Cano Petroleum: the importance of catalysts ($CFW)
This is an excerpt from a Seeking Alpha article written a year ago. Value investors have a natural skepticism about investing in commodities. Specially at the top of the cycle. But remember, Buffett bought Conoco and when Munger wrote about his worst investment mistake this was his answer:
Why resurrect this idea now?
- The NAV discount has gotten only more extreme lately. I will show a proved developed analysis in a later post
- Catalysts of course: recovery in oil prices, Cato is showing signs of life -Panhandle not yet-
While there is justifiable skepticism about Cano’s ability to convert its PUDs (proved undeveloped reserves) into production on a realistic schedule (hence the 90% discount), the 45% discount from PDP (proved developed producing reserves) is unheard of for a going concern with any kind of viable business model, let alone one with potentially very large PUD-to-PDP conversion potential. Cano did, at least, convert 1.4M Boe of PUDs to PDPs in the quarter, which is positive. Cano also recently did a large equity raise and is considering divestitures of non-core assets.
While the purpose of the equity raise and the potential divestitures is to fund capex at Panhandle, Cato, and Nowata, the question is the same as it has been for many quarters: can Cano’s management deliver? Cano’s enterprise value suggests that expectations could hardly be lower. Setting the bar this low also means that almost any kind of success – in what should be a highly predictable business model – would justify a significantly higher stock price.