Article in Motley Fool:
Lightstream Resources Ltd.
Light oil producer Lightstream Resources Ltd.’s (TSX: LTS) share price has been hit hard, almost halving over the last year. This can be attributed to weaker oil prices along with the market having lost confidence in Lightstream after it was forced to slash its dividend and capital expenditures to reduce leverage and preserve capital at the end of 2013.
As a result, Lightstream now appears incredibly cheap, trading with an enterprise value of a mere four times EBITDA and 18 times its oil reserves. This is despite the company’s considerable progress with its turnaround strategy, completing a range of non-core asset sales ahead of schedule and successfully making over its balance sheet.
More importantly, despite these asset sales, Lightstream still holds a portfolio of high-quality, low-decline-rate oil assets with oil reserves of 173 million barrels.
The company continues to generate one of the best operating margins in the patch, with a netback of $57.49 per barrel for the second quarter of 2014. This netback is superior to the majority of players in the patch and is higher than the industry wide average for oil companies operating North America of $42 per barrel.
More importantly as Lightstream’s production continues to mature, decline rates will fall further reducing the amount of cash required to sustain production. This will free up additional cash flow, which can be directed to boosting cash reserves and further paying down debt.
With a dividend yield of 12% Lightstream pays one of the juiciest yields in the patch and when coupled with an overall payout ratio of 14% it certainly appears sustainable.
Clearly, Lightstream is underappreciated by the market and with such a cheap valuation, it may only be a matter of time before it is considered a takeover target. This would certainly act as a catalyst to drive its share price higher.
