Note: I started studying investing in August of 2011, and prior to that knew little-to-nothing about investing/finance - so you should be very skeptical when reading this, but I've been studying like crazy since then and here's my take on this small-mid cap oil company I found that I think looks super undervalued/good. So let me know what you guys think of the article and of the company! I love being critiqued so if you notice some flaws don't hesitate to let me know - keep in mind it's the first one I've done though haha.
TransGlobe Energy - based in Calgary, Alberta but its primary operations are in Egypt.
Its market cap is around $600 million right now - but I think that's way undervalued due to the political instability Egypt is facing at the moment.
It's of course a high-risk investment, but it looks to me like a it has a favourable risk-reward ratio so I decided to take it last month, investing a smallish amount of money that I can afford to lose at around $7.50 a share.
Here's a shortish article I wrote up on the company that doesn't quite cover everything but I hope will show why I'm excited about this company/stock.
TransGlobe Energy Analysis
First we’ll look at some basic fundamentals:
Category: TGL vs Industry Average
Price/Earnings: 10x vs 19.4x
Price/Book: 1.8x vs 3.1x
Price/Cash Flow: 7.5x vs 13.3x
Gross Margin: 49.62% vs 9.44%
Operating Margin: 73.53% vs 27.31%
Profit Margin: 24.19% vs 5.62%
Return on Assets: 13.84% vs 6.46%
Return on Equity: 20.07% vs 11.21%
Return on Investment: 15.17% vs 9.4x
It’s also worth noting that as of Q3 2011, TGL has over $100 million in cash and cash equivalents. TGL’s total assets are worth $465 million, and shareholder equity is at $310 million which is up from $30 million in 2003. TGL has a very small debt load, a very competent and intelligent management, and great future prospects: they’ve continued to grow at an exceptional pace.
They are currently not producing any oil in Yemen due to attacks on the pipeline, but in the future if stability returns to the region they have the potential to increase their oil production by at least 3000 bopd without any additional investment. Furthermore, the company is currently producing more than 10,000 bopd in Egypt (their main operation) – and they just received government approval to acquire a $60 million property in West Bakr which will likely double their production within the next 18 months.
Okay, okay, so it’s a great company with solid fundamentals and growth prospects – but what’s the downside? What’s the market cap?
Well, currently the market cap for TGL is under $600 million: at the rate they’re growing their shareholder equity should overtake this market cap within 18 months, and based on any discounted cash flow models the company is worth well over $2 billion – and could be worth more than $5-$6 billion if they can keep growing at this astounding rate.
So why is the stock so cheap right now? Why did the share price tank from nearly $19 in late 2010 to below $8 in late 2011?
The reason is two-fold. First, a global economic slowdown caused by the European Sovereign Debt Crisis could push oil prices down, and keep them down for an extended period of time. Second, after the ousting of the dictator Mubarak, there has been growing political instability in Egypt. People are again taking to the streets, and some rogue elements are even attacking oil pipelines that export oil to neighboring Israel, and there is a lot of uncertainty as to whether the Egyptian army will give up power or not, and if they do – will the new government be as in favor of foreign investment as the current one? Could they nationalize the oil industry?
Well, to tackle the first point the company has already shown that it can survive a global slowdown and poor oil prices: the company not only survived during the financial collapse of 2008, it thrived: by the beginning of 2008 to the end of 2010 the company’s share price increased nearly 400%. Furthermore, I’m somewhat bullish on oil prices: I think the US will continue its economic recovery, and I think that the growing tensions in the Middle East, particularly with Iran and the Strait of Hormuz, where 35% of the global seaborne oil is shipped through, could continue to sustain the current oil prices – or push oil even higher.
To tackle the second point: Egypt nationalizing the oil industry or rogue elements attacking pipelines are very real concerns. I emailed the CEO of TGL, Ross Clarkson, who said he doesn’t think the oil industry in Egypt will be nationalized anytime soon: he thinks that their economy is hurting badly and that they’re starving for all the foreign investment they can get. Furthermore, the oil pipelines that have been attacked by rogue elements are only the pipelines exporting oil to hated neighbour Israel, which is to the north east of Egypt – TransGlobe’s oil production takes place in the far north west and south west regions of Egypt – nowhere near the attacks, nowhere near Israel.
I do not want to play down the risks involved, as they are very real and very substantial. The question is: are the risks severe enough to justify a $600 million market cap for a $2 billion+ company, and a company which will exceed $600 million in equity within 2 years?