Buy the Rumor, Smash the Stock
It's been a tough climate for resource shares of all breeds for the last 18 months, a total disconnect from the price of gold or oil. Gold goes up, the shares go down. Go figure.
Actually a decline on the news was pretty much baked into the cake. In the nine days prior to the announcement the stock was up six days and even another three days. Somebody knew that good news was coming out. But the stock plummeted from $.60 some 25% down to $.455 before settling at $.46 on Friday last.
It was way overdone and the stock is a screaming buy. I started following the stock at $.32 in September of 2011. President and CEO Chris Cooper believed he could end 2011 producing over 600 boe. He beat those numbers by 10% at 669 boe.
The energy business in Canada and the US has required some fancy footwork for the last couple of years. Natural gas is selling for less than the cost of exploration and production. For the present, it isn't worth owning. Since natural gas provided 33% of their production in 2011, Chris made a strategic move away from gas into oil. Now over 90% of production is from oil and the remaining 10% natural gas is shut in until conditions improve. Supply and demand really do matter and they work.
I talked to Chris after the 2012 numbers were released. He was a whole lot more upbeat than the market proved to be. Under difficult conditions, he managed to shift away from natural gas into oil and increase production about 50% at the same time. That's very good.
He wasn't prepared to make even an educated guess about the production numbers for 2013 but he did brief me on how they stand now.
Current cash flow is just under $1 million a month. By the time they start drilling, after breakup those numbers should grow to over $1.5 million a month and the new drilling should add about $75,000 per month per well.
At the Peace River Arch basin, they play 6-8 development wells. These are low cost and high probability wells. At the 100% owned Kirkpatrick Lake he plans 2-3 new wells. At West Hazel he is going to add 2 wells and upgrade the facility in order to double production.
Best of all, there are no plans for any private placement. Free cash flow will finance all they have planned.
I can add and I figure that the company should end 2013 with somewhere between a 50% to 100% increase in production. So look for 1500 boe to 2000 boe at year-end.
We know what oil sells for on a boe basis where Aroway has their wells. 600 of the boe are worth $60,000 per boe. That's $36 million if you wanted to sell them today. Another 300 are worth $40,000 per boe. That's $12 million if you wanted to sell today. So if the company folded its doors and sold every well they have today in the open market, they would be worth $48,000,000 or $.78 a share.
Blue sky is worth something, especially when a company is increasing production at a 50%-100% per year rate. I think the stock is capable of $1.50 without breaking a sweat. For damned sure $.46 is cheap.
Aroway is an advertiser. I own shares and I'm biased. I talk to management on a regular basis and I'm impressed. Do your own math.
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March 10th, 2014
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