I love the new CAPS rules. I can now rate Cano Petroleum, a stock that could easily double from this level.
I would like to give a standing ovation to the fine folks at CAPS for changing the rules to the game so that companies with prices per share of less than a dollar can be picked. Sure, there's always going to be people out there who try to game the system by shorting penny stock garbage, but there are a number of legitimate investment opportunities in legitimate distressed companies.
Here's one that the fantastic folks over at Above Average Odds Investing recently brought to my attention, Cano Petroleum (CFW).
I have truly evolved into a loser by playing CAPS because I love trying to come up with liquidation values for companies. Here's a Company that I believe is trading for less than the value of its assets.
I went long CFW in CAPS a week or two ago believing that the company's merger with Resaca might still go through and that even if it wasn't Cano's net assets were worth significantly more than the stock's current market value. It was so cheap that equity investors probably would have even made out well in the event of a bankruptcy.
Yesterday CFW rose 10% (today it has given back 5% of that) after it announced that it was pulling the plug on the Resaca deal because it believes that its assets are worth significantly more than it was scheduled to be paid through its previous merger agreement now that the credit markets have thawed some and the price of oil has stabilized.
Cano Petroleum hires advisers to explore sale, merger
Cano Petroleum calls off merger, back on market
Now obviously when a stock gets this cheap, there's a very good reason :). This company used enhanced recovery techniques to squeeze oil out of oil, tired fields. It is my understanding that it has fairly old equipment that it is using to do so as well. Add a ton of debt to the equation and you have one real mess.
The fact that Cano is so messed up is exactly why I like the situation. I find special situations like this one absolutely fascinating. Every stock has a story to tell. The trick is to figure out the right ones to invest in. If I'm going to invest in a non-dividend-paying stock the upside has to be excellent and there has to be some sort of catalyst that will trigger it. I hate just drifting around at the whim of Mr. Market without even getting paid to wait.
Several years ago Cano's share price was bouncing back and forth between $5 and $10/share. Today, the company with basically the same assets, or course with a lot of debt as well, is trading at $0.65/share.
I believe that the likelihood Cano it finds a buyer that will pay it more than its current price per share that is high. Even if it doesn't and the Company is forced to file for bankruptcy, I believe that its assets are worth enough that there is a good chance that owners of the company's common stock would realize a gain in the event of a liquidation.
Let's take a look at Cano's assets. All of this is rough, a back-of-the-envelope sort of analysis since I'm not really invested in this company and don't feel like spending the time to get really down and dirty with it.
If I am not mistaken, Cano has 49.1MMboe in reserves (7.7 MMBOE of proved developed producing reserves, 2.4 MMBOE of proved developed non-producing reserves, and 39.0 MMBOE of proved undeveloped reserves.) in the Southwestern U.S.
Let's say that we were to value those reserves at the uber-conservative rate of $3/boe (I have read that sales in that area have gone for $4 to $15/boe).
That brings us to a value of $147.3 million for the company's reserves, not including any other assets that it has. We then need to back out the company's current liabilities, which according to Yahoo! are $115.5 million.
I believe that CFW has some preferred shares outstanding that might impact the liabilities portion some, but still using this rough estimate that still leaves $31.8 million for equity holders. CFW's current market cap is only $27.9 million. This seems like a reasonable margin of safety to me.
The question of course is whether the company's reserves are actually worth three bucks per barrel of oil equivalent. I honestly don't know. It's tough to peg a truly accurate valuation on such things by merely following a paper trail from afar. Someone who was in the industry, or in Texas might be able to find out though and hit a real home run with the stock. I tried to play it safe by using an almost unreasonably low valuation for the reserves in my rough valuation of the company's assets.
Of course, if the company is forced to file for bankruptcy it might not actually liquidate. One can never know for certain what will happen, but there looks like a large enough margin of safety here to give CFW a shot in CAPS. I had better be careful, I might actually talk myself into buying shares of this thing :).
Someone over on Seeking Alpha has done a much more detailed analysis of Cano than this. I am being more conservative in my valuation, but the detailed one in the article is definitely worth a look (at the very least it is interesting for an investing nerd like myself).
Cano: A Closer Look at Valuation
Is anyone out there familiar with this Company or the valuation of oil reserves? I'd love to hear your thoughts.