We revisit the notion of unvalued “imbedded options” this morning because we believe there is another company that is being given no value for a number of its resource holdings. Said company is Resolute Energy (REN/$11.36/Strong Buy). According to our exploration and production analyst John Freeman:
“During this uncertain commodity outlook, REN should be one investors start to look at as a more defensive name. REN is 90% liquids-weighted, 16% net debt/capitalization, and is the only U.S. name we cover that trades below its proved-only reserve value at the current oil price ($82/bbl). Roughly 75% of the company`s current production comes from its core Aneth field, which has a breakeven oil price below $40/bbl. If commodity prices are strong, REN can spend $59 million per year and grow production from the field more than 15% a year for the next five years. However, if commodity prices weaken further, the company only needs to spend $11 million per year to keep production flat from the field (in other words, the "maintenance capex"). The Aneth field generates roughly $80 million in cash flow and that huge cash cushion will serve the company well if commodity prices remain depressed. At the moment, there`s basically no value in the stock for its other assets including the Bakken (33,0000 net acres), the Permian (8,000 net acres), and the Mowry Shale (115,000 net acres). If we assume $90/bbl flat oil price, REN`s proved-only reserves are worth ~$14 per share and at $80/bbl flat oil price, the value is ~$12/share. Next catalyst is likely Plains Exploration (PXP/$22.71/Outperform) announcing a Mowry Shale well result when it reports 3Q in late October or early November.”
The call for this week: Goodbye and good riddance to 3Q11, which has been the worst performing quarter for the SPX since 4Q08. Welcome to 4Q11, and the month of October, which has been termed the “Bear Killer” since many downtrends have found their nadir in the Halloween month. Indeed, recall that after being bearish since the Dow Theory “sell signal” of November 21, 2007, we turned bullish in October 2008 when 93% of all the stocks traded on the NYSE made new annual lows. Hopefully, this month will prove as kind for stocks as 2008. I do find it interesting that our analogue to the bottoming sequences of October 1978 and October 1979 continues to have a remarkable correlation to the current pattern of the SPX following its mini-crash of early August. I hope the resolution will also parallel 1978/1979’s subsequent rallies that carried the averages higher into the new year. Of course, if the August 9, 2011 intraday low of 1101.54 is decisively violated we will have to reconsider our bullish stance.
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Copyright © Raymond James
