Undervalued Oil Producer - Simplified Thesis
Amid historic oil price volatility, this oil stock could soar
This is the simplified, no jargon version of an investment idea that I published a couple of weeks ago. The company released very strong Q1 results recently, coming in ahead of expectations.
Because oil prices have been extremely volatile lately and short-term price moves are inherently difficult to predict, I like this company in particular because I think it offers an attractive return in a lower oil price environment and a potentially huge return in a higher price environment. Essentially, heads I win, and tails I win less.
The thesis is simple: the company is improving, with another recent quarter of outperformance, but the market still isn’t giving it credit. The company is paying down debt, buying back stock, and generating high cash flow, yet it still trades at a large discount to peers on both cash flow and reserve value:
This undervaluation has persisted even after the company recently posted another very strong quarter, leading one leading investment bank analyst to comment:
“Overall, this is a solid quarter for them… 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. As this company continues to improve, the market should gradually narrow the valuation discount and may eventually assign the stock a premium multiple. If its stock were to merely rise to the market values it peers, the upside is compelling:
The company’s oil-heavy production gives it strong upside if oil prices stay high. Even now, it’s already generating more cash, paying down debt faster, and buying back shares.
The setup is simple, powerful, and already happening month by month:
And because the stock is already valued very cheaply, it has protection if oil prices fall.
This is one of my largest holdings. Even after the recent pullback in oil stocks, other Bison Insights ideas have continued to outperform the broader energy market:
