Personally, I'm long-term bullish on the price of oil -- and
because I'm bullish, I'm interested in companies that control
massive deposits of crude.
I like to compare an investment in companies sitting on large
stores of oil to owning land that lies beyond city limits. That
land might not be worth much today -- but once the city's
expanding borders reach that land, it could be worth a
and technological advances in oil recovery are like the city
borders moving to where my land is. Higher prices and improving
technology make recovering more of the oil that producers are
sitting on economically feasible.
However, I wouldn't invest in a producer solely because it has
a big accumulation of oil in the ground. The company also has to
be inexpensively priced relative to the value of its proven
reserves and cash flow.
Now, I've turned over quite a few rocks over the past couple
of years looking for undervalued opportunities in the oil sector.
I don't know that I've come across many companies -- if any --
that trade at as large a discount to proven reserves and have the
balance sheet that the little-known company I'd like to tell you
about today does.
Bankers Petroleum (
is a Canadian oil producer that operates exclusively in Albania
-- which isn't exactly Canada, but it certainly isn't Iraq
either. What attracted Bankers Petroleum to Albania was its
reasonably stable operating environment... and a unique
opportunity: Bankers controls the Patos-Marinza oilfield, the
single largest onshore oilfield in Europe, with an estimated 5.4
billion barrels of oil.
Bankers has 232 million barrels of proved and probable
reserves valued at $2.2 billion. That works out to $9.72 a share
-- more than 50% above the current price around $6.25.
I've seen a few highly leveraged companies that trade at big
discounts to their reserves. But these companies generally are
one short-term commodity price downturn or one operational hiccup
away from having an equity value of zero.
I don't see that sort of downside risk in Bankers, not with
its recent cash flow:
Bankers' enterprise value of $1.6 billion equates to a cash
flow multiple of 5.5 on 2014's expected cash flow. That's quite
attractive for a company whose cash flow is growing at an annual
rate of 15% to 30%.
So Bankers is attractively priced relative to its reserves and
cash flow -- but what excites me about this company is the upside
from improving the percentage of the Patos-Marinza field's 5.4
billion barrels of oil that can be recovered.
Bankers' 232 million barrels of proved and probable reserves
amount to only 4.3% of the original oil in place. Improving the
recovery factor by just 1% would mean an additional 54 million
barrels of reserves, a 25% increase for Bankers.
The answer lies in the implementation of secondary recovery
methods such as water and polymer flooding. In water flooding,
water is injected into a reservoir to increase pressures and
force more oil out. A polymer flood involves injecting a gel into
the water to make it thicker and push even more oil out.
Bankers cites the example of heavy oil secondary recovery
success stories such as
Cenovus Energy (NYSE:
on its Pelican heavy-oil field, which has gone from a recovery
rate of 10% under primary drilling to almost 20% with
Without any success with these secondary recovery efforts,
Bankers Petroleum is an attractively valued stock -- but any
success could position it for big gains.
Risks to Consider:
The primary risks for Bankers lie in oil prices and the
country risk involved with operating in Albania.
Action to Take -->
Buy shares of Bankers Petroleum for the attractive valuation and
steady, predictable growth -- with added upside from improved
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