Petro River Oil Corp (OTC:PTRC)
Now that the U.S. has an administration in the White House that is bent on making the nation energy independent, investors should embrace an opportunity to find and profit from emerging, under-the-radar stocks. Finding them is not enough, though. Investors also need the willingness to get out in front of the trade to bank the rewards. Since President Trump took office, my focus has been on finding the finest of the emerging energy bunch, taking advantage of small and micro-cap opportunities that can deliver both near and long-term value to investors with an appetite for adding risk to their investment portfolio. Now that oil has made a break above the $50 level for the first time in weeks, the desire for energy-focused investment is on the rise. And, as is usually the case during market rotation, the clear winners are the early adopters that take positions well ahead of the shifting market, enabling them to capture gains from the change in momentum, which brings prime opportunity to score stellar returns.
As CNA Finance followers and subscribers know, I am uncompromising when it comes to uncovering the next pack of developing leaders in a reinvigorated sector, and Petro River Oil has advanced to my list of emerging oil producing favorites. Petro River Oil (PTRC) is deserving of the attention, and when compared to its peers, the case for substantial share price increase and long term opportunity gets magnified. Now, it's up to investors to look at the big picture to understand and take advantage of the opportunity developing at PTRC.
PTRC Is Primed
No investment comes without risk, and when it comes to investing in the oil and gas industry, those risks often get intensified. While capital intensive pressures play a significant role in individual success and failure, the concern of the regulatory pressures put on producers has also played an intense role in limiting the opportunities for small competitors. Finally, this trend in overzealous oversight may have ended, and the next four to eight years may be the best chance investors have had in quite a while to entertain the idea of adding oil producing companies to their investment portfolio.
While PTRC may be under-the-radar to many investors, the stock has been on my screen for several months, and now that the company has completed a series of steps necessary to advance to the next stage of viable and long-term production, the investment thesis is compelling.
Why? It's simple. Markets rotate, and when they do, investors are provided a golden opportunity to become a first responder, taking advantage of the low-hanging fruit that less aggressive investors leave on the table. My investment style is comparable to my eating habits - I partake in the appetizers. The similarity is that just like a good appetizer may oblige the early pangs, the main course is usually more satisfying. Thus, why not enjoy both, and take advantage of the satisfaction that each has to offer? Following that logic, taking an early bite into PTRC is attractive, potentially allowing investors to realize quick gains coupled with long-term satisfaction.
Investors have already been nibbling at PTRC stock, with shares up over 43% since the beginning of May. But, the increase may only be setting the stage for a significant move higher as investors come to recognize the inherent value in the company. Simply put, my excavation practices may have uncovered an investment opportunity in PTRC that the market herd is yet to recognize.
Petro River Oil As An Emerging Oil Stock
From my vantage point, accumulation in PTRC started two months ago, with volume increasing from 10X to 50X normal trading levels. Obviously, there are interested parties that see potential in the company. Despite the recent increase in share price, though, I believe the company has significant opportunity to run higher, with sights set on a near-term return of more than 100% from current levels. My bullish views are not outrageous, and they get substantiated by the proven reserves, the strength of the balance sheet, and by the company's strong management team, who have clearly demonstrated the capability to accomplish their goals in an efficient and cost-effective manner.
If my analysis proves to be correct, the early investors into PTRC may sense that the company is now positioned to generate substantial revenue at current oil prices. In fact, the company has stated on several occasions that even a sub $40 per barrel spot price keeps the pumping profitable. Independent from the company's statements, outside analysts have suggested that PTRC is positioned even better, enjoying the capability to generate profitable returns on oil priced as low as $35 per barrel.
Unlike the plethora of start-up production companies, Petro River Oil did not blindly meander into the oil business. The PTRC mission is calculated, designed, and intended to deliver returns. Focusing on the proven grounds of Osage County, Oklahoma, PTRC has spent the past several months conducting 3D seismic testing to recognize opportunity and minimize risk. As experienced sector investors know, oil production is a zero sum game for inexperienced drillers. Dry wells produce nothing and can be an exhaustive drain on capital resources. Despite the proven reserves in Osage County, small and inexperienced producers have gone belly-up trying to bring the black-gold to the light of day. Others, however, have made fortunes. And, because PTRC is taking a prudent, step-by-step approach to limit production risk, the company may indeed become the newest initiate to the "fortunate" club.
Osage County, Oklahoma, PTRC Historic Opportunity
Money making opportunity in Osage County, Oklahoma is not a new concept. The grounds were proven fertile well before Oklahoma became a sovereign state. Oil pioneers became aware of the underground asset in the early 1800's and quickly took advantage of its potential, learning that the geographic location provided an inexpensive means of pumping the oil to the surface, a factor that still exists today.
Production was booming in the region for decades, and it wasn't until the U.S. government entered the fray that the market took a turn. Typical to over-regulation and unintended consequences from ill-advised government intervention, many producers left the region. The oil remained, however, and with it the opportunity for innovative and experienced producers, like PTRC, to exploit the area for this valuable resource. Now, with a softening political climate, and technology capable of substantiating production value, smart companies have brought their focus back to Oklahoma, where billions of dollars in oil reserves lay in wait.
As others ran from the heavy government oversight and stifling regulations enforced by the former administration, PTRC intensified investment in the region upon the belief that the Trump Administration may finally clear a path to unobstructed production with a business-minded approach to regulation. Certainly, President Trump is a hawk when it comes to becoming an energy independent nation, which bodes extremely well for Osage County producers, particularly for vertical drillers like PTRC.
Osage County producers have been no stranger to bureaucratic roadblocks. But, much of the decades-long political wrangling came to a head in the first quarter of 2016, with a strong case presented to alleviate the bureaucratic delays from an understaffed Bureau of Indian Affairs and the U.S. government's restrictive EPA office. Already showing progress, the promises made and executive actions taken by President Trump to reduce or eliminate the debilitating effects of government intervention are beginning to pay dividends to Osage County producers. For companies like PTRC, who staked their claims before the political shift, the rewards could be substantial by taking advantage of the fertile grounds and state-of-the-art technology at their disposal.
Petro River Oil Is Positioned To Exploit Institutional Interest
Petro River Oil is in an enviable position to deliver substantial returns for investors. Additionally, they are also ideally placed to take advantage of renewed institutional interest in the sector. As an example, investors should focus on a deal recently announced by PetroShare to understand the opportunities that PTRC may be able to exploit.
On Friday, PetroShare (PRHR) (not affiliated with Petro River) announced that they had been underwritten to offer $50 million in common stock through Johnson Rice and Seaport Global. Now, not until you realize that PetroShare had revenue of only $1.5 million in the first quarter of this year, compared to zero a year ago, does the offering demonstrate the institutional interest on a grander scale. The offering swallows the entire market cap of PetroShare, which after Friday's close stood at roughly $43 million dollars. Beyond the impressive size of the offering, however, the cash is going to a company that has significant debt overhang, a history of quarterly losses, and virtually no trading volume in the stock. On the other hand, the corporate weaknesses on display at PetroShare can play extremely well for Petro River Oil, which clearly shows superiority on a multitude of fronts that can bring with it stronger interest from institutional money.
Side by side, Petro River is a stronger company on almost every business metric. While PetroShare is doing what they can do increase shareholder value, their funding news also serves to validate interest on the institutional front that may surely benefit Petro River.
To be clear, we're talking about an institutional market that is becoming interested in financing emerging oil producers, and it's not my intent to place PetroShare into the Hall of Shame. But, comparing the two companies offers insight into the substantial opportunity available to PTRC. Taking a closer look at the two invariably highlights the distinctions and why institutional interest may soon avail themselves to PTRC, which could generate major increases in shareholder value.
First, Petro River has no debt and has secured the funding for planned 2017 drilling programs. In contrast, PetroShare, in March of 2017, entered into a $10 million PIPE financing to raise the capital necessary to perpetuate lease development.
Second, while both companies utilize 3-D seismic technology to prove wells and de-risk exploration, only Petro River has the capability to drill vertical wells. Thus, for PetroShare, the horizontal drilling method may turn out to be a one-and-done approach, adding significantly greater risk and cost in comparison to wells explored through vertical drilling.
Third, PetroShare has a share price of roughly $1.90 a share, with approximately 22 million shares outstanding. While not necessarily an excessive number of shares issued, they are obligated to senior secured debt of about $12 million, and an additional $10 million in unsecured convertible notes. In addition to the convertibles, they also have a warrant overhang that has an exercise price of $3.00 per share, which can bring in $20.1 million with associated dilution of 6.7 million shares. Now, for those who may not understand the entirety of warrant structure, they often play the devil's role, with astute investors hedging the warrants against a position or using an arbitrage strategy to benefit from the structure of the warrants. While the smell of warrant money is attractive to many retail investors, the untold truth is that the warrants often have a debilitating effect on share price, keeping a ceiling in place for the stock price and causing financial and negotiation distractions for a company that becomes desperate for cash.
The Petro River Oil Distinction
In comparison to the metrics listed, Petro River has 15.8 million shares outstanding, a $1.25 stock price and a market cap of approximately $20 million dollars. Now, while both the market cap and stock price are lower in comparison, PTRC has no debt, no warrant overhang, and no convertible loan features to dilute growth. Therein lay the distinction and opportunity I alluded to a few sections ago. With institutional investors now warming up to financing these emerging players, it makes strategic and financial sense for institutional investors to cozy up to companies positioned for sustainable growth, especially ones sitting as well as PTRC. Thus, while PetroShare may soon execute on their $50 million dollar dilutive offering, the terms for Petro River may become progressively better. Adding
intrinsic value, both companies have strategic partners to assist with growth and strengthen the balance sheet. Petro River enjoys a partnership and 20% ownership interest in Horizon Energy Partners, a potentially lucrative investment. PetroShare has a strategic alliance with Providence Energy Group, who owns approximately 13.7% of the company's outstanding shares through a $3 million purchase during the company's IPO.
Comparing the two, while taking into account the news of the pending cash raise at PetroShare, the deal only bodes well for PTRC shareholders in the future. If and when PTRC decides that they want to address the capital markets, they will have the ability to negotiate from strength and clearly show that the terms provided to PetroShare serve as a starting template for any proposed funding agreements. In simplest terms, with PTRC being the better company, there is no reason they should not enjoy better conditions, better underwriters, and greater investor interest in the near-term future.
Where PTRC Will Profit
Petro River Oil is generating meaningful press. On May 8th, PTRC announced the discovery of a new oil field in its Osage County concession. While the company needs to perform some exploratory work to substantiate the potential of the well, initial results are encouraging. According to the company, preliminary testing indicated strong production potential with up to 20 feet of oil productive formation. Confirmatory tests are planned to evaluate the extent and potential of the discovery, and the company has announced that they plan to perform additional 3D seismic testing on new channel sand formations, which have indicated a potential to deliver over 2.5 million barrels of oil.
Investors should not look at the discovery as a one-off, potentially winning lottery ticket. History suggests that additional oil deposits will likely emerge in nearby concessions. PTRC management is cautiously optimistic, believing that the initial discovery confirms their 3D seismic testing technology, which will likely lead to the development of two additional wells in the coming weeks and months. In addition to news of their recent discovery, management reiterated their confidence in its 3D seismic testing, indicating to investors that they believe to have discovered the possibility to develop an additional 12 producing fields, which could generate significant revenue streams and shareholder value.
As of May 2017, PTRC listed current assets at over $28 million, with cash receivables more than $5 million. As noted earlier, the company has no debt. The most recent balance sheet shows that the stock has a book value of $1.03 per share and a cash value of roughly ten cents a share. In comparison to industry valuations, with PTRC trading at around 1.5X its tangible value, the case for PTRC being undervalued is made stronger.
Now, it is true that not all emerging stocks are created equal, and the markets rarely price emerging companies efficiently. For undiscovered and growing stocks, like PTRC, the challenge is less about demonstrating its clean balance sheet and catalyst rich future than it is about getting investors to understand the value trapped beneath the surface of their name. For PTRC, there is value on several fronts, inclusive of a respectable balance sheet, an experienced management team, use of state-of-the-art 3D seismic testing technology, and most importantly, a recent discovery of assets that may serve as a leading indicator for the discovery of new and potentially lucrative oil deposits.
What should be exciting for investors who have today become familiar with PTRC is that the management team is becoming more focused on telling the story to the investment masses. Different from companies that put out multiple press releases a week to build brand recognition without underlying substance, PTRC has kept a spotlight on its accomplishments and is building their brand as a result of success.
For investors who seek out stocks intended to deliver exceptional returns based on substantive data and catalyst potential, Petro River Oil may be an ideal candidate. With the share price higher by over 43% since the beginning of May, this once under-the-radar stock is now obviously on the investing screens by those recognizing the opportunity and potential of this company.
PTRC has mitigated much of the downside risk with a strengthened balance sheet, its minority-owned interest in Horizon, and by its recent asset discoveries. The momentum is in place, and the stage is set for additional market moving developments. At current levels, PTRC is an absolute bargain and is certainly worthy of being positioned as one of my most promising oil stocks for 2017. Factoring in less restrictive oversight that should ultimately lessen the regulatory burden in the Osage County corridor, PTRC may be perfectly positioned to capitalize on both its asset-rich environment and the rejuvenated interest in institutional funding. Each may serve to benefit PTRC in both the near and long term, ensuring long-term viability and sustainable growth potential for the company.
Disclosure: This article reflects my own opinions and unique articulation. This article is not intended to offer investing advice, guarantee 100% accurate predictions or to be interpreted as providing a personal recommendation. What I can guarantee, though, is accurate research, thoughtful analysis and an enthusiasm about any stock that I cover.
While I seek to uncover emerging companies that I feel have true value and potential, it's important that investors assign an appropriate time horizon to each of their investments, understanding that emerging companies need time to mature.
I wrote this article myself and it includes my own research and expresses my own opinions. I am not receiving compensation for it (other than from CNA Finance). I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: I have no position in any stock mentioned, but may initiate a long position in PTRC within the next 72 hours.
This article was originally featured on CNA Finance.