In their most recent investment letter entitled ‘Value Trumps Fear,’ and dated October 21, 2008 portfolio managers Herb Abramson and Randall Abramson of Trapeze Asset Management comment on the unrecognized value of a few of their portfolio holdings. The following are a few excerpts:
“Corridor Resources and Orca Exploration are 25¢ dollars and therefore could increase four fold, while our two largest cap holdings, Walgreen and United Technologies, are only 50¢-60¢ dollars."
"Positive surprises, the commercialization of Corridor’s shale play or the monetization of Orca (both of which we believe could happen over the next year) obviously have much more price impact than anything that could positively occur to Walgreen or United Technologies."
"For example, our largest holding, Corridor Resources, now has a market cap of $200 million, though based on our appraisal, we believe it should trade at $12 giving it a market cap over $1 billion. At a minimum, the company should trade above the discounted present value of its 2P (proven and probable) reserves—twice the company’s current price. And, that allows zero value for further development of the Hiram Brook resource and the material upside potential from the company’s exploration prospects. If natural gas prices were to fall well below the current $7 price, the company might need to cut back on capital expenditures to make sure spending does not outstrip cash flows in a capital constrained world. The company is on a solid financial footing—next year’s cash flow is expected to be at least $80 million, the company has no debt and working capital of $20 million. At 2x cash flow, 80% of book value (having spent virtually its entire trading history over the last 8 years above 2x book value until the last couple of months), 50% of 2P reserve value and 15% of its risk adjusted Net Asset Value, Corridor should not persist very long at this ultra-low valuation level. As good as it gets. High reward, low risk. Value well above trading prices. And, well financed, a clean balance sheet, material cash flow, no current needs to access additional capital, plus a consistent record where they’ve found gas virtually every time they’ve drilled for it."
"Orca Exploration trades at 25 cents on the dollar, has a debt free balance sheet and substantial and growing reserves. With 1.25 TCF of 2P reserves and substantial additional resources, we estimate Orca has intrinsic value in excess of $12 per share. As a monopoly supplier to the power starved Tanzanian market, other companies should be extremely interested in Orca’s growing assets."
"Canadian Superior and Petrolifera Petroleum are 20 cent dollars with world class assets. Canadian Superior’s two recent discoveries in Trinidad added about $5 to the company’s asset value (now over $8) yet the share price has dropped, like all the others. There should be significant interest by major energy companies in the very valuable Trinidadian assets, even if the stock market isn’t willing to recognize the value. Petrolifera’s Argentinean assets alone are worth more than 4 times the share price. At around 70% of book value and 1.5x expected cash flow of more than $80 million, the company is absurdly cheap, especially given the exploration prospects in Colombia and Peru."
"Sterling Resources and Canoro Resources both have spending needs in '09 which require capital. That said, each has no debt, asset values far in excess of prevailing share prices and could access capital or delay projects until capital is readily available. We expect little dilution. Sterling has assets we believe are now worth more than $500 million yet the market prices the entire company at only $85 million. And, cash flow in 3 years is expected to be more than $400 million per year from oil and gas they’ve already discovered. They just hit on two more wells in Romania and another in the North Sea. Canoro’s market cap has dropped all the way down to $34 million (34% of book value), yet the company has approximately $20 million of cash, $10 million of cash flow, $170 million of 2P reserves and a total risked asset value that’s over $300 million (10 times the prevailing market cap)."
"Our other key holdings trade at big discounts too and should have no need for capital in the near term. Etruscan Resources trades at one-third of our appraised value, United Technologies is a 60 cent dollar and Walgreen a 50 cent dollar."
Note: The investment letters by Trapeze Asset Management are a recommended read for all investors and their most recent one is no exception.
Source: Trapeze Asset Management
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