Sometimes the stock market is completely irrational. I will illustrate this with two wildcat oil companies (or junior exploration companies as similar companies often prefer to be called). Both companies are highly risky and may never make a profit. They are both highly speculative. Given the risks, however, one seems cheap while the other seems priced for perfection in this world and in the next. The first company, StormCat Energy (SCU); $0.81 +5.19%, market cap: $65.6M, seems cheap to me. It is trading at an all-time low, just about at its net tangible asset value (about $60 million). It is producing some oil, although still not very much, and remains unprofitable.
While I am no oil and gas expert, I know that paying no more than the net value of all the company’s property and equipment (not even considering the value of the oil and gas underground) will lead to success more times than not. As long as the company’s management has some clue what they are doing, the company should eventually become profitable. There is a decent chance of management having a clue–the company’s executive roster reveals a decent amount of experience.
While I am no oil and gas expert, I know that paying no more than the net value of all the company’s property and equipment (not even considering the value of the oil and gas underground) will lead to success more times than not. As long as the company’s management has some clue what they are doing, the company should eventually become profitable. There is a decent chance of management having a clue–the company’s executive roster reveals a decent amount of experience.
Fox Petroleum (FXPE.ob) is a different story. The company has no employees and no assets other than a few mineral leases on property on Alaska’s North Slope and in the North Sea.
The company has a market cap of $116 million and its leases are worth at best $50 million (and that is being very generous). If the company cannot raise enough money to explore or does not find oil, its leases are worth $0. Other than its leases, the company has assets of $2 million. The company’s management does not inspire confidence, either. Only one of the executives has oil operating experience, while one was involved on the financial side of mining companies and the third has no previous similar experience.
Perhaps the only good thing I can say about Fox Petroleum is that management is not being paid absurd salaries. Fox Petroleum’s contract with its President and CEO does not inspire confidence either; the requirement is that he must work a minimum of three days per week (see the 8k where this is reported). For $140k per year, that seems like a very minimal requirement. See the company’s most recent 10Q and 10K for details.
The company has a market cap of $116 million and its leases are worth at best $50 million (and that is being very generous). If the company cannot raise enough money to explore or does not find oil, its leases are worth $0. Other than its leases, the company has assets of $2 million. The company’s management does not inspire confidence, either. Only one of the executives has oil operating experience, while one was involved on the financial side of mining companies and the third has no previous similar experience.
Perhaps the only good thing I can say about Fox Petroleum is that management is not being paid absurd salaries. Fox Petroleum’s contract with its President and CEO does not inspire confidence either; the requirement is that he must work a minimum of three days per week (see the 8k where this is reported). For $140k per year, that seems like a very minimal requirement. See the company’s most recent 10Q and 10K for details.
While I am no expert on valuing oil exploration companies, I cannot think of any logic behind the divergent valuations of these two companies. Disclosure: I have no pecuniary interest in either SCU or FXPE.ob. My disclosure policy never capitalizes its exploration costs.
Via: SeekingAlpha
by Michael Goode
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