I’ve decided to publish this research report specific to Jagercor Energy’s business and not to dive too much into the macro opportunity in Argentina. The investment opportunities in Argentina are numerous and compelling enough to justify a separate report on why to invest there before and into the “regime change” occurring in January 2016. I will publish “Why Argentina” via Elite Investments blog which will outline a handful of ways to profit and where to have exposure in specific companies. That research will show without a doubt that smart money is already positioning in the country and that asset values are sure to rise in the coming years. Certainly now is a terrific time to be isolating investment themes because as people are more comfortable in a new environment next year and beyond, money will flow to Argentina from around the globe. It is the third largest economy in Latin America behind Mexico and Brazil with a GDP over $600 Million. I will also be writing about the opportunities in Brazil, where I own a home and visit yearly. The economy has run into trouble and the currency and market are historically getting very cheap.
The fact is that after much due diligence pouring over balance sheets and investment ideas in Argentina, Jagercor Energy (JEM in Canada/JAMTF in US) is still my favorite speculation. Since my last report in fall 2014, we now have some meat on the bone to chew on when analyzing value for the company. Jagercor is now an oil producer and a rare penny stock that has a robustly cash flow positive business. The CEO and CFO of Jagercor Energy both migrated from very high paying jobs at the largest integrated oil company in Argentina, YPF SA. YPF is a $16 Billion company and both Alejandro Chernacov (CFO) and Edgardo Russo (CEO) both held positions as Directors. Management is critical in these small growth companies and the pedigree here is impressive (between YPF and Jagercor Edgardo worked at Baker Hughes in Texas).
Alejandro was the Director of investor relations at YPF, working with numerous institutional investors such as the Soros fund. In addition, Alejandro was very involved in raising over $3 Billion in long and short term financings for YPF, which should come in very handy as JEM grows into a more sizable company. Edgardo at one time led more than 700 employees operating 15 rigs at YPF and has strong operational skills in addition to being an engineer by trade.
Oil reserves like the Vaca Muerta shale in Argentina are massive (U.S. Energy Dept states that Argentina has the world’s 4th largest recoverable oil resources at 27 Billion barrels-over $1 Trillion worth). The largest companies there are focused on wells that can produce thousands to tens of thousands of barrels per day. However, there are plentiful opportunities in these company’s portfolios that already produce oil where a company like Jagercor can come in and optimize/operate the projects. That business strategy alone could make Jagercor a very strong growth story but they began their journey investing in a low risk field called Castriel Oeste in the Rio Negro Province. Jagercor signed an agreement in mid-2014 with Central Resources for the right to drill 8 wells. Due to Argentina’s deficit in domestic oil production the country signed a new energy bill in late 2014 incentivizing producers within the country. Even though oil prices collapsed to the $40’s per barrel recently, Argentina pays their domestic producers $77 per barrel, thus Jagercor commands a premium to global oil prices (currently $60).
Central Resources is the operator on the first 3 wells and Jagercor receives 70% of revenues until costs are recouped, then flip to 40% for the life of the wells. We now have close to 2 full quarters of production data from the initial 3 wells and besides a weak month in February due to weather and union issues, production has leveled off at approximately 4500 barrels per month (January was 4,676 so it is likely a bit higher). After deducting transportation and other costs from the $77 barrel price, I estimate Jagercor’s NET take to be $42 per barrel, which brings us to nearly $200,000 per month in revenues ($189,000 at $42×4500 barrels). The burn rate at the company is around $50k per month so cash flow is right at $150,000 on a consistent monthly basis. They are optimizing well production and that number could trend closer to $175,000 currently but we’ll use $150k for estimate purposes.
The fact is that the two wells in the northern area of Catriel Oeste produce 85% of the oil while the southern well is weak and produces quite a bit of water. I believe they’ve increased oil production in well #3 to nearly 20 barrels per day so it is meaningful and might be improved but we’re not counting on it. The next 12 months of production should be quite consistent and predictable. The company revealed a cash balance near $450,000 as of January 31st 2015 so with 90 days of additional cash flow they will be approaching $1 Million in cash very soon (approximately $850,000 as of April production is my estimate). This is very important for several reasons. #1. How many penny stock micro-cap companies do we actually see with nicely positive consistent cash flow like this? They do not need to raise any money from the market during this period when the share price is dramatically undervalued.
Certainly, with the positive economic profile of the Catriel Oeste wells (particularly in the north where their next targets are), I would like to see them drill the next 5 wells quickly. At a $4 Million market cap, it doesn’t make sense to raise money by issuing equity to drill these wells at $1 million a pop. However, in just a handful of more months, Jagercor will definitely be able to drill a 4th well out of their own cash flow. One big benchmark that will need to be resolved, and is a risk (albeit a small one I feel), is the need for the Rio Negro Province to extend the Catriel Oeste oil concessions beyond the October 2016 timeframe. Based on conversations I’ve had with various folks, it seems very likely officials will vote on (and choose to extend) concessions within the next 3-4 months. That will be just in time for Jagercor to pull the trigger on well #4 in the fall of 2015, further expanding their production profile and revenues.
I am going to model my projections later on with that additional well from cash going into 2016. However, it does not by any means indicate that I believe the company won’t do more to aggressively grow the business. In fact, in an April 20th, 2015 press release, Edgardo Russo confirmed that “Management is currently engaged in negotiations with a couple of different companies, seeking operatorship and minority interest in three different oilfields in Argentina”. In addition, he stated “We are pleased to confirm that we are running a cash flow positive business, currently seeking to enter agreements which should provide us the possibility to grow production, revenue, and position ourselves as oilfield operators in Argentina”.
This is exciting on several fronts but becoming an operator that can also claim reserves ownership is an important step and classification in Argentina. This would open up various opportunities for Jagercor no doubt. We will have to wait and see what they have up their sleeves but I feel quite confident after conversations with management, and reading these press releases, that we’re getting quite close to seeing their next move to expand. One thing that Alejandro and Edgardo made very clear to me when I met with them earlier this year was that neither of them left their cushy high paying jobs to run a 3 well company. Meaning, they are here to build and grow and I believe they will be successful to one degree or another.
Now down to the numbers in terms of valuing this company. We know earnings will be in the $2 million area (give or take $250k—$1.8 Million using $150k per month which is conservative) for 2015 based just on current production rates. A 10X earnings multiple (PE) would give Jagercor a value of $20MM, or approximately 20 cents per share. Ypf is trading at 13 times trailing earnings, which would put us closer to 25 cents per share. However, Jagercor is growing much faster than YPF and will continue to do so for some time, potentially commanding a higher earnings multiple by the market. Say they expand their production by 100 barrels per day by adding another well or by acquiring similar production. That would put revenues closer to $300k and cash flow at $250,000 per month, which I fully expect to happen by year end, if not sooner.
I believe Jagercor has much larger opportunities on the table as well but management is prudently building block by block and focusing on a few more base hits before swinging for the fences. There is actually very low risk buying this stock at 4-5 cents CDN right now. To put things in perspective, if JEM just sits on their hands for 9 more months and accrues cash, they could choose to issue a 2 cent cash dividend to shareholders in Q1 2016(i.e. pay 4 cents per share in the market today and get half your money back on the dividend yet still own the shares). Obviously that is not likely because we want them to invest that money into growing the business but it puts the investment in perspective when you have such a low market value and are nicely cash flow positive.
My blue sky guess here (I think it’s not blue sky and is more of a mid-range estimate) is that Jagercor Energy is a $50-$100 million company in 2 years. Once cash flow and production double from current levels, which won’t be very hard, there will be opportunities to finance more projects with debt or even traditional bank financing. Or, if JEM trades back to a more realistic $20 million market capitalization, they could easily justify an equity raise for several million to drill more aggressively in Catriel Oeste or other ripe fields. My guess is also that Jagercor could be a very attractive acquisition for an energy company looking to enter Argentina in a couple of years once the political and business environments are not nearly as uncertain or hostile. Why start from scratch when you could buy a cash flow positive company with assets and significant management relationships for $30-40-50 million dollars?
In summary, I like this deal quite a bit. It makes sense on multiple levels and despite the very tiny market capitalization and low stock price, the risk is actually very low at this juncture due to predictable cash flow from existing operations. It’s quite conceivable that we see additional projects announced within the next several months that excites investors. It’s also realistic to assume this company will experience hockey stick growth in 2016 once they become a respected operator and producer in Argentina. Opportunities abound in Argentina as asset prices are suppressed yet an entirely new business environment is just ahead in 7 short months. Even the furthest left candidate would be a significant swing in the right direction to stimulate capital flows back to Argentina.
Due to Jagercor’s very low share price, I will be somewhat conservative in my estimates. Even though I believe we can justify 10x forward earnings currently, I’ll push my 20-25 cents price target out 12-18 months. So, by year end 2016, this is a 5 bagger from the current 4 cents per share price. A big benchmark we’ll need to see to alleviate any concerns here will be the concession extension for Catriel Oeste. I think the risk is low that the extensions won’t be granted as the province is motivated to stimulate and maintain revenues and oil production is a big part of that. My suggestion is for long term investors to continue to accumulate shares under 5 cents while you can. It is possible that news of a new endeavor rerates the share price to a more reasonable valuation as it is simply too cheap at a nickel. As cash accumulates in the treasury each month, the stock will sooner or later trend higher. The only explanation of why we have continued to see selling is that the initial shell “investors” were given ½ of one penny stock. It was 2 cents but after the 4 for 1 split, half of a penny is their cost average so selling at 3-4 cents is still a huge gain. But, because we’ve seen nearly 45-50 million shares traded since last summer, it is not likely many of the original players are still around. My guess is that, maximum, they have another 10 million shares to sell. Which is great because it allows growth investors a chance to add cheap positions and at maximum only equates to less than $500k CDN in value, which is peanuts in the big scheme of things.
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Disclaimer: Eric owns 3 million shares in Jagercor Energy and may choose to buy or sell anytime without notice.
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