This article was originally published on April 27, 2023, when Mizrahi’s ads started running. The ads have started running again recently, with emails saying that the weakness in oil prices recently has created a good buying opportunity, but the teaser pitch remains unchanged and is still dated “April 2023.” What follows has not been updated or revised since April, but I’ll add a note about the performance to date at the bottom (spoiler alert: as of today oil is down about 2% since April, and the stock is down about 40%).

“One game-changing decision now lets this tiny company generate up to 5x more money — for the same product — than its competitors.

“And thanks to an obscure, 20-year-old federal regulation… You have the chance to beat Wall Street into this $5 stock.”

That’s the lead-in to an ad from Banyan Hill for Charles Mizrahi’s Microcap Fortunes ($1,995/yr, no refunds — “guarantee” means you can get a credit for a different Banyan Hill newsletter if you don’t like this one). So, naturally, Gumshoe readers wanna know about this microcap $5 oil stock. Let’s haul the Thinkolator out of the garage and fuel her up, and I’ll be ready to shovel in the clues and get you some answers in a minute.

Here’s a little more from Mizrahi…

“… today I’m going to share with you what I believe could be the next great business success story — a small company that has an advantage its competitors can’t touch.

“And it’s in one of the biggest, most important sectors in the world — energy.

“It’s not a pie in the sky renewable. Or the inventor of some magical energy source that can power your car to the moon and back on a single charge.

“Nope, not even close.

“This company is in oil and gas.

“And the CEO has made the one decision that I believe will prove to be THE game-changer for this company…

“Because this small oil and gas producer can now generate up to five times more money than any other competitor … for the same energy.”

That sounds a little odd — after all, the essence of any commodity producer is that they’re dealing with a commodity — no oil producer or copper miner can set or change the price of their product, they’re “price takers,” not “price makers”. We’re going to need a little more explanation from Mizrahi on that…

“The company is an ‘E&P,’ which means it’s in exploration and production.

“To be a successful E&P, you need lots of oil-rich real estate to drill on. And over the past few years, it has been engaged in a land grab.

“In fact, these land purchases have allowed the business to grow its proven and probable reserves — the resources it has in the ground — to record levels … increasing its oil and gas by a whopping 65% in just the last year.

“With more land to drill on, that has led to higher production. In fact, in just four years, oil and gas production increased 34%.”

And that number might go up further…

“…the company reports that advanced recovery processes could result in doubling the amount of oil they can extract from the ground.”

And we get some info about the CEO:

“… this microcap has an experienced oil and gas person at the helm.

“He’s an expert petroleum engineer, with over 40 years in oil and gas fields.

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“And talk about having skin in the game.

“The CEO has gone all in on this company — investing $22 million of his own money to start the business — nearly everything he had.”

And what’s that “5X more money from the same energy” bit Mizrahi is talking about? He finally goes into that here:

“In 2020, the CEO brought online a small 4 megawatt electrical power plant.

“Instead of selling natural gas on the open market, this company uses its natural gas to generate electricity in its power plant … and then SELLS that electricity to the power grid.

“The price of natural gas right now is about $2.

“But by generating electricity with its gas — and selling to the grid — it can generate the equivalent of more than $11 for its gas….

“… the company is expected to expand its capacity to generate electricity it sells to the grid by 500% this year.”

And Mizrahi argues that investors don’t realize this yet:

“… the fact that this company can generate up to five times more money for the same natural gas…

“Is NOT being reflected in the $5 share price….

“… I’d be pretty disappointed if it only doubled or tripled over the next few years.”

Ah, so it’s not that they’re selling their gas for a higher price… it’s that they’re moving up the value chain and becoming a vertically integrated power producer.

While we wait for the Thinkolator to chew on those clues, we should quickly address the other part of the pitch, that Mizrahi says an “obscure regulation” means that you can buy this stock before the fat cats.

“… because of this obscure, 20-year-old regulation…

“You can buy this stock BEFORE the big Wall Street investors are able to.

“It’s called Release No. 34-47591. Or Regulation AC for short….

“This one regulation effectively keeps Wall Street out of certain stocks.

“This gives average investors, like you and me, the chance to beat the big shots into some of the best companies in the stock market — before they take off.

“It’s like being a kid, in a candy store — before it opens for business. You don’t have to rush or push others out of the way … because you’ve got the whole place to yourself … to pick and choose to your heart’s delight.

“See — this $5 oil and gas company trades in a segment of the market that is practically off limits to the big institutions:

“Microcaps … companies with a market capitalization less than $500 million.”

It’s true that big institutional investors don’t often buy smaller companies in the sub-$500 million range, though I don’t think that’s particularly because of Regulation AC, which mostly just requires analysts to be honest and disclose their conflicts (like whether they were paid to report on a company). Small caps just generally don’t attract institutional money, since they often aren’t liquid enough to absorb a big investment, and they often don’t have much (or any) analyst coverage from the Wall Street firms.

Mizrahi puts it this way…

“It was first passed by the SEC back in 2003 to protect investors from the ‘fiction writing’ of stock analysts. In other words, the SEC wanted them to tell the truth.

“To make sure they are truthful, Wall Street analysts must certify that the views expressed in their stock reports accurately reflect their research and their personal views.

“This 20-year-old regulation effectively eliminated the entire microcap sector from receiving the kind of coverage it deserves.

“Because these companies are so small, with little information available … it’s simply not worth it for analysts to cover them.

“So, they simply ignore these stocks.

“And that sets up our opportunity.”

We can argue about the reasons, but the end result is the same: Yes, small cap companies get less attention from analysts and from institutional investors, and most companies are small companies and are relatively unknown… so that presents us with the potential to find something that’s under-followed and misunderstood. Though it also means that those small companies might stay unknown for a long time, making it hard to generate much of a reward for your work in finding them.

Mizrahi says that his $5 oil and gas company has a total of two analysts covering it, so it’s not completely ignored, but he thinks there’s “enormous mispricing” in the stock. And, of course, part of the reason he’s interested in a commodity producer is that he thinks the commodity will see rising prices ahead…

“I don’t make predictions.

“But I will tell you this: higher oil prices in the very near future are as sure to me as the day is long.

“And here’s why…

“Demand is rising — while supply is lagging.”

And I just heard the “ding!” from the driveway, so it sounds like the Thinkolator is finally done with those clues… whatever is our answer here?

This is Journey Energy (JOY.TO, JRNGF), which is indeed a Western Canada oil and gas producer with a growing footprint of relatively low-decline producing fields. It does match the clues perfectly, both the comments about the CEO and founder (Alex Verge) and the growth in their reserves and production… and Verge is really doing something similar here with Journey to what he did at Bonavista and some other producers, buying up reserves and production to roll up assets, reach a profitable scale, and grow production per share.

Verge did reportedly put about $22 million of his own net worth into the company, which he joined when it was called Sword Energy (they changed the name to Journey soon after). The firm did a bunch of small acquisitions about a decade ago, and then went public right around the time the oil price peaked in 2014. That means, as an investment, that it’s been a bit of a disaster if you bought that 2014 $12 IPO… but they spent several years buying up producing assets and growing the cash flow and, eventually, even buying a small electric power plant. The big transformational deal in 2020 was to buy back ~$100 million of their own debt at a discount, in partnership with a big shareholder at a point when the company was on the rocks, and that worked to rescue a company that otherwise looked like it might go bankrupt (the shares were trading for pennies). Then, once oil started recovering and the business was doing better, they did a big acquisition last year to grow production dramatically, buying assets from Enerplus for about $140 million, with a pretty friendly purchase price. That acquisition was nicely accretive to Journey’s cash flow, though it did bring some more debt back in the books, and it also pushed their production in the right direction (more oil and natural gas liquids, less dry natural gas).

I’m no expert at evaluating drilling projects, but it looks like Journey has pretty low-decline projects that are relatively inexpensive to operate and relatively predictable, and the stock at C$5.60 (US$4.15) certainly trades at a good discount to the net asset value NAV of their proven, developed and producing reserves (C$6.77/share), and a dramatic discount to the reserves if you include proven and probable reserves that aren’t currently producing (total of C$14.35/share). They now have $99 million in net debt, and the vision they note in their Investor Presentation is that at current oil prices (~US$75/bbl WTI) they could pay back $33 million of that debt this year, and add more power projects that have a combined net present value of $80-100 million… and if oil rises in price to $85/barrel, they could grow production by 5-10%.

They expect “adjusted funds flow per share” in the neighborhood of C$1.25 this year, which would be down from the high of $1.93 last year (with oil and gas prices much higher). That’s not the same as “earnings,” which are more impacted by things like depletion, but it’s somewhat like a FFO number for a REIT, it’s basically cash flow from operations before transaction costs and decommissioning costs. At C$5.75, then, the stock is trading at something like 4-5X cash flow. The one or two analysts who do cover the stock estimate that they’ll have earnings of about C$0.90 per share this year, so at that rate they’d be valued at about 6X forward earnings. If oil goes up to $120 or falls to $40 this year, of course, then the results will be far different… but if we’re not at a peak in oil prices, then that’s a pretty attractive valuation, and it’s in line with a lot of other small oil and gas companies we’ve looked at in the past. This one does have a good story (with that growing portfolio of power plants to provide some flexibility), and with their focus on low-decline production that can be predictable and fairly low cost. They expect to be able to grow pretty meaningfully, on a per-share basis, without needing more capital. They do not currently pay a dividend, the push seems to be to try to compound value by reinvesting in production growth.

Beyond that, I’m afraid you’re on your own in making a judgement call for your portfolio. The latest investor presentation provides some of the numbers I mentioned above and gives a good overview.

And there’s a good (albeit very long) interview with CEO Alex Verge on YouTube here, if you want a little background on the story and some insight into the company’s strategy (skip ahead to the 1hr. 10min mark if you want the specific discussion of their power generation assets, which may grow but currently have a small impact… and yes, he does say that right now the power generation economics mean that they can “effectively sell their natural gas for $10-11 per mcf” — they have 4MW now, may have 20MW within a year, and perhaps 50MW in a few years)…

I haven’t bought the stock, but it seems pretty appealing at first glance, and I was impressed by that interview above with the CEO. Sound like your kind of stock? Interested in oil investing these days in general? Do let us know with a comment below.

*****

February 2024 Update… The “appealing at first glance” hasn’t helped the stock at this point. They have continued to do reasonably well on the operational front, drilling new wells as planned and generating some cash flow, and continuing to invest in power generation assets on a small scale, but, thanks in part to oil prices being a bit lower than they hoped (though really, oil is roughly flat over the past year), it hasn’t been enough cash flow to deal with the continuing debt repayment… so they’ve made agreements with their major creditor to (again) spread out the repayment a bit more. I expect that a meaningful part of the stock’s weakness is probably concern that if oil prices don’t move higher, there’s a meaningful risk that Journey will have to dilute shareholders through more equity fundraising.

Here’s what the chart looks like since we first posted this teaser solution on April 27 of last year… that’s the oil price in blue, the average oil and gas explorer and producer in green (the XOP ETF), and the S&P 500 in orange.  Clearly not a popular investment, though the same could be said, perhaps to a greater or lesser degree, of most of the smaller oil and gas names we’ve covered over the past year or so.

And what happens next?   We’ll have to wait and see.