Josef Schachter is president of Schachter Asset Management. His focus is on oil and gas stocks.
Due to our cautious outlook – we see downside in the S&P/TSX Energy Index to below 200. It's now about 266. Hold significant cash reserves for great buying opportunity later this year.
We see the stock having material downside risk. We expect that over the coming quarters that this stock could be a 2-for-1 sale. Reasons: 1) The company has not met its production targets and in fourth quarter 2011 had production below third quarter 2011 despite spending $56-million. 2) Cash flow in fourth-quarter 2011 was much below forecast due to missing production numbers and sharply rising cost structure. 3) In an environment of greater than $120 (U.S.) per barrel Brent crude, the company made net income of $281,000 on $88-million (U.S.) of revenues. With record commodity prices, making such a minimal amount of net income is horrid. In third quarter 2011, they made $13.7-million. 4) The stock has traded below book value in weak stock markets – the current book value is $1.66/share.
NKO has production and cash flow from India, significant land holdings and exploration opportunities in India, Indonesia and Trinidad. Upcoming high impact drilling in Indonesia and Trinidad, if successful, could be significant drivers of net asset value. NKO has a strong balance sheet, no bank debt and cash flow to cover the exploration program. In India they, with partners Reliance and BP, have a very attractive land spread with significant discoveries on them but no activity may occur until natural gas pricing issues are resolved. The stock has been hammered due to the ongoing issues in India and is down from over $113/share in mid- 2010 to lower lows than in 2008/2009 during the worst of the financial crises. Very cheap. My target is $75/share.
Past Picks: May 10, 2011
(Formerly Galleon Energy)
Total return: -40.32%
Total return: -54.37%
Total return: +43.86%
Total Return Average: -16.94%
We remain in the bearish camp. Sluggish economic growth in most of the OECD, depression in Spain and Greece and a slowdown in China will dampen demand for commodities. As a result of fears of the closure of the Straits of Hormuz by Iran, high levels of oil inventories have been built to cover such an event. Now that we are entering the energy shoulder season - between winter demand and the summer driving season - any weak economic data will accentuate the glut of oil inventory and depress prices. In April 2011, prices retreated from $114/barrel for WTI to $76/barrel in August. Additional items that could impact the price of oil negatively would be a stronger dollar if the sovereign debt crises in Europe rears up again, and if the Presidential election race focuses on balancing the budget and accepting austerity. Our target for the S&P/TSX Energy Index remains less than 200.
Compiled by Franklin Cameron, BNN Market Call Tonight