“Ride to Oil Riches with the Lucky Tombstone Kid: Stake Your Claim in the Three Bakkens”

Sniffing out Roger Conrad's No. 1 pick in the "three Bakkens" for his Canadian Edge newsletter

By Travis Johnson, Stock Gumshoe, March 13, 2012

The copywriters over at Investing Daily certainly spin a good tale — we’ve seen pitches about the discovery of South Pacific wonder-ports, secret buyouts by the Rockefellers, and plenty of tales of mouth-watering dividends that make even the most boring companies sound sexy … so I do always enjoy seeing a new tease for picks from Roger Conrad, Yiannis Mostrous or Elliott Gue.

So naturally, when readers started forwarding Roger Conrad’s latest missive en masse, my Gumshoe sensors started tingling — and it doesn’t hurt that I’ve liked plenty of Conrad’s past picks, or that they tend to be dividend-paying and relatively large, stable companies (not always, of course — we’ve always got the Yellow Pages Income Fund to mention, along with its drop from $6 to 11 cents when we feel the need to note that not every pick of his makes sense … presumably he sold out of that one somewhere during the collapse).

This one is much more in Conrad’s bailiwick — he has covered what were the Canadian Royalty Trusts for years, more closely that any other newsletter guy I can think of, and he has continued to focus on high-yielding Canadian stocks, usually in the energy business, in the years since the trusts started to be phased out. The pick he’s teasing today, run by a young CEO who he calls the “Tombstone Kid,” is a former trust that converted to a corporation back in 2009 but still pays a good dividend. So there’s one hint from me, how does Conrad tease his “No. 1 pick in the three Bakkens” that he expects will “catapult itself into the oil major league?”

Here’s a taste:

“Out west, a little-known energy outfit led by a brash, young and quick-on-the-draw CEO is proving there’s more than one way to build an oil fortune in the Bakken Shale…

“Ride to Oil Riches with the Lucky “Tombstone”* Kid

“… and you’ll profit from the best of THREE Bakkens.

“Did you know three major oil discoveries exist in the Bakken region?

“Many investors are still unaware. Even fewer know the name of the company now in position to pump light, sweet crude from all three finds simultaneously.

“This fast-rising company is run by a colorful ex-National Hockey League guy—the Tombstone Kid—who’s already turned scores of ordinary investors into Canadian Bakken millionaires.

“Even better, he’s about to do it again… this time south of the border. Saddle up now and join with The Kid and his hard-charging team for the gallop to big Bakken oil profits…”

See? What did I tell you — always a fun story to be told. The basic pitch is that this “Tombstone Kid” has made people rich with his prescient investments in the Bakken plays on the Canadian side of the border … and now he’s “galloping” toward the oil on the U.S. side, too.

There’s even a story behind the “tombstone” bit — all about poker chips and a poorly-timed IPO that was planned right around the time of the 9/11 attacks. Here’s a bit of that:

“It all begins with a handful of poker chips.

“When the venture capitalists staked the cocky then-33-year-old to an $8 million oil biz start-up fund, they handed him a gift of poker chips — called “tombstones” in the business — as a reminder of the risky nature of the deal.

“That was eleven years ago.

“The Kid still carries those poker chips — “tombstones” — as a reminder of the risk and hard work that went into taking his outfit from a mere 275 barrels of oil and oil equivalent per day to over 83,000 barrels per day and a $13 billion market cap… while putting his company in prime position to catapult to major oil league status.”

So … that’s actually enough to identify our “Tombstone Kid,” but let’s get a little bit more of Conrad’s tease so we can get a taste of his argument for buying these shares:

“It is, very simply, one of the most innovatively managed energy companies I’ve ever encountered in my decades covering the field.

“Growth, Growth, Growth

“A growing business is the best guarantor of a high yield.

“And growth is the hallmark of my top recommendation. Again, in a remarkably short period of time, their market cap has surged to nearly $13 billion.

“This eye-popping growth has occurred because, time after time, The Kid and his partners have shown uncanny skill at corporate takeovers and even more brilliance in investing in drilling rights and operating highly productive wells.

“On top of these successes, they’ve capitalized on extraordinarily innovative oil recovery techniques—including one method (scoffed at by naysaying competitors) that boosts recovery rates in many tight oil plays by up to 58% ….

“… the company holds dominant positions in the Viewfield Bakken—the Canadian portion of the North Dakota Bakken—and the Lower Shaunavon in southwest Saskatchewan.

“Regarding the latter, The Kid and company just agreed to buy a rival exploration outfit, strengthening its position as the largest player in the Shaunavon, one of the richest plays in Saskatchewan.

“This is truly a major acquisition.

“Shaunavon is the third-largest resource pool ever discovered in Canada, and The Kid’s company now owns 90 percent of the land….

“Ever on the prowl, the company also acquired land in the Swan Hills area of west central Alberta, which one inside source believes could potentially double their current net asset value in the next three to five years.”

Conrad also notes that they were one of the few to avoid dividend/distribution cuts during the last market crash, and he thinks they have “rock solid” financials, and the “stage is set” for another massive profit run for the stock (they did have a huge run recovering from the 2008 lows).

So who is it?

Toss all that into the mighty, mighty Thinkolator and we can tell you that this is certainly … Crescent Point Energy (CPG in Toronto, CSCTF on the pink sheets).

Crescent Point is indeed a former trust, they converted to corporate status in the Summer of 2009. And their CEO, Scott Saxberg, is a prominent young leader who was recently named “Oilman of the Year” and came from a decidedly non-energy family (sounds like he had his heart set on being a National Hockey League TV guy before falling backwards into the energy business after college). There’s a good profile of him in the Calgary Herald here if you’d like to hear more (that’s where much of Conrad’s teaser story appears to come from).

I don’t know the company well, but they are an “emerging major” with a market cap of about $13 billion, and they do pay a solid monthly dividend (about a 6% yield at this point). The primary complaint about the company seems to be that some investors think they should pare back the dividend so they can more aggressively grow their drilling program and increase cash flow from the many, many acquisitions they’ve made — but despite the “Tombstone Kid” story they seem to be fairly conservative with their balance sheet and focused on acquisitions that can be fairly quickly accretive to cash flow, enabling them to keep paying out that dividend. Those “Three Bakkens,” by the way, are indeed areas of focus for Crescent Point — that includes, in Conrad’s parlance, the Canadian Bakken, the Bakken formation, and the Three Forks formation underneath the Bakken. I don’t know if that’s how geologists would separate them, but generally it means they’re looking at large unconventional reservoirs that are harvested with horizontal drilling, fracking (or fraccing, or however you use the term), and water flooding, among other enhanced recovery techniques.

On the flip side, despite the ramp up in oil prices over the past year they haven’t raised the dividend since 2008, but perhaps it’s that near-death experience of 2009 or the shaky beginnings in 2001 that are keeping them from overextending. They carry very little debt relative to their size, and they’ve done plenty of equity offerings over the years to reduce debt further and to pay for their many acquisitions, including recent ones to expand their holdings on both sides of the border in the various Bakken-related plays. Personally, I like to see a focus on distributing cash to shareholders as aggressively as you can, especially if the economics of your business are such that you can do so without sacrificing much of your growth, as appears to be the case.

So the rosy story is, you get a 6% yield from a growth-focused company that apparently isn’t gambling too much with their business. The downside is, you’re paying a big premium if you look at earnings — they are priced for growth, so you have to assume that they’ll continue to grow very well and that oil prices will be stable enough for them to make a good profit in the years to come. They are a hedger, meaning they sell some of their future production so they’re not levered exclusively to rising prices. They take limited chances, it appears, and say they’ll continue to try to be opportunistic at hedging away some future oil price exposure in order to guarantee their cash flow and give them a chance to reinvest in the company (and in growth) if and when oil prices dip.

That said, the analyst estimate is that they’ll earn just 90 cents (that’s the average, estimates cover a wide range) in 2012, and that means the stock is trading at about 50 times expected earnings and that they’re distributing far more than their reported earnings. That’s a trust mentality, and it’s not necessarily bad — distributing cash flow instead of reinvesting all of their depreciation and depletion costs into growth, but that’s why some folks seem to fear either that the growth is being underfunded or that it will be paid for with new equity offerings. The company says they have a drillable inventory and prospect list that should enable them to keep busy for at least a dozen years even without more acquisitions, which is also the kind of thing a royalty trust would say.

Interesting company, to say the least, and they seem to be growing nicely — As I said, I haven’t looked too closely at their numbers and I don’t know the company well or have no idea whether they’re going to hit another massive growth curve like they enjoyed in the recovery from the 2009 lows, which is what Conrad seems to be expecting, but there are worse things to do with your money than invest in a good yielder with limited debt and a wide growth horizon in some hot oil territories. If you’ve got an opinion on Crescent Point, by all means, shout it out with a comment below.

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11 Comments on "“Ride to Oil Riches with the Lucky Tombstone Kid: Stake Your Claim in the Three Bakkens”"

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bob paglee
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bob paglee
March 13, 2012 1:31 pm
I bought some CSCTF some time ago and it has given me an 18% gain and some decent income. If CSCTF is about to bring home some juicy bacon from new drilling in the Bakken and 3 Forks formations, that is welcome news, so I may invest some more after I look at the recent price chart. But I hope the reference to the “tombstone kid” isn’t promoting another kind of fast draw — shoot quickly to make a fast killing. About 50 years I visited that infamous cemetery in Tombstone, AZ, and the short inscriptions on the wooden crosses… Read more »
Darrell
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Darrell
March 13, 2012 1:43 pm

I have owned for quite awhile and dividends are about all you can look for from these guys. Unlike BEXP, CLR, KOG, and others, these guys seem happy to just sit on their land. I like their land positions, so I’ll keep holding.

bob paglee
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bob paglee
March 15, 2012 4:53 pm

Rats! I too nave several thousand shares of Reliable’s low-priced stock for which I obviously paid too much as I was down around 30% on it upon last look. But I also have some Crescent Point, so maybe it will work out somehow eventually —when I’m around 95.

Donald Johnsrud
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Donald Johnsrud
March 15, 2012 10:51 pm

Very interesting artical!

Bob A
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Bob A
March 17, 2012 8:46 am
I have owned this for a few years now….as pointed out this has been a reliable dividend payer…and before that a “distributor” as an income trust. I don’t expect this stock to appreciate very much as management keeps diluting the stock to fund acquisitions/growth…but at some point who knows. When I did a drive by of some of their properties a couple of years ago I was impressed by miles of new wells in neat lines…perhaps 2 per quarter …drill one line, then move down and drill the next…etc. Every one with a pump jack. Nothing like drilling into a… Read more »
wynn
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wynn
March 17, 2012 10:18 am

Looks like it may be a good investment for the future. No one knows what the future will bring.
I for one will stick to MLP’s like MMP, EPD etc. for income and growth. They are not going out of business and provide reliable income. They are also tax deferred with some growth.

Paul Beisenherz
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Paul Beisenherz
April 6, 2012 2:49 pm

Thanks for all of the comments. I can now do my own research and decide whether to buy shares in CSCTF.

blufox
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April 6, 2012 4:00 pm

I, too, own a bit of Reliable and am a bit irritated at their being acquired for only a 20% benefit to shareholders. The sale sounds like an ‘insider’ deal wherein management makes out but shareholders don’t. I will probably unload it once the transaction takes place.

Alan Coburn
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April 6, 2012 7:56 pm
I don;t know how far back you go with this guy but he was hooked up with another newsletter a Dr. leab or something like that.THE TOMBSTONE KID MR. CONRAD WAS TELLING EVERYBODY TO BET YOUR HOUSE, CAR LIFE ON ENRON. NOW THERES A MAN THAT DOES HIS HOMEWORK. SINCERELY ALAN COBURN
George Hill
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George Hill
April 23, 2012 6:48 pm
Great funds-from-operations at CPG, but small earnings, with a high P/E ratio. This confused me, so I googled and also phoned CPG. The explanation is that “earnings” are what is retained in the company after dividends have been paid out to the shareholders. They are the corporate earnings. There is a shortfall in drilling costs, which are 59% paid from the dividend reinvestment program, but debt is very low, and the drilling program is successful and nearly all oil, a far safer business than natural gas at this time. Considering peak oil issues as well, it seems right to be… Read more »
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