Manitok Energy is straight up killing it.
Often, when talking to pubco CEOs, you engage in a dance where they talk about the things they’re doing right and politely step around the things they’re not doing so well.
But Massimo Geremia, President and CEO of Manitok Energy (TSX:V.MEI
, Stock Forum
) comes into the conversation with workboots, not dancing shoes.
“We’re in the best place we’ve been in a long time,” he told me in a phone interview. “Up until 2012, we had to do equity financing to get any kind of capital program done because we didn’t have production and cash flow. We did some equity in 2013, lowered our debt, that kind of thing, but this year we’re funding internally.”
That’s because the oil is flowing and production rates are good and payback rates are generous and the company sold off some non-core assets earlier in the year, pulling in another $22m in petty cash.
It all adds up to a company that has taken ‘risk’ to the woodshed and beaten it to within an inch of its life
“With our cash flow, and our line of credit, we will spend $115m in our capital program drilling this year,” says Geremia. “Assuming we’re successful on our budget, we’ll end the year with 7500 boe/day, with a $90-95m cash flow run rate based on commodity prices being where they are right now.”
That’s an awful lot of drilling, bought and paid for with what’s already coming in the door.
“Next year we can spend $90m on cash flow alone, without any additional equity, and do another $110m program with a small amount of debt. To be able to grow like that without raising equity gives us strength to compound that growth as we go,” he says.
Unlike many explorer/producers, Manitok has a lot of room on their line of credit if they spot more opportunities. “We’re not in a tough spot,” says Geremia.
But all of that cash means nothing without good places to utilize it, and Manitok appears to have no shortage of that. The company has at least twenty locations targeted at the Stilberg project, with a year and a half of drilling set to go.
“Then when we drill, we’re going to find new opportunities,” says the CEO. “Ultimately we can stay busy for 18 months to 3 years based on our current level of success.”
Now, if you’re an investor in Manitok, you know this story. It hasn’t been a secret. For the last two years, whenever Manitok has set a target, it’s taken that target out as planned. It was built on the concept of ‘drill, produce, use proceeds to drill more, produce more, repeat’, and now that concept is ramping up to a critical point. But the company share price remains static, bouncing up and down between $2.10 and $2.80 for the last eight months.
Manitok is trading at 2.5 times 2014 cash flow, while its peers are at the 4.5x range. Quality companies that have shown growth over time trade at the 6x cash flow range. With no dilution needed going forward, its 70.3 million outstanding shares present investors with what many would call a very reasonable buying opportunity.
But Geremia is only now shifting into third gear.
“We have well results from the first wells drilled at Entice, there’s the large land deal we did last fall. We’ve drilled five wells just before spring breakup and have been completing them as we can. We’ve been able to complete three wells so far, and will get to a fourth in the coming weeks, we’ve got two wells in the foothills right now, and results for all of them should be available around the same time.”
“Frankly, it’s a gamechanger,” says Geremia. “We’ve tied up nine townships of land in this large land deal, so these are just the first five wells of what will be many. With success you can exploit different zones along that land base, so we could be drilling the whole area for the next six years. We’ll take some key targets from it, and we’ve got good indication that we’re doing well and that eventually production can be increased significantly.”
“We’ve added a new core area which has shifted things. Personnel changes have been made, Q4 numbers came in strong, drilling results are good.”
My inclination when a story presents this well is to find something – anything – that keeps the CEO up at night, wondering if it could derail the un-derailable. A quick “no, nothing at all,” is a good sign there’s something a CEO is hiding.
Geremia doesn’t hide. He worries about diversification of his production program, oil prices, and the potential for ‘act of god’ infrastructure issues down-pipe, all of which you’d put in the ‘unlikely to hurt in the short term’ category, and which many CEOs would brush aside as irrelevant.
Geremia is planning for them and acting accordingly, further derisking an already solid play.
“Right now, everything’s coming out of one area,” he says, “that’s why we did the land deal. Entice has a different risk factor, there are two areas, we have more ideas about where to be looking, and we’re not dependent on any one thing.”
“5000 barrels per day are coming out of six sections in Stolberg, so if something happened to the gas plant we use, we’d have to cease production. So it would be nice to establish the same production somewhere else as a growth area and diversify,” he says.
“At the end of the day, it’s still the oil business; every time you drill you get something different. But with the capital where it is, and with our hedging on commodity prices, and working towards consistency and predictability, we’re increasingly happy with the results we’re getting.”
The Manitok CEO believes oil prices will move upward going forward, especially with delivery issues and winter gas storage levels at low points.
“Globally, we’re not finding a whole lot more of it, and there is a higher demand globally right now. Issues in the short run are deliverability, pipelines, getting it down to the US, how much we can make off each barrel. But those are short term problems everyone has. When utilities see there’s more demand than capacity, it’s an easy capital decision for them to build the pipelines and there’s plenty of reason for governments to help make that happen.”
“Gas prices will be interesting over the winter,” says Geremia. “Relative to storage levels a year ago, current storage levels are really down. It will be a challenge to see if they can be filled to the same levels as last year rolling into next winter. There’s no new equity in to natural gas players right now, so we feel there’s a 12-18 month window for much better gas prices than we saw the last two years.”
In the longer run, Manitok projects as a growth play with high upside. You know, the sort of thing that might attract acquisition interest – or build around acquisitions of its own.
Geremia leans more to the latter.
“My take has always been to push the growth end of the equation,” he says. “We don’t want to say it’s time to put ourselves up for sale, we want to find the next opportunity for growth, which will command much better value when the acquisition talk gets real.”
Gemeria says the company has drawn no ‘serious interest’ to this point, but says “if it made sense, we could move things along.”
“We’ve got our eye on two or three ideas. There’s always something to look at in this business, but there’s nothing imminent. We’d like to move on targets in the next 12-18 months but there’s no way to know if you can execute this far out. We’re not a group that wants to bid on 30 things and land one; we’re more selective. We’ll focus on our core areas, we’ll be accretive, and act if it makes sense for our core business. We’re looking for a great deal, not just -a- deal.”
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