CASE STUDY: Journey Energy (JRNGF)

(Zen Buddha Silence by Marilyn Barbone)

(Image: Zen Buddha Silence, by Marilyn Barbone)

December 12, 2021

It’s usually not possible to predict oil prices.  But oil prices have been relatively low on average since early 2015.

If oil prices remain high, then Journey Energy (JRNGF) will probably be a wonderful investment.

 

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It appears probable that oil prices will be higher in the coming years, perhaps $65 to $75 a barrel (WTI) or more.  (If there is a recession, oil prices will likely drop temporarily before snapping back.)

Here is the best article I’ve seen on oil prices: https://seekingalpha.com/article/4474152-the-historic-oil-bull-market-will-reward-buyers-of-energy-equities

If the demand for jet fuel normalizes over the next 12 to 18 months, that will add approximately 1.5 million bpd (barrels per day) to oil demand.  Also, continued recovery in transportation is likely to add 500,000 bpd to oil demand.

Since 2012, global oil supply has increased by 10 million bpd.  6 million bpd has come from U.S. shale oil while 4 million bpd has come from OPEC.

Currently, U.S. shale oil production is at 7.5 million bpd, about 1.5 million bpd below its peak of 9 million barrels per day.  Because investors are demanding that U.S. shale oil production return more cash to shareholders—which it hasn’t done for most of the last 8+ year—U.S. shale oil production is likely to increase only 750,000 bpd in 2022.  Thus far, capex has been much lower than cash flow from operations.  And only the Permian basin has enough frac fleets to grow production.

Recently, OPEC+ agreed to increase production by 400,000 bpd each month starting in July 2021 and going through September 2022.  But so far, instead of adding the scheduled 1.6 million bpd, OPEC+ instead has only added 900,000 bpd.  With oil prices being high, OPEC+ members have every incentive to maximize their production.  They are not doing so because they cannot.  (For example, Angola is underproducing its quota by 250,o00 bpd, while Nigeria is underproducing its quota by 390,000 bpd.)

Meanwhile, the major producers in OPEC+ are not overproducing in order to make up for the deficit.  (Russia is overproducing its quota by 100,000 bpd, but other major producers in OPEC+ are not overproducing their quotas.)  Thus, the collective supply deficit from OPEC+ will keep growing.  It may turn out that OPEC+ is not able to achieve pre-pandemic production levels.

This situation has caused oil inventories to be 200 million barrels lower than pre-COVID levels.  The lower inventories fall, the more upward pressure on oil prices there is.  If oil inventories keep falling, then eventually the oil price will hit $100 per barrel (WTI).

Since it takes five years to develop a major oil project, there won’t be any material addition to oil supply from new projects for at least five years.

Of course, if there is a recession, oil prices will fall temporarily but then snap back.

As for long-term demand for oil, it’s likely to grow at least at 1% a year on average.  It may grow more than that as a result of all the fiscal and monetary stimuli in response to the COVID pandemic.  See this recent note from Bridgewater Associates, “It’s Mostly a Demand Shock, Not a Supply Shock, and It’s Everywhere”: https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-supply-shock-and-its-everywhere

Also, longer term, the per capita oil consumption in China, India, Africa, and other countries nearby is a tiny fraction of the per capita oil consumption in the United States.  The transition away from fossil fuels is likely to take decades, and oil demand is likely to increase for at least 10 to 20 years.  If per capita oil consumption increases in China, India, Africa, and other countries nearby, that may make oil demand keep increasing even as western countries are working to reduce their oil demand.

Even if car manufacturers started making only all-electric vehicles today, oil demand would keep rising for many years, as Daniel Yergin points out in The New Map.

I am, of course, in favor of the transition to a post-fossil fuel economy.  But the global economy needs a lot of oil in order to make that transition over the next several decades.

The oil and gas industry will exist in close to its current form 10 or 20 years from now, as Jeremy Grantham has noted.  (As well, most oil companies do not have more than 15-20 years of reserves.)  The fact that some investors are no longer investing in oil and gas companies means that oil and gas stocks now have even higher expected returns.

 

JOURNEY ENERGY

Journey Energy (JRNGF) appears very cheap because of the recent increases in oil prices.

Normalized EBITDA is at least $60 million.  Normalized net income per share is at least $0.80.  Operating cash flow per share is least $1.10.  And normalized revenue is at least $132 million.  Whether the normalized figures are higher or lower depends mostly on oil prices.

The current market cap is $85.7 million, while the current enterprise value (EV) is $134.2 million.  The stock price is $1.73.

Using the normalized figures, here are the multiples:

    • EV/EBITDA = 2.23
    • P/E = 2.16
    • P/NAV = 0.69
    • P/CF = 1.57
    • P/S = 0.64

(We use P/NAV instead of P/B.  The NAV assumes $70 WTI.)

The Piotroski F_Score is 7, which is good.

In order to pay down debt, Journey Energy spent very little on capex in 2020 and 2021.  The company has $7.6 million in cash and $67.9 million in debt.  (Debt a year ago was $124.6 million.)  JRNGF plans to end 2021 with debt at $53 to $54 million.

In 2022, the company plans to spend $36 million on capex and $20 million on debt reduction, leading to a debt level of about $34 million at the end of 2022.

Currently, TL/TA is 76.0%.  This is high, but Journey Energy continues to rapidly pay down debt.

Insider ownership is 10%.  That is worth $8.5 million.  Insiders will make a good deal of money if the company does well.

For the intrinsic value scenarios, we calculate NAV based on 2P reserves (proved plus probable).

    • Low case: If the oil price averages $50 (WTI), then the stock may be worth half the current NAV ($2.50), which is $1.25.  That is 28% lower than today’s $1.73.
    • Mid case: If the oil price averages $70 (WTI), then NAV per share is $3.75.  That is over 210% higher than today’s $1.73.
    • High case: If the oil price averages $90 (WTI), then NAV per share is $6.25.  That is over 360% higher than today’s $1.73.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

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