Three Great Oil Companies - and One That the Market Has Missed
Tamarack, Headwater and Cardinal have earned premium valuations. A remarkably similar oil producer has not - at least, not yet
Three Canadian oil producers have stood out over the past several years: Tamarack Valley, Headwater Exploration and Cardinal Energy.
These are three are excellent oil companies, with different strengths. Tamarack has built significant scale in the Clearwater and used waterflooding to reduce declines and improve capital efficiency. Headwater has repeatedly turned inexpensive acreage into valuable new oilfield discoveries. Cardinal has combined low-decline conventional production with successful thermal development and a steady dividend.
I’ve followed all three closely, and I’ve made money owning shares in each of them at different points. Their strong outperformance has been well deserved:
When I look at these companies, one thing I find remarkable is that there is another company that would fit right in, very much resembling these three oil companies - but its stock trades at a large discount to them.
This Canadian oil producer has a similar oil weighting, comparable cash-flow margins, competitive development costs and a long reserve life:
The company also produces more oil than two of these companies and is pursuing many of the same strategies, including multilateral drilling and waterflood expansion. Yet the market continues to value it at a fraction of these peers.
This large discount was once easier to understand. The company had legitimate governance and capital-allocation problems that included large acquisitions that increased debt and diluted shareholders. Those decisions damaged investor confidence and caused its stock to underperform.
But the business has changed considerably over the past three years. Management has repeatedly exceeded production expectations, repaid debt, repurchased shares and improved the asset base through highly accretive bolt-on acquisitions.
These improvements led one leading investment bank to recently comment following another better-than-expected quarter:
“Overall, this is a solid quarter … We believe that posting better-than-expected quarters will start to earn more confidence in the story from the market and be a key factor in driving down the valuation discount relative to mid-sized peers.”
I agree. This company is increasingly operating like the higher-valued producers discussed in this article, and it is remarkably similar on key operating metrics - but the market is still valuing it based on its distant past.
In this article, I will explain some of the characteristics that make Tamarack, Headwater and Cardinal such strong businesses, why each may deserve the premium valuation the market is awarding it, and why this overlooked Bison Insights idea is much more similar to them than its current valuation suggests. The upside potential, even in a partial re-rating scenario, is enormous:
This is one of my largest holdings and is a top idea in the Bison Insights composite index, which has outperformed the XOP 0.00%↑ ETF and the broader market SPY 0.00%↑ since publication began one year ago:
Disclaimer: This is for informational and educational purposes only. This is not an offer, solicitation, or investment recommendation. Please consult an advisor and do your own diligence. Past performance is not indicative of future results.
