C$6, but I didn't start buying it until the low-to-mid C$2 level. Now here it sits at gift-like levels that I think will yield a big return for me if I can exercise a little patience.
Even though the bottoming process can sometimes take a while, I'm pounding the table on TGL here. It's way, way, way too cheap at these levels and should be heading into a good news cycle of development wells, testing at South Alamein (Ross says within 2 weeks in the interview linked above), followed by "Big E" exploration potential in 2018. Timing entry points can be tough, but I think TGL is making it easy here for me. In time, I pretty sure I'm going to look back at these prices as a journey to Oversoldsville, and at least I'll have some stock to show for it as a souvenir.