Get A 9% Yield While You Wait For This Unloved Oil Stock To Pop

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There are many different approaches that an investor can use to succeed. The key is to find the approach that works for you.

Personally, I operate best when I think of a stock as a small ownership interest in a company and not a piece of paper to be traded on a frequent basis. My approach is to buy shares in a company I like at an attractive valuation and let management build wealth for me over the long term.

That said, if I had the ability to be a market timer, that is what I would do. It would be far less stressful (not to mention rewarding) if I could accurately time the low point for a stock and buy only then.

Ordinarily I'm very skeptical of my ability to pick the bottom for a stock -- but today, I have a pretty good feeling about one.

The company is Canadian light oil producer Lightstream Resources ( LSTMF ) . I think this month could represent a long-term bottom for a company turning a corner.

Lightstream has a market capitalization of over $1 billion and production exceeding 46,000 barrels of oil equivalent ( BOE ) a day. If you name a horizontal oil play in western Canada, chances are Lightstream has a significant land position in it.

These are high-netback  horizontal oil plays -- not oil sands, not heavy oil, and not natural gas.

In addition to having one of the largest positions in both the Bakken and Cardium oil plays, Lightstream also has a significant presence in several other emerging oil plays that include Swan Hills, Montney, Duvernay and Nordegg.

This is a company built for the long term. At its 2013 drilling pace of roughly 100 wells per year, it will take Lightstream more than 20 years to drill up only the drilling locations it has already identified. That large inventory doesn't include any of the emerging plays other than Swan Hills.

Despite this deep asset portfolio, the market has thrown Lightstream into the bargain bin because it is unhappy with the current level of debt the company carries relative to its cash flow. Lightstream's assets are heavily discounted because of debt concerns.

Lightstream's management is aware of this. Last month, management said the company had embarked on a process to reduce debt by $600 million through the sale of non-core assets.

As the proceeds from those sales are used to reduce debt, shares of Lightstream should rise toward a valuation similar to that of its peer group. If Lightstream's projected 2014 funds from operations ($620 million) were to be valued similarly to its peer group multiple of 8, the price of LSTMF would be $14.80 -- nearly three times its current price of just over $5 a share.

The next question that needs to be asked: How likely it is that Lightstream can execute on these asset sales at attractive prices?

The answer may be foreshadowed by the recent actions of Lightstream CEO John Wright, who over the past week has spent over $1.2 million of his own cash buying shares of Lightstream in the open market. In addition to Wright, two other directors have also combined for almost $1 million in open market purchases. With Lightstream's ongoing plans for asset sales, the actions of Wright and his fellow board members suggest they're encouraged by what they're seeing.

In addition to buying shares today in front of potential upcoming catalysts, investors are locking in a juicy dividend yield. Lightstream pays a dividend of $0.04 a share -- which it pays monthly, like many Canadian companies -- which means the yield is over 9% at the current stock price near $5.

Lightstream is cheap, has a pending catalyst and pays a nice dividend while you wait. Better still, I think the timing is exactly right to invest in this one.

Risks to Consider: Lightstream currently has a significant amount of debt: Its debt-to-cash flow ratio is about 3-to-1, which is on the high end for Canadian producers. In addition, Lightstream, like all commodity producers, is susceptible to price volatility.

Action to Take -->  Buy Lightstream at its current price. Shares are currently valuing Lightstream's assets at a steep discount, offer a significant dividend yield and have potential near-term appreciation upon completion of non-core asset sales. Investors have been leery of Lightstream's debt and have missed the fact that this company has an outstanding portfolio of real estate in Canada's best horizontal oil plays.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: BOE , LSTMF

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