Headwater Exploration Inc. (CDDRF)

[geodan]

Great report on CDH-SeekingAlpha CurrentValue.72
http://seekingalpha.com/article/4036471-corridor-resources-potential-gaming-changing-acquisition
Laurent CadotteFollow(339 followers)
Long only, deep value, long-term horizon, contrarian

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Summary

I went long Corridor Resources again on Jan. 6.

Its current NPV is C$0.72 per share.

The acquisition of assets in Western Canada would lead to significant upside.

Note: All figures are in USD unless otherwise stated. Corridor Resources trades primarily on the Toronto Stock Exchange as CDH. If you like this article, please follow me using the link next to my name on top of the page.

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Source: Corridor Resources

I bought back the shares of Corridor Resources (OTC:CDDRF) I sold in early 2016 because I realized something last December: If the company is going to buy energy assets in Western Canada, now must be the time.

Why Now?

To answer the above question, because energy prices have bottomed. In other words, Corridor must move in now to benefit from the oil collapse. Indeed, Corridor has been looking to buy Western Canadian energy assets ever since New Brunswick first announced its fracking moratorium.

The price for each flowing barrel is still stable in western Canada. Let's take a look at acquisitions by one of my holdings as an example. Raging River Exploration (OTC:RRENF) paid C$93,550 per boe/d in November 2016 vs. C$42,750 per boe/d in May 2016. The netback adjusted price for each acquisition is stable at about C$42,000 per boe/d. Furthermore, the price of oil is still hovering at under $55 per barrel despite the OPEC deal. In all, there is still some time left for Corridor to find a good deal.

Downside Is Protected

Fundamentally, it's a money thing. Current working capital (C$30M) amounts to C$0.32 per share. The NPV10 of Corridor's current proved producing reserves are worth C$36M, or C$0.40 per share. Therefore, the current fundamental value of the company stands at C$0.72 per share. We are buying a dollar for 70 cents. This should protect our position from any prolonged downside.


Valuation

The company is trading at 2.8 times estimated 2016 FFO (C$43M market cap, C$30M in the bank and 2016 FFO of C$4.6M). Corridor can't grow its production, so the low multiplier is understandable. This multiplier will increase if Corridor starts producing oil in Western Canada.

Let's say the company buys high-grade land for C$58M just like Raging River Exploration did last November.

Price (C$M)
58.0
Netback (C$/boe)
38.5
Production (boe/d)
620
Corridor will take on C$24M of debt with estimated 2016 year-end cash of C$34M. Estimated financing costs amount to C$1.4M per year with financing at 6%. The oil asset will return C$7.3M of FFO annually. Total estimated FFO will amount to C$11.4M, including New Brunswick operations (10.6% decline rate), or C$0.13 per share. This brings shares at C$1.04 with a standard 8x estimated annual FFO.

This analysis is using $50 WTI. As WTI oil increases in price, production grows and leverage (2.1X FFO) comes down, the stock will have even more upside. Also note that some of my holdings currently trade at over 8x annual FFO.

Bottom Line

"Only fools don't change their minds." -- John H. Patterson

I bought back the shares I sold in early 2016. While this is a speculation play (we can't say Corridor will move west for sure), we know management is still working to buy assets in Western Canada.

The stock is trading under its fundamental value (target of C$0.72 per share)
The window for a counter-cyclical acquisition is closing
Management needs to make a move; it's now or never
A game-changing acquisition in western Canada will completely reverse the current stock's performance (target of C$1.04 per share)
This is why I am long Corridor again.

Disclosure: I am/we are long CDDRF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.