Charles Mizrahi is out with a pitch for one of his “upgrade” services, Charles Mizrahi’s 8-Figure Fortunes ($1,495/yr, no cash refunds)… that’s a new service for us, this is how the pitch describes it:

“In 8-Figure Fortunes, Charles will tell you about the market’s BEST small-cap investments. Each one could have the potential to grow 500% … and even 1,000% in the next few years…

“EVERY recommendation will follow his strict criteria.

“The company MUST be in an industry like oil seeing substantial tailwinds.

“It MUST be run by an rock-star CEO and management team with decades of experience increasing value to shareholders.

“And it MUST be on a strong financial footing — showing the right combination of sizeable profits, debt reduction, strong earnings and plans to grow into the future.”

And as you probably guessed from the headline, the bait for this particular teaser ad is a “secret” small-cap oil stock… so let’s feed those clues to the Thinkolator and see what kind of answers we can get.

Mizrahi often positions himself as a “value” guy these days, and one of the hooks in the ad is not just that “oil stocks will go up,” a common-enough sentiment from market pundits these days, but that he’s recommending a stock which would be Warren Buffett’s first choice in the oil patch, only it’s too small for Uncle Warren to buy…

“Last year, amidst high gas prices, and gridlock against oil and gas companies in Congress, Warren Buffett placed one of the most controversial bets of his sagely career, investing $40 billion into two dominant oil companies — 10 times more than Berkshire Hathaway invested in any other stock last year.

“But my guest today has a few choice words for investors.

“He says if you thought last year’s gas prices were the highest we’ll see, think again.

“Because according to him, we could be in the midst of another 1,000% surge in oil prices.

“This is why we believe Warren Buffett is investing so much money in this industry.

“But my guest can practically guarantee … he’s not buying his first choice.”

What else are we told about this company? The clues start flowing…

“… this company … the very one Buffett cannot buy … is overflowing with cash … it’s aggressively growing its production despite massive headwinds from the Left … it’s 100% debt-free … and it’s returning value to its shareholders in spades.

“And that’s with oil going for about $80 a barrel….

“It’s a small, $3 billion firm … 100 times smaller than Buffett’s biggest oil and gas investment … that lies far to the north, beyond Wall Street’s sight — and OUT of Washington’s reach.”

So Mizrahi, in referencing Berkshire’s big purchases of Chevron (CVX) and Occidental Petroleum (OXY) over the past year or so, says that “Buffett didn’t buy his first choice. He bought his second and third choices.”

So what other clues do we get about that “first choice?”

Well, it’s small…

“This company has a market cap of $3 billion. That’s 100 times smaller than Chevron … and 10 times smaller than any other oil and gas company I’ve recommended.”

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And it’s got a pretty impressive financial profile, per these clues:

“Insiders own 50% of the business.

“Last year it generated $500 million in free cash flow.

“Over the last 18 months, it’s raised the dividend six times over.

“And over the last two years … it’s grown its oil production by 50%.”

That general valuation picture, with a market cap somewhere near $3 billion and about $500 million in free cash flow, sounds appealing… but it’s also not all that unusual in the world of small-cap oil companies right now. The windfall those companies got from soaring oil last year created some huge free cash flow numbers, and often some big special dividends and buybacks. Some of those will continue to do well, even with oil at lower prices these days, but not many of these companies are likely to do as well as they did last year (Mizrahi talks up windfall returns from $500/barrel oil prices as a possibility… I don’t know if that happens in the next couple years, but if so it probably wouldn’t last long because it would create a global depression, which would destroy oil demand… but one never knows what the distant future holds).

And the company is apparently pretty well set for the future, without having to spend a bunch to buy or look for more oil…

“They’re NOT wasting the money going out and trying to find a bunch of new oil. The company already has all the proven reserves it’ll ever need.

“Instead, they used the cash to pay off debts. The company now is 100% debt-free. Zero debt! Recently, it had $370 million of it … and they just paid it off like it was nothing!

“They also spent another $104 million paying shareholders an additional 3% in the form of a special dividend — in addition to the 5% they already pay them.”

And the outlook is good, we’re told — they’ve increased production by 50% in two years, and plans to grow another 35% in the next two years…

“And this year, they expect to have even MORE cash than last. Free cash flow is estimated to grow from $500 million to $650 million. And this time … they don’t have to pay off $370 million in debt.

“That means they’ll likely move ahead with their plan to buy back 8 million shares — another $200 million — returning massive value to shareholders.”

Mizrahi sums up…

“It doesn’t have to spend any money searching for oil…

“Doesn’t need to compete for a lease on federal land…

“Doesn’t need to spend years setting up new drills…

“And right now, it’s rapidly growing its oil production.

“You see, what makes this company so special, is it owns over 2.5 MILLION acres of drillable land.”

And says the President can’t stop them from drilling, even if he wanted to…

“And the best part … it’s all under land that Biden cannot touch. He has no legal authority over it.”

We also get a nice story about the founder of the company, so the clues are really piling up now…

“It was founded by an oil tycoon all the way back in the 1970s. It’s one of those stories you love to hear about. He was born on a farm in the 1930s. His father was a World War II veteran and worked as a mailman after the war. His mother was a schoolteacher. Tough, working-class people.

“Like a lot of kids, he wanted to be a train conductor. That is, until his older sister got him a summer job working as a geologist. He never looked back.

“He spent a decade working as a geologist for the Standard Oil Company — which gave him tremendous experience to go out and start his own company….

“Over the course of 45 years, he built an energy empire that grew from one oil well, six employees and a $5 million valuation … to a 400-person operation, with 2.5 million acres of drillable land, as much as 650 million barrels of oil in reserves, and a market cap of $3 billion.”

So who is this “off the radar” company that Mizrahi says would be at the top of Buffett’s list?

Well, despite all those clues, we did have to haul the Thinkolator out of the garage for this one… gassed it up, got it moving with a few swift kicks, and once it was chugging along we shoveled in those clues — but the answer came out right quick, this is Paramount Resources (POU.TO, PRMRF).

How do we match our clues? It’s got a market cap that’s a little over $3 billion now, at least in the US (the market cap is about $3.4 billion today)… the dividend is paid monthly, which a lot of people like, and is currently at 9.25 cents (in US$ — 12.5 cents Canadian), so that’s $1.11 a year, giving us a dividend yield of just under 5% at the current US$24 share price (though yes, they also paid a honker of a 75-cent special dividend in January, for a bonus 3% yield).

The rest of the story fits perfectly, including the level of free cash flow, the repayment of their debt (though they do have $1 billion in credit they could draw on if they wanted), and the story of Paramount Founder Clay Riddell (the large insider stake, roughly 47%, is mostly due to the fact that it’s still a family-controlled business — Clay’s son, James Riddell, is the current CEO. Clay Riddell, who was a billionaire and part-owner of the Calgary Flames, passed away about five years ago).

There’s one little mismatch: they didn’t pay off exactly $370 million in debt recently… though it was the sale of some of their properties, for C$370 million in January, that let them both pay their C$1 special dividend and repay all their remaining draw on their credit line, so they should be debt free when they report next quarter (assuming they don’t draw on that credit line to make an acquisition). Close enough of a match to the current story in my book, particularly since everything else matches perfectly.

Why is it that “Biden can’t touch” their 2.5 million acres?

Well, it’s pretty simple: they’re in Canada. Which certainly has some “green” initiatives of its own, but is far more dependent on energy production and mining than the US, and unlikely to turn against oil companies. Paramount’s land is in the Montney and Duvernay areas of the Western Canada Sedimentary Basin, mostly in Alberta… and they’ve got tons of reserves (proven and probably reserves worth about $9 billion, at a 10% discount rate), which gives them years of drilling inventory.

Most of the production at Paramount is actually not oil, it’s natural gas and natural gas liquids/condensate… but the liquids/condensate pricing is really driven by the price of oil. They are dependent on natural gas prices, too, but not solely “dry gas”. They say their regular dividend and the midpoint of their capital spending plans would be “fully funded” as long as the average price of oil (WTI crude pricing) stays above $71/barrel for 2023 (or $55/barrel if they cut back on growth spending, which would mean they don’t drill to grow production). Their expectation is that they’ll have free cash flow of C$3.1 billion over the next five years, which would average out to a pretty solid 13-15% free cash flow yield… though they don’t know any better than we do, of course, what the price of oil or natural gas will be over the next five years.

There isn’t a ton of analyst coverage of Paramount Resources, but the general expectation seems to be that they’ll grow their top line revenue by 10-15% over the next couple years, and that they’ll likely have close to C$4 in earnings per share this year, which would mean they’re currently trading at a PE ratio of about 8, with a (almost) 5% dividend.

Paramount has been around for a long time, so we can see that they haven’t been able to avoid being subject to commodity prices — if oil goes to $500/barrel, I’m sure they’ll have some excellent free cash flow and will pay high dividends, but, of course, who knows what happens to the rest of the investing world in that scenario. Here’s what Paramount has done over the past 15 years or so (total return in purple), measured against the price of oil (orange):

So it’s a solid company, it has done well for a long time… but when oil collapses. it gets ugly. That should be no surprise, for pretty much any oil & gas producer, but even when “everyone” seems certain that oil prices should soar, we should remember that sometimes surprises happen. When oil prices dropped by 75% or so from the 2014 highs, Paramount shares dropped by more than 90%… when oil collapsed in the early COVID shutdowns in 2020, Paramount fell by a good 80%+. It works the other way, too, when Russian tanks crossed into Ukraine, oil went up about 25% and Paramount surged about 60% in early 2022.

Over the past year, the deleveraging and the solid dividend growth, including the big special dividend, have pretty clearly helped — oil is down about 25% from its highs of last year, but Paramount shares have held up better than that, and shareholders have seen a total return of about 4% in twelve months.

What happens next? That, I don’t know. The family control and high insider ownership, and the fact that they’re currently debt-free, provide a level of confidence, and the nearly 5% dividend should be sustainable this year, with perhaps more special dividends or buybacks if oil and gas prices stay high-ish. They could also tap into their credit line to make a big acquisition, as they’ve done many times in the past, or invest heavily in expanding production — which would make the performance more volatile. Paramount also has some external investments, mostly in other small energy companies and service companies in Alberta, though I’d guess those investments are probably more intended to support the core business than to generate investment returns. If you think oil and gas prices will be strong, that lack of debt makes them stand out, and the largely predictable production from their core assets make this a reasonable story to consider.

Disclosure: Of the companies mentioned above, I own shares of Berkshire Hathaway. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.